Mankiw's blog linked to a press release by the Congressman Jim Saxton, using CBO data to show "middle income tax burden at lowest level in decades". The attached graph, as Junk Charts readers will immediately recognize, is classic chartjunk. Every time the vertical axis does not start at zero, one suspects something is amiss. And what with the gridlines and data labels?
"Don't believe it? Check out the data source yourself." I followed Mankiw's suggestion and was indeed surprised... but not by the great fortune of the "middle class". The surprise was how the chart painted a dishonest picture of the CBO data.
The original chart plotted only the tax rate experienced by the middle 20% of the population. The CBO provided data for all five quintiles; why not plot them all? In this new chart (right), the "surprise" windfall to the middle 20% proved not to be anything special at all! All five quintiles, especially the middle three, followed pretty much the same trend over time. The effect of singling out the middle 20% is to deprive the context by which the data should be interpreted.
Further, what might be the result of the declining middle income tax burden? The CBO data painted an unexpected picture. Paradoxically, as the middle 20% see their tax rate decrease, they also earn a smaller share of the nation's after-tax income (black line at right). At the same time, the top 1% saw their share of after-tax income double from about 8% to almost 16% (blue line). The top 20% line is also upward-sloping although less pronounced. So, the implication that the middle class have had it good is plainly wrong.
What is going on? Two factors were at play and the Congressman presented only one side of the story (the tax rate). What he omitted was that during this period, the nation's wealthy took home larger and larger shares of the pre-tax income. This shift in pre-tax income more than offset any relative reduction in tax rate for the middle 20%.
This distortion can be traced back to the use of quintiles (or more generally, ranks). We use them to cope with data having extreme distributions but a by-product is losing information about how extreme are the extreme values. As demonstrated here, the quintiles from old are really different from the quintiles from today because the underlying distribution has become much more extreme.
Finally, another bit of mystery (to me) is how the middle 20% came to be considered "middle class". Is there a widely accepted definition?
Reference: "CBO Data Show Middle Income Debt Burden At Lowest Level in Decades", Feb 21 2008.