January 2001
Who We Are Now Isn’t Who We Were Then
People's needs and priorities change as they age. Middle-aged people with concerns about mortgages, parent-teacher meetings, and keeping up with the neighbours are quite different from college students worrying about exams and what pub to frequent. Similarly, many of the worries that preoccupy those now in middle age will seem inconsequential when they reach retirement. The point is that our interests and worries change over the course of our lives.
Unfortunately, the reality of this "life-cycle" perspective is lost in most debates on income distribution, taxation, and poverty, among other issues. That is, instead of acknowledging and incorporating peoples' varying stages of life into any discussions of poverty and tax reform, many commentators look just at the current period, and evaluate only the immediate impact of a new policy, as if people's lives were static.
Income distribution offers a particularly good example of ill-formed policy analysis. Advocates for an interventionist and redistributionist state argue that the distribution of income as it currently stands is unjust. They cite, for instance, the fact that in 1990 the bottom 30 percent of families received only 8.7 percent of total income (before tax) while the top 30 percent received 57.4 percent of total, before-tax income. Over the last decade, those in the bottom 30 percent have seen their share of total income drop to 8.1 percent while the top 30 percent have seen their share of total income (before tax) rise to 59.4 percent.
Many commentators judge this change in the relative distribution of income to be unfair. The problem with this judgement is that it fallaciously assumes that people are fixed in their income stations. That is, the discussion assumes that the same families are trapped in low income for the full decade.
The Canadian data on income mobility, although not as extensive as American statistics, suggests a very different picture. In fact, available data reveals a relatively high degree of income mobility. A soon-to-be released Fraser Institute study entitled Flat Tax: Principles and Issues devotes an entire section to explaining how to assess tax policies, given life-cycle patterns and income mobility. It presents Canadian research based on Statistics Canada's Survey of Labour Income and Dynamics which concludes that between 1995 and 1996, 24 percent of families earning incomes in the lowest two quintiles found themselves at least one quintile higher. That is, in a single, one-year period, almost a quarter of families that were previously in the bottom 40 percent of income increased their earnings sufficiently to move up at least one income group.
The income mobility evidence is even more notable when the analysis is extended to a 5-year period. A total of 45 percent of those families in the bottom two quintiles of earned income moved up at least one quintile over the five-year period of the study. As well, nearly 21 percent of all families in every quintile moved up one quintile in earnings while another 8 percent moved up more than one quintile over the five-year period.
One of the most detailed studies of income mobility from the US is the University of Michigan's Panel Survey on Income Dynamics. Analysis by Michael Cox and Richard Alm in Myths of Rich and Poor concludes that "being in the low-income bracket isn't, for a large majority of people, permanent," (p. 74) as evidenced by the fact that only one-half of one percent (0.5 percent) of the sample was in the bottom quintile for every year of the 15-year study. In fact, only 5.1 percent of those in the bottom quintile in 1975 were still in the bottom quintile in 1991. Cox and Alm report that "all through the University of Michigan data, there's a consistent, powerful thrust toward the top of the income distribution" (p. 75). In fact, over the study period (1975-1991), the average income in the poorest quintile grew 2,196 percent while the average income in the richest quintile grew only 8.7 percent, again indicating a tremendous upward momentum in earnings.
There are a number of studies corroborating these results. For instance, Cox and Alm also refer to a 1992 US Treasury Department study (pp. 76-78) examining tax returns between 1979 and 1988, which found that "86 percent of those in the lowest income bracket moved to a higher grouping. Two-thirds of them reached the middle strata or above, with almost 15 percent making it all the way to the top fifth of income earners" over the study period.
What we have to remember when discussing important public policy issues such as poverty and tax reform is that taking a simplistic "snap shot" view of society is just not accurate. We live in a dynamic society. People's lives change, sometimes dramatically, over the years. The failure to incorporate this significant income mobility into the analysis results in a misleading depiction of reality at best, and, at worst, can end in bad and damaging public policy.
References
Cox, Michael and Richard Alm (1999). Myths of Rich and Poor. New York: Basic Books.
Drolet, Marie and René Morissette (1999). To What Extent are Canadians Exposed to Low Income? Ottawa: Statistics Canada.
Drolet, Marie and René Morissette (1998). The Upward Mobility of Low Paid Canadians, 1993-95. Ottawa: Statistics Canada.
Federal Reserve Bank of Dallas (1999). By Our Own Bootstraps. Dallas, TX: Federal Reserve Bank.
Webber, Maryanne and Mike Sheridan (1998). Labour Market Dynamics: Information for New Canadian Longitudinal Sources. Ottawa: Statistics Canada.
Webber, Maryanne, Cathy Cotton, Mauri Meere, Kevin Bishop, and Peter Hewer (1999). A Comparison of the Results of the Survey of Labour and Income Dynamics (SLID) and the Survey of Consumer Finances (SCF), 1993). Ottawa: Statistics Canada.
Jason Clemens is the Director of Fiscal Studies at the Fraser Institute and co-author of Flat Tax: Issues and Principles (forthcoming) and Christopher Sarlo is a Professor of Economics at Nipissing University and an Adjunct Fellow of the Fraser Institute.
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