Oct

26

A Congressional Budget Office report released today shows that from 1979 to 2007, after-tax income grew by 275 percent for the top 1 percent of households, compared with 18 percent for the bottom 20 percent. Bloomberg News.

Great example of the regression fallacy. Ones that happen to be in top 1% in 2007 necessarily grew more in % than typical person, much more than ones in bottom 20%.

Allen Gillespie adds:

And isn't that also true for trees, the top ones pulling nutrition from the bottom ones and growing from the inside out and higher simultaneously. Hence, why utilities as regulated monopolies are the most stable - they have eaten all the competition.

Stephen Stigler writes:

A reaction to the report which says "A Congressional Budget Office report released today shows that from 1979 to 2007, after-tax income grew by 275 for the top 1 percent of households, compared with 18 percent for the bottom 20 percent."

First, it is not clear what they actually did, but you can be pretty sure they did not find what the item says. That would involve following a very large number of people and their individual after-tax income over a 28 year period, and I do not believe such data are available - and even if they were available there would be a serious problem of definition - do they mean top 1% in 1979? Or top 1% in 2007? These were not the same people - in fact, some of the top 1% in 2007 were in the bottom 20% in 1979, including probably Steve Jobs.

So what they probably did was just take the average after-tax income of the top 1% in 1979 and compare to that of the different group of people who were top 1% in 2007. Now, as I say, these were different people by and large, with an unreported overlap to be sure.Some in the 2007 group would be testimony to the opportunities that allowed them to improve from even the bottom 20% in 1979, a change that some might think possibly admirable and certainly non-discriminatory.Other problems are that the bottom 20% includes not just the undeniably poor, but also the young and not yet successful, and the comparison at the top compares the pre-Reagan tax cut era (when there were huge incentives to keep income out of the tax calculation), to the peak boom year when rates were relatively lower and the incentives to hide income much less.

This is not really a regression effect, but a different type of selection fallacy. Had they really taken the top 1% in 2007 and followed them individually back to 1979, similarly with the bottom 20%, that would have produced a regression effect. But I doubt they could do that. Anyway, who cares what Mark Zuckerberg was making in 1979? He was born in 1984!


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