What Percent Are You?

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One useful thing the recent CBO report did was clarify what the minimum cutoff points were for entry into different American income cohorts. This one looks at pre-tax income:

One interesting thing you see here is that the amount of inequality happening at the bottom level is tiny in absolute dollar terms. In real human welfare terms, the difference between living on less then $15,000 (as the bottom quintile does) and earning in the $45,000-$70,000 range (as the middle quintile does) is gigantic. But the extra $40-$50k it takes to move from the bottom quintile to the middle quintile is a very small number of dollars compared to the $110,000 or so it takes to get from the 96th percentile to the 99th percentile.

That’s just a reminder of the enormous power of redistribution to improve human welfare. People in the top 5 percent, and especially in the top 1 percent, are competing against one another primarily in positional ways. Nobody wants to lose tens of thousands of dollars in income and fall behind the Joneses. But if everyone’s incomes in the tippy top dropped, not only would there be no loss of psychological positional advantage, but the price of many of the goods consumed by wealthy people would fall. If you’re super-rich, instead of just prosperous, you can afford that great summer place in the Hamptons. But the only reason that great summer place in the Hamptons costs so much in the first place is that all these other people are so rich. Moving consumption opportunities down the income ladder does much more benefit to the people who get the money than it does harm to those at the top.