Note: This series of posts builds on “Economists are rethinking the numbers on inequality: An academic disagreement has big real-world implications” in The Economist, November 28th 2019 issue.
—
The conventional wisdom:
Over the last half-century, the incomes of the top 1% have soared.
The incomes of middle-earners have stagnated.
Wages have barely risen even though productivity has done so, meaning that an increasing share of GDP has gone to capital (e.g., physical assets, dividends) rather than to labor
The rich keep reinvesting the fruits of their success, thereby increasing wealth inequality.
Increasing income and wealth inequality are an essential feature of late capitalism.
Each argument has always had its doubters. But the doubters have grown in number as a series of new papers have called the existing estimates of inequality into question. Let’s look at Number One.
1. Over the last half-century, the incomes of the top 1% have soared.
Economists typically use tax data to determine income distribution in the US (my sole focus in this post), but their results vary widely. For example, Piketty and Saez (2003) estimated the one percent’s share of income before government transfers and taxes is 21.5%, while Auten and Splinter (2019) put the share at 13.1% and the Congressional Budget Office (2019) came up with a 15.8% income share for the top one percent. Why such a range of estimates? It’s complicated but I’ll try to simplify the issues without misrepresenting them.
Party because economists differ as to what the “tax unit” should be: households or individual taxpayers. When tax units are households, the top one percent gets a bigger slice of the income pie than when the tax units are individual taxpayers. That’s because high-income households have more earners than low-income households, thanks to the decline of marriage over the past 50 years - a decline that hit low-income folks much harder than the affluent and college-educated.
It doesn’t make much sense to compare Income before transfers and taxes anyway. Differences in living standards are better conveyed by incomes after transfers* and taxes. When the Congressional Budget Office (2019) incorporated transfers and taxes in its calculations, the top one percent’s income share went from 15.8% to 12.5% in 2016. An updated inequality report from Piketty, Saez and Zucman (2018) put the post-transfer/tax income share in 2016 at a bit above 15% while Auten and Splinter had it at around 8% (see chart below). That’s still a large spread.
Now to the issue of whether the income share of the top one percent has soared over the past 50 years. And the answer is the same: it depends on which economist is talking. Piketty and Saez (2003) and the Congressional Budget Office (2019) say there was a steep increase in the 1980s and 1990s, while Auten and Splinter (2019) find little change over several decades . The disagreement has to do with tax law changes in the 1980s, which the Auten and Splinter say created incentives for business owners to report profits as personal income instead of sheltering profits within corporations. This created the impression that rich business owners were suddenly making a lot more money, but, per Auten and Splinter, it was only their reported income that soared during this period, not their actual income.
Despite their disagreements on the income share of the top 1%, these economists actually agree on how the income share of the top 1% is currently trending: it’s been relatively flat for the past decade. Check it out:
So, no: the incomes of the top 1% in the US are not “soaring”. It’s not soaring in other developed countries either, but that’s another story.
More important, the top 1%, 5%, or 10% are not the same people from year to year but “slices of the population which are made up of different people at different points in time”. Most US households have a high income moment, transitory though it may be. According to Mark R. Rank at Washington University, 12% of US households will reach the top 1 % of income earners at least once, 39 % will spend time in the top 5 % of earners, 56 % will be in the top 10 %, and a whopping 73 % will spend at least a year in the top 20 % of earners. For most Americans, income inequality is less about “Us versus Them” than how Our income rises and falls across the life span.
—
* Transfers are means-tested cash payments and in-kind transfers from federal, state, and local governments, such as Medicaid, food stamps, and Supplemental Security Income.
References:
Auten, Gerald, and David Splinter. 2019. "Top 1 Percent Income Shares: Comparing Estimates Using Tax Data." AEA Papers and Proceedings, 109: 307-11. DOI: 10.1257/pandp.20191038 https://www.aeaweb.org/content/file?id=9677
Piketty, Thomas and Emmanuel Saez (2003), Income Inequality in the United States, 1913–1998, The Quarterly Journal of Economics, Volume 118, Issue 1. 2003, Pages 1–41, https://doi.org/10.1162/00335530360535135
Piketty, Thomas, Emmanuel Saez and Gabriel Zucman, 2018 "World Inequality Report 2018,"
The Distribution of Household Income, 2016. Congressional Budget Office July 2019.