As the debate over income equality in the US continues to build, economists and policy makers are focusing on the large amount of new and old studies that attempt to quantify the rising disparage of incomes. However, many of these studies and statistics can be misleading because they do not take several important factors into consideration. For instance, most studies focus on income and ignore taxes, income transfers, and equity. A realistic measure of inequality should focus on disposable income and the overall standard of living. If there is a wide gap between income groups in the standard of living, then it should be clear that the US is experiencing increasing inequality. In many ways, the standard of living depends on disposable income, income that people can spend on necessities, leisure, and other consumption activities. The graph below shows the amount of annual expenditure for the top 20% of income earners and the bottom 20% of income earners for the years 1985 and 2010.
Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, 2010
(http://www.bls.gov/cex/home.htm), and Manhattan Institute calculations
As you can see, the top 20% has seen a relatively small increase in expenditure from 1985-2010, the bottom 20% however has seen a significant increase in expenditure since 1985. In fact, in 1985 the top 20% had 2.47 times more expenditure than the bottom 20%, and in 2010 they had a lower 2.35 times more expenditure. This tells an interesting story because expenditure is determined by disposable income. Disposable income is after tax and after any income transfers, so it reflects the amount individuals can actually spend to pay for necessities and leisure activities.
Instead of showing increasing inequality, the data shows that after taxes, welfare payments and benefits, as well as other factors, the poor have been able to increase their expenditure while the rich have remained near the same historical level. This may be due in a large part to the amount the bottom 50% pay in taxes compared to the top 50% of income earners, as well as taking into consideration the income benefits of welfare transfers.
To see a break down of expenditure per year since 1985 check out table 6: http://www.manhattan-institute.org/html/ir_2.htm
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