Chairman Obey, Ranking Member Walsh, Members of the Subcommittee; it is an honor to appear before you today to discuss, “Implications of Economic Trends for Workers, Families, and the Nation.”

I would like to make three major points:

• Despite the rise in inequality during the last few decades, real incomes have risen significantly in the middle of the income distribution. Real incomes have also risen at the bottom of the income distribution, although at a very slow pace.
• The existing federal tax system is highly progressive, with a small group of high-income taxpayers bearing a large portion of the federal tax burden.
• Due to economic mobility, annual income can be a misleading measure of wellbeing. A significant portion of households with low incomes in any given year experience large income gains in later years.

Real Incomes Have Risen in the Middle of the Income Distribution

Some observers have claimed that the middle class has experienced falling living standards in recent decades, as their incomes have failed to keep up with inflation. The best evidence demonstrates, however, that real incomes have risen significantly in the middle of the distribution, although not as rapidly as at the top of the distribution. Real incomes have also risen in the bottom of the distribution, although those gains have been extremely small.

To assess this issue correctly, it is necessary to use a measure of the overall economic status of middle-income Americans. Incomplete measures can yield misleading results.

For example, the Bureau of Labor Statistics' measure of average hourly earnings of production and non-supervisory workers has often failed to keep pace with inflation. At best, however, that measure reflects households' before-tax cash wage income, which is only part of the picture. To obtain a comprehensive measure of the economic resources available to households, it is necessary to include their other sources of income--fringe benefits, property income, and government benefits--and to subtract their tax payments. Even the Census Bureau's measure of household money income is incomplete, because it omits fringe benefits, in-kind government benefits, and capital gains and does not subtract tax payments.

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Alan D. Viard is a resident scholar at AEI.