The so-called rising wealth-disparity

On November 15, incoming Va Senator Jim Webb sounded in a WSJ op-ed what I think will be a theme of the new Congress – wealth disparity. [In fact I think this is the underpinning of a lot of the complaining about executive pay, particularly in the NYT (e.g.).] Webb said:

America's top tier has grown infinitely richer and more removed over the past 25 years. * * * The top 1% now takes in an astounding 16% of national income, up from 8% in 1980.

Alan Reynolds writing in today's WSJ has a useful corrective. He points out, to begin with, that "[t]he top 1% of households never received anything remotely approaching 16% of personal income (national income includes corporate profits). The top 1% of tax returns accounted for 10.6% of personal income in 2004." Then he proceeds to pick apart the data from economists Piketty and Saez that is fueling the wealth-disparity frenzy.

• The economists exclude Social Security and other transfer payments, which rose to 14.7% of personal income in 2004 from 9.3% in 1980.
• Personal income in 2004 was $3.3 trillion, or 34.4%, larger than the amount included in tax returns the economists rely on. This income/tax return gap is 4% larger than in 1988
• The top 5%'s share has been flat since 1988 except for 1993, when there was a change in survey methodology.
• The economists use income per tax unit rather than per family or household, which includes a rising number of high income two-earner couples filing joint returns.
• Most of the increase in the top 1%'s 10.6% share was in 1987 and 1988 after the Tax Reform Act of 1986. This reflects the phenomenon that as marginal tax rates drop, people have more incentive to earn and report high incomes, including less incentive to take deductions and non-salary compensation.
• The drop in individual rates accounted for a successful push toward loosening up the availability of Subchapters S and K, and then the well-known shift from the C-corporation form (Reynolds highlights Sub S, but I should add Sub-K forms including the significant rise in LLCs). So businesses' share of the top 1% increased from 7.8% in 1981 to 28.4% in 2004. This didn't make individuals richer, it just shifted business owners' income into "individual income" to be picked up by Piketty and Saez. Reynolds says "aside from business income, the top 1%'s share of personal income from 2002 to 2004 was just 7.2% -- the same as it was in 1988."
• After the tax rate on top salaries dropped after 1988, corporate executives switched from ISOs taxed as capital gains excluded from the Piketty & Saez estimates to nonqualified stock options reported as W-2 salary income. Thus, as Reynolds reports, the share of the top 1%'s share rises with the stock market in 1997-2000 then falls in 2001-2003.
• The economists' tax data misses the increasingly large share of investment income accumulating tax free in 401(k), IRA and 529 plans.

As Reynolds notes, the wealth-disparity gambit is a grab for new taxes, as well as regulation of executive compensation, which has always been as much about resentment as about agency costs.  The flawed data will undoubtedly be trumpeted endlessly by the NYT to the point that it will be seen as just as true as such other fundamental and irrefutable truths -- as, say, global warming and corporate greed. 

Comments

[M. Hodak]

Actually, corporate greed is a real phenomenon, which is why it is so easy to attack.

The fraud of the NYT's editorship is that it fails to distinguish anti-corporate greed, which is at the bottom of the attack on the earned wealth of the "rich" in favor of using state force to confiscate that wealth so it can be spent according to the NYT's priorities.

What disgusts me is that the NYT (and the readers and politicians to whom it panders) can claim the moral high ground in attacking greed while baldly pursuing an agenda of covetousness, envy and, ultimately, theft.

I am not a religious person, but it seems to me that one great benefit of religion in America in the 19th century, until W.J. Bryant came along, was that it was not so selective in which sins should be condemned.

[save_the_rustbelt]

Ask a dozen economists and you get at least 4 or 5 different answers.

Both sides are partially right, and both partially wrong, at least from the view at the front lines. There is a shift in income and waelth, it does appear to be not temporary, but I don't think anyone has the data right yet.

(On a somewhat related note, apparently SarbOx didn't kill all of the profits on Wall Street this year, at least not at GS. Can integrity co-exist with capitalism? Wow!)

"Greed is good" Gecko

[Deoxy]

"Can integrity co-exist with capitalism?"

It certainly can, but SarbOx has nothing to do with it, except perhaps get in the way.

[save_the_rustbelt]

All over the blogosphere real economists are tearing Reynolds apart.

Reynolds does not seem to be a real economist, more of an economics idealogue who makes the think tank circuit. Or am I wrong on that?

[Larry Ribstein]

Depends on whether you think Milton Friedman and Greg Mankiw are "real economists" -- the former agreed with Reynolds' criticism of tax data, the latter says the data is inconclusive. As far as I can see, Reynolds' WSJ op-ed raises legitimate issues about the reliability of the Piketty and Saez numbers as a basis for policymaking.

[Alan Reynolds]

The question is not whether or not I'm a "real" economist, but whether or not this is real economics. The op ed evolved out Chapters 4 and 5 of my book, "Income and Wealth," which is a college textbook. It was further refined in my presentation at the Western Economics Association annual meeting in July, which is currently being condensed and reworked for probable publication. If there is something fundamentally wrong with the logic or evidence, I have yet to hear about it.