French economist Thomas Piketty captured the attention of the Western world through his research on income inequality. With his collaborators, University of California at Berkeley’s Thomas Saez and (later) Gabriel Zucman, Piketty asserted that share of income going to the top 1 percent in the U.S. had more than doubled since 1960. Accepted as simple fact, this finding is embedded in the stump speech of nearly every competitor for the Democratic presidential nomination, particularly in calls for a tax on wealth.
But it may not be true. Gerald Auten of the U.S. Treasury Department’s Office of Tax Analysis and David Splinter of the congressional Joint Committee on Taxation released a paper in 2018 that raises a number of questions about the approach taken by Piketty, Saez and Zucmanand arrive at quite different conclusions. This is complicated, so buckle up!
Let’s start with their conclusion and work backward: Auten and Splinter estimate that the after-tax share of income going to the top 1 percent rose from 8.5 percent in 1960 to 8.8 percent in 2014. This is rather different from the Piketty et al.finding that the 1 percent’s after-tax share rose from 10 percent to 15.7 percent over the same period. (Piketty’s doubling is pre-tax, incidentally—the “headline” result does not adjust for the impact of taxes and transfers on the income distribution.)
I’m not going to dig into all the details of Auten and Splinter’s paper. Nor do I claim to be qualified to judge the accuracy or fairness of their adjustments. But these are responsible economists without an ideological axe to grind. If nothing else, I hope that you’ll gain an appreciation for how difficult this kind of analysis can be, and how assumptions can change conclusions.
One adjustment to the original paper (and adopted by Piketty et al.in their revisions) is interesting and easily explained.
Who’s in the 1 percent? Initially, Piketty sorted all of 1960’s tax returns in pre-tax income order and measured the share going to the highest 1 percent of returns. Then he did the same thing at the end of the period and compared the share at the beginning (9 percent) to the share at the end (20 percent). This is the conclusion that spurred those stunning headlines.
Among the many things that changed over those 55 years was marriage rates. Auten and Splinter observed that marriage rates among the wealthy had remained roughly constant over the period (90 percent and 85 percent in 1960 and 2015, respectively) but fell overall from 67 percent to 39 percent (we’ll leave the explanation to sociologists). So, the share of “married filing jointly” in the top 1 percent of tax returns was about the same at the beginning and end of the study period but not for the rest of tax filers. By classifying the “top 1 percent” by the number of adults instead of the number of returns, Auten and Splinter found the share of income going to the top 1 percent fell nearly two percentage points.
Tax policy changed rather a lot over the period, too. The top marginal tax rate in 1960 was 91 percent (yep, individuals earning $200,000 or couples earning $400,000 owed Uncle Sam 91 cents of every additional dollar of income). You can imagine that tax avoidance had become quite creative. As the tax rate on corporate income was lower than the tax rate on individual income, there was an incentive for the business to retain earnings over distributing dividends that would be taxed by the shareholders.
When the tax code changed in 1986, the tax rate on personal income became lower than the tax rate on corporate income. Now there was a substantial incentive for firms to organize as “pass through” entities in which the firm paid no tax, but passed along the entire tax liability to the owners. Adjusting for this change trimmed the increase in share going to the top 1 percent by another percentage point.
Changes in benefits and payroll taxes also made a difference. Employer-provided insurance and employer-paid payroll taxes rose over the period and disproportionately increased the income of the 99 percent. These adjustments cut the share to the 1 percent by another 1.5 percentage points.
We’re still looking at pre-tax, pre-transfer income: The Auten-Splinter estimate of the 1 percent’s share of 1960 pre-tax income is 11.4 percent versus 9 percent in Piketty et al. For 2015, their estimate was 14.2 percent versus 20.3 percent in Piketty et al. Thus, Auten and Splinter found that the pre-tax share of income going to the 1 percent rose by less than three percentage pointscompared with the 11 points reported by Piketty.
Still with me? Finally, Auten and Splinter considered how government programs and various taxes changed the distribution of income. Government transfers grew from 5 percent to 14 percent of income from 1960 to 2015. They added Social Security, Supplemental Security Income, the value of food stamps, unemployment benefits, the Earned Income Tax Credit, etc. into the income stream. There’s an argument to be made that families in poverty would be better off trading marketplace earnings for program benefits. Nonetheless, adjusting for relative taxes and the transfer payments that these taxes fund captures a true difference in purchasing power. This adjustment reduced the share of income going to the 1 percent by half a percentage point in 1960 and nearly two percentage points in 2015.
All told, the Auten-Splinter analysis shows the 1 percent gaining less than half a percentage point in share over the period—again, from 8.5 percent to 8.8 percent. I recommend the Auten and Splinter paper to your consideration as it is detailed and well annotated. What we might consider the “true” shift from the 99 percent to the 1 percent depends on a range of assumptions and we might each choose differently from either set of researchers. I trust that you have a better understanding of the challenges inherent in this kind of analysis, however.
Inequality remains a critical social problem. Moreover, the “winner take all” characteristic of many of our most successful technology companies suggests that the number and influence of the super-rich is growing. This new paper suggests, however, that the magnitude of the change is not quite as harrowing as we’d come to believe.