Taxation without Legislation - Part I

Milton Friedman, the noted American economist once said that, “Inflation is taxation without legislation” and, lately, there has been a little bit of talk about inflation.  One of the points I’ve heard expressed is that inflation has had a larger impact on lower income households than on upper income households.  Knowing that this might occur as a result of greater or lesser proportions of consumers’ budgets being spent on items with more, or less, inflation, I decided it would be fun to investigate this claim and bring it to our readership. While I could cut to the chase and give you the answer, I have decided to take three weeks to get there.

 

This week, we will look at the characteristics of households in each quintile of income in the United Sates.  (A quintile represents 20% of the population and, if you prefer, think of them as lower class, lower-middle class, middle class, upper-middle class, and upper class.)  Next week, we’ll see what we can learn from examining the expenditures of each quintile.  Then, in week three, we’ll add what the Bureau of Labor Statistics has reported about inflation over the past year and calculate how the overall measure might be different for each quintile.

 

First, to find information on income, expenditures, and rates of inflation, we turn to the US Government’s Bureau of Labor Statistics.  For much of what we will discuss, the source is: http://www.bls.gov/cex/2009/Standard/quintile.pdf.  I have reproduced a portion of the table that describes the characteristics of each income quintile.  Please, survey the table to see what you can learn to reinforce or alter your view of our country’s citizens.  For this week, I draw the following summaries with a parenthetical comment after a point being additional information or an observation.

 

·         When we divide the country into income quintiles, the “top” group begins at a household income of $93,196.  (I have spoken to countless US citizens that, when learning of this number, are astonished to learn they are in the upper-class, as defined by income.)

·         The average income of the highest 20% is more than the sum of all the average incomes of the remaining four groups ($152,022).  (This is not surprising, as there is no upper limit on income but the lower limit is $0.  It is true, however that income in the United States is heavily skewed toward the top and most estimates conclude that around 70% of the total income of households is received by the 40% of households at the upper end.)

·         Income after taxes in greater than income before taxes for those in the lowest 20%, as a result of transfer payments (e.g., earned income tax credits, college tuition tax credits, and etc.).

·         The average age of the household head is greater in the lowest two income quintiles, indicating that low income is associated with older adults.  (While low-income is associated with older adults, it is estimated that from 20% to 24% of all children in the United States live in households below the poverty level. Sources: US Census Bureau and National Center for Children in Poverty )

·         Family size, the number of children under the age of 18, the number of earners, and the number of vehicles owned each increase with level of income; while the number of persons over the age of 65 trends downward as income increases.

·         The gender of 47% of the reference persons was male and female gender was, in fact, the dominant proportion of reference persons for each of the three lowest income quintiles.  Male reference persons, however, represent the majority in the two highest income quintiles.  (According to the US Census Bureau, 44.3% of single female-headed households with children are officially poor and 26.5% of single male-headed households with children are poor, while only 11% of households with children, in married-couple households, are poor.)

·         Rates of homeownership increases with income, with a range of from 40% of those in the lowest quintile to 89% of those in the highest quintile.  (It is quite interesting to point out that the proportion of homeowners that do NOT have a mortgage on their homes is 65% (=26/40) for those in the lowest income quintile and this proportion continually decreases until it represents only 20% (=18/89) of the homeowners in the highest income quintile.)

·         When we consider race, we can see that the proportion of households represented by minorities generally decreases as we move from lower to higher income quintiles.  (While this is true, it is also true that, when compared to the number of poor white households, there are both 46% fewer poor black households and 33% fewer poor Hispanic households than there are poor white households. Source: US Census Bureau)

·         Income is dramatically influenced by the educational level of the household.  While 45% of those in the lowest quintile have a college education, fully 84% of those in the highest quintile have a college education.  (A good education remains the best investment one can make.)

·         While automobile ownership/leasing increases with income, the rate is 31% less for the lowest quintile, when compared to the highest.

·         Finally, both the lowest and second lowest quintiles, on average, spend more than their after-tax income.  (Some of the shortfall may be covered by money that is in savings but much of it will be covered by debt being added to the household’s net worth statement.  Additionally, transfers of income from others – either the government or family members – may also be a way to cover the overage.)

 

This is the current snapshot of our country and her people.  Next week we will assess how each of these quintiles spend their money and what conclusions we can draw from that examination.  We welcome your feedback.

 

Item	All consumer units	Lowest 20 percent	Second 20 percent	Third 20 percent	Fourth 20 percent	Highest 20 percent
Number of consumer units (in thousands)	120,847	24,165	24,120	24,212	24,154	24,196
Lower limit	n.a.	n.a.	$19,175	$35,598	$57,295	$93,784
Consumer unit characteristics:
Income before taxes	$62,857	$9,846	$27,227	$46,012	$73,417	$157,631
Income after taxes	$60,753	$9,956	$27,275	$45,199	$71,241	$149,951
Age of reference person	49.4	51.4	51.4	49.3	47.1	47.8
Average number in consumer unit:
Persons	2.5	1.7	2.3	2.5	2.9	3.1
Children under 18	0.6	0.4	0.6	0.6	0.7	0.8
Persons 65 and over	0.3	0.4	0.5	0.3	0.2	0.2
Earners	1.3	0.5	0.9	1.3	1.7	2.0
Vehicles	2.0	1.0	1.5	2.0	2.5	2.8
Percent distribution:
Sex of reference person:
Male	47	38	42	49	51	56
Female	53	62	58	51	49	44
Housing tenure:
Homeowner	66	40	56	67	79	89
With mortgage	41	13	25	40	57	72
Without mortgage	25	26	31	27	22	18
Renter	34	60	44	33	21	11
Race of reference person:
Black or African-American	12	18	16	12	9	6
White, Asian, and all other races	88	82	84	88	91	94
Hispanic or Latino origin of reference person:
Hispanic or Latino	12	13	15	13	11	7
Not Hispanic or Latino	88	87	85	87	89	93
Education of reference person:
Elementary (1-8)	5	10	6	4	3	1
High school (9-12)	34	44	47	36	30	15
College	61	45	46	59	68	84
Never attended and other	a/	1	a/	a/	a/	a/
At least one vehicle owned or leased	88	67	87	94	97	98
Average annual expenditures	$49,067	$21,611	$31,382	$41,150	$56,879	$94,244
Deficit or Surplus		-$11,655	-$4,107	$4,049	$14,362	$55,707