Tuesday, September 19, 2017

You Can Start Disbelieving the Nonsense About the 1% Getting Richer

In the U.S., the 1% are getting richer, and no one else is. Right? That, at least, has been the narrative over the last fifteen years or so. The first pass research on this, by Piketty and Saez in 2003, helped make them famous.

The evidence for that has been based on individual tax returns. But tax rates change through the years. Looking at tax returns without considering the underlying rates (and how they might change behavior) is called the unadjusted approach. It shows the 1% getting much richer.

So what needs to be adjusted for?

  • The biggest tax reform of the last 50 years in 1986
  • Corporate profits, that are paid out as dividends at different rates depending on tax rates.
  • Value of employer provided health insurance.
  • Smaller household sizes, and lower marriage rates.
  • Government transfer payments

Now the tax experts have incorporated corrections for all of those. The big ones are that the treatment of corporate profits that were not paid out (but that rich people had access to, say, through corporate owned vacation property) was much larger in 1960, while it turns out that now the top 1% is actually supporting a bigger group of unreported dependents (rich families aren’t the ones getting smaller).

Piketty and Saez reported that the share of income taken in by the top 1% doubled since 1960. The new research by Auten and Splinter find that over 90% of Piketty and Saez’s increase is there because they didn’t adjust for that stuff. Basically, the 1% are a tiny bit richer. Not enough to worry about.

One thing that both studies find is that the share of the top 1% dropped significantly in the 1970’s. So their share is U-shaped. This is consistent with tons of evidence that business cycles hit the income of the rich the hardest, and there were 4 recessions in a 13 year period centered on the 70’s.

Over the last couple years, it’s also become common to remark that the share of income paid out to individuals has fallen, and that the share going to profits, interest, and rent has gone up. The adjusted “broad income” in this chart shows that’s not the case:

Income Shares Capture

What the new research corrects for is that about half of income is now coming from stuff other than wages and salaries:

Income Sources from Auten and Splinter Capture

Piketty and Saez were looking mostly as the center section.

This points to a good convention when thinking about news reports about inequality: if they focus on wages and salaries, they’re cherry-picking.

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