Challenging the Piketty gospel

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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 PikettySaez 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-taxincidentally—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.

Marriage rates

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.

Corporate structure

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. 

3 thoughts on “Challenging the Piketty gospel

  1. This is a very interesting article, and it is nice to see a serious economic and social analysis that digs deep into a topic to reveal insight and perspective. A refreshing piece of journalism.

    However, I’m bothered by the first sentence of the last paragraph: “Inequality remains a critical social problem.” On what basis is this being offered?

    Is this an apologetic disclaimer, as to not upset those who might not be able to accept any challenge to the 1% is evil dogma? It’s unfortunate the article couldn’t just rest on its sound data and reasonable disclaimers, without requiring an admission of capitalism’s supposed flaws.

    As long as we wish for this to be a capitalist society, there will be income inequality. This is the result of supply and demand and other forces that reward talent, effort, education and experience. What is the “critical social problem” specifically? That some people make more than others? That there is even a top 1%? What is the appropriate/acceptable premium that the top 1% should be eligible to earn relative to the mean or median? Sans that specific line in the sand, how can we state that there is actually is a problem?

  2. That’s a fair point, Mike, and one I take seriously. I asked myself the same question when I wrote the piece: Am I just conforming to a social norm or is this a concern I share? So let me say emphatically that while I acknowledge the necessity of income inequality in a mixed capitalist system–and observe that the efficiency loss among more redistributive models is large and, to most, unacceptable–there is a serious risk of social instability as inequality rises. See a prior post of mine at CGR.org: http://blog.cgr.org/kent-gardner/disruptive-technology-can-job-creation-keep-pace-with-job-destruction/ There is no natural law guaranteeing that the pace of job creation will match the pace of job destruction. Kurt Vonnegut’s Player Piano (one his earliest novels) is a pretty scary novel!

  3. If 99% of the population of the US made just 1$ per year and the remaining fraction made a whole 5$ per year there would still be a 1% — in this case just a 1% making 5$ instead of 1$. The point being, there will ALWAYS be a 1% unless EVERYONE makes EXACTLY the same amount.

    The problem isn’t that there IS a 1% — again, there will always be a 1% if people make different amounts. Instead, the problem is the *discrepancy* between the wealth of the 1% and the wealth of the everyone else. I know Fox claims that “liberals” hate the 1%; we don’t, what we hate is the discrepancy in wealth between the 1% and everyone else, because of the damage that does to society. If 99% of the population makes 1$ per year and the remaining 1% make 5$ there MAY be a problem (a 5x spread after all). If 99% make 35,000$ and 1% make 350M (a 10,000x spread) there’s definitely a problem.

    The letter writer wants to know what that problem is? Go look on the internet at the tangible effects of income inequality, or, really *wealth* inequality. Just one example, I’m sure there are some people who truly believe the system is completely level and therefore the rich are in that state because of their harder work and better smarts? Yeah, well, ever heard of lobbying and buying tax cuts for the wealthy, and not the moderately incomed? Fox talks at length about “the unions” buying advantages for their members; lobbying for the rich does the same, much more effectively, and I’ve yet to hear the people complaining about unions skewing the playing field also talk about what the lobby for the rich does to distort that field.

    Again, the argument isn’t that everyone should make the same amount, it’s that the spread between the (very) rich and (very) poor has to be controlled, because a democracy doesn’t survive when that spread becomes to great.

    Or does the letter writer believe that medieval England was a shining example of a democracy? Again the complaint isn’t against “the rich” or “the 1%” or “capitalism,” it’s a complaint against a very very specific problem of an inordinate difference between the very rich and everyone else.

    ***

    As far as Kent’s article goes, when I read it initially I thought “well, it’s good there are criticisms of Piketty, but readers aren’t going to take away the other point of the article — that income equality (really *wealth* inequality) is still a huge problem.”

    Piketty’s exact numbers can be examined, and should be. But … well, here, read this and then say that there’s no problem:

    “A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total. The bottom half of the world adult population owned 1% of global wealth. Moreover, another study found that the richest 2% own more than half of global household assets.” (https://en.wikipedia.org/wiki/Distribution_of_wealth)

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