In a new research study, American Enterprise Institute (AEI) economists Kevin Hassett and Aparna Mathur argue that the perception of a rapidly growing gap between the nation’s wealthiest and poorest citizens is based on the wrong factors: income data are not the best measure of overall welfare. A better indicator of household well-being is consumption (not income), because unlike income, consumption remains relatively steady throughout life since individuals borrow during years with low income and save in high-income years.
The authors findings show that there is no need for huge tax increases on the wealthy which have been suggested as a solution to a perceived “income gap.”
Hassett and Mathur use two sources to assess changes in consumption inequality: the Consumer Expenditure (CEX) Survey, which shows aggregated changes in consumption expenditures for households at all levels of the income distribution, and the Residential Energy Consumption Survey (RECS), which helps to assess consumption inequality in durable goods.
Among their findings:
- Consumption inequality has increased only marginally since the 1980s.
- Consumption inequality narrows in periods of recessions, such as during the 2007–2009 recession. (Possibly because higher-income households that have more invested in the economy are harder hit by business-cycle shocks. These shocks affect their income and wealth as well as their consumption rate).
- On average, contrary to the popular perception, the consumption gap between low income and other households is narrowing. Increasingly, low income households are able to afford and possess household use of appliances such as microwaves, dishwashers, computers, printers, etc.
- There is therefore no need for the proposed “solution to the growing income gap” which would dramatically raise taxes on the wealthy and set top marginal tax rates at 70–90 percent, significantly higher than the current top rate of 35 percent.