Income inequality is often a popular topic in the media. Regular reports detail the rising income gap between the rich and the poor. Unfortunately, there are key nuances with this topic that are rarely mentioned in public discussions. They are:
1. When talking about income differences, we are usually talking about people at different stages of life: High-income earners simply tend to be older than low-income earners. This is normally the result of experience and skills, too. It is also common sense.
2. Most people do not remain in the same income quintile in perpetuity: There is great economic mobility in the United States. A person in the lowest quintile of income earners one year will probably find himself or herself in a higher quintile a decade later. Likewise, it is common for individuals to fall from a higher quintile to a lower quintile.
3. Discussions about income differences often neglect overall compensation: Reports vary about wage growth or wage stagnation, but the common theme always seems to be that wages are not growing rapidly enough. Still, wages are just one component of compensation in most cases. With rising health insurance costs, many employers keep wages steady while footing more of the employee’s health insurance bill; so total compensation is rising even if the cash component is not.
4. Not all income is treated equally for tax purposes: By now the so-called Buffett Rule is fairly well-known. The catch line goes something like “Warren Buffett shouldn’t pay a lower tax rate than his secretary.” This reigning non sequitur is effective politically, but it is very misleading. Yes, Warren Buffett might pay a 15% tax rate on his income, but his income is largely derived from capital gains. That is, earnings from investments. This is also money that Buffett earned at some point, was taxed at regular income tax rates, reinvested, and earned him a return. In other words, it is not income from wages but investment income—it’s money that he bet on this company or that company with the hope that he would realize a profit.
5. Income is not distributed: While becoming less prevalent, many politicians have decried an unequal “distribution of income,” as if some central power shoveled cash all over the country and simply gave some more and others less. Income is earned on an individual basis. The employee exchanges time for money while the employer pays to have some task completed.