A new research paper from two senior economists challenges the narrative that America is experiencing astronomical and accelerating levels of income inequality, long held by adherents of the modern progressive movement.
The idea that the United States is experiencing a new gilded age — which allegedly contributes to polarization, economic destabilization, and other social ills — has appeared in the campaign messaging of many Democratic politicians, such as Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA).
It has made its way into the rhetoric of progressive pundits in legacy media as well as platforms popular among young people like Twitter, Twitch, and YouTube. They have influenced Occupy Wall Street and the new socialist movement spearheaded by the Democratic Socialists of America (DSA), and indirectly influenced demonstrations led by Antifa and Black Lives Matter against President Donald Trump and American law enforcement.
Learn the benefits of becoming a Valuetainment Member and subscribe today!
The origin of this influential talking point (or at least its latest iteration) can be traced back to the work of French popular economist Thomas Piketty and his research colleagues at UC Berkeley, Emmanuel Saez and Gabriel Zucman. Saez and Zucman were tapped to provide advice to Elizabeth Warren’s 2020 presidential campaign. The three also influenced the budget of the Obama administration.
Piketty, who has personally admitted to having never studied the works of Karl Marx, instead bases his anti-inequality argument in an empirical analysis of national tax records. The tax records of the United States, provided to Piketty’s research team by the Internal Revenue Service (IRS), have long only been available to them.
Piketty, Saez, and Zucman (PSZ) had thus exercised an ideological stranglehold over the argument—until relatively recently, when two new researchers were granted access to the data.
Their names are Gerald Auten, of the U.S. Treasury Department, and David Splinter, of the Joint Committee of Taxation. While their estimates have been in circulation for several years, only in September did they publish a fleshed-out paper in the Journal of Political Economy, one of the top journals in the academic study of economics. Using a different methodology on the same exact data, the pair have reached wildly different results from PSZ.
Was the income-inequality narrative of the past ten years substantially overstated? | By @Jon_Hartley_ https://t.co/PvZ7YYVjAI
— National Review (@NRO) December 29, 2023
Auten and Splinter (AS) conclude that post-tax income inequality has barely changed over the last few decades, while pre-tax income of the top 1 percent has indeed increased but not at the extremes that PSZ have argued.
Unlike PSZ, AS include “informal” non-visible income (“off the books”) in their analysis, which they extrapolate from tax evasion records.
AS’ figures for “pre-tax income” measures “tax-exempt interest, corporate retained earnings and taxes, employer-paid payroll taxes and insurance, imputed rental income on housing, underreported income, and other taxes and income.” Their paper explains that with the combined effect of “the declining importance of corporate retained earnings” and “the growing importance of employer-paid taxes,” gains in these excluded sources of capital income have been rewarded to the bottom, not the top of earners. Thus, they argue, by excluding these sources from their analysis PSZ have made the gulf between rich and poor greater than it really is. AS explicitly say the main reason their results differ from PSZ’s is due to their inclusion of “income not on tax returns.”
Critics of PSZ have scrutinized their exclusion of earned-income tax credits (tax breaks for the less fortunate), which is one of the largest and most effective, if not the most effective, antipoverty programs in the United States. Saez and Zucman in their book The Triumph of Injustice also claim that health insurance premiums are a hidden labor tax, even if paid through an employer. They add that the health insurance mandate introduced by President Barack Obama does “not fundamentally change” their argument (although they allegedly do not factor health insurance premiums into their analysis).
Additionally, AS take marriage and marital tax status as a factor. They write:
Our analysis also accounts for the differential decline in marriage rates, which decreased substantially in lower- and middle-income groups but only slightly at the top of the distribution. Holding all else equal, as the overall marriage rate decreased, more adults filed separate tax returns. This increased the total number of tax units, thereby increasing the number of high-income tax units in the top one percent. This differential decline in marriage rates overstates top income shares in recent years.
Taking all this into account, AS calculate that the pre-tax top one percent share of national income increased by 4.4 percentage points between 1979 and 2019; in post-tax income, they saw a 1.4 percentage point increase among the top one percent (Piketty puts it far higher at roughly 14 points).
If measured from the early 1960s until today, AS find that the top one percent pre-tax share of income increased by only 2.6 percentage points, and the post-tax share was equivalent to where it was in the 60s.
In a word, AS believe income inequality only appears to be skyrocketing if you ignore tax breaks for the poor, wealth transferred to the bottom and out of the top through welfare programs, and untaxed income. If this is the case, that means the PSZ-influenced Left are incorrect in their diagnosis of the socio-political situation, and our various social maladies must have a different source.
Add comment