When people find out that a firmly held belief they have is false, there is this grieving process, ranging from denial to sadness to anger. At least for me, I prefer to adhere to sound research methodology, logic, reason, and facts. That way, if new information or evidence comes along that challenges previously conceived notions, it is less of a shock to my worldview and I do not deal with such a grieving process because I do not believe that personal is political. I do my utmost separate the political arguments from the person. For those who believe that the personal is political, this grieving process can rattle one's cage.
Take income inequality for example. CNN tells us that income inequality is snowballing. Washington Post posits that income inequality harms everyone, including the rich. The famous economist (or infamous, depending on your point of view) Thomas Piketty popularized the narrative that the rich made of like bandits because, according to their research, the top 1 percent's share of income increased from 8 percent in the 1980s to 27 percent in 2021. Even the centrist Council on Foreign Relations depicts income inequality as "one of the defining challenges of this century."
All we hear about is how income inequality has continued to rise in recent decades and how awful it has been. What would you think if it turns out that income inequality has barely budged in the past sixty years? It would run counter to so much of what we have heard, especially since the Occupy Wall Street movement in the 2010s.
A study published in the Journal of Political Economy last month scrutinizes the narrative and turns it on its head (Auten and Splinter, 2023). The authors of this study are far from being lightweights in tax policy. Gerald Auten has been an economist at the U.S. Treasury for nearly four decades. David Splinter is a senior economist at the Joint Committee on Taxation.
Why do I prefer this analysis over the likes of Thomas Piketty? In short, it better contextualizes what is going on and measures it more accurately. In terms of context, Auten and Splinter take into account the reforms from the Tax Reform Act of 1986. This Act lowered the statutory rates and broadened the tax base. The higher statutory tax rates created incentives to shelter income inside corporations. Without these adjustments, top income shares from the 1960s are understated (p. 3).
Auten and Splinter also accounted for decline in marriage rates. Why is this important? To quote the authors, "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 (ibid)."
In addition to making these adjustments, the authors sensibly accounted for two other factors. One is that they adjust for post-tax income. Pre-tax income tells a certain story, but post-tax tells a more practical story since post-tax income is what one de facto earns and takes home. The second adjustment is with regards to including government transfers. Whether it is welfare benefits for low-income households or tax breaks for high-income households, these funds need to be factored in to determine actual purchasing power.
When the authors factored in all of these adjustments, the picture surrounding income inequality looks quite different. What we see with the share of income for the top 1 percent is much more modest than Piketty depicts.
It is not only the Top 1 percent that are faring better, but also individuals in lower income brackets. The authors looked at the data by quintile. One key trend is that income shares for the middle and lowest quintiles did not change. The second more notable change is that income [in 2019 dollars] went up for those in the lower quintile (p. 26).
It should be no surprise that Piketty and his colleagues take issue with the findings from Auten and Splinter. I am also not surprised that Splinter was able to refute the flaws in Piketty's response, especially since Piketty did not address most of Auten and Splinter's criticisms of Piketty et al. in the first place. Furthermore, I remember analyzing a Harvard study from 2014 showing that single-mother households had significantly more impact on income mobility than income inequality.
This is more than academic sparring or quibbling over methodological differences. The findings from Auten and Splinter have real-world implications. Forget for a moment that income has increased for lower-income households after adjusting for inflation. After all, measures of income inequality or wealth inequality do not tell us about the well-being of poor people, as this 2018 Cato Institute report on wealth inequality reminds us or as I brought up in 2014 when scrutinizing the Gini coefficient.
What does it mean that income inequality has stayed by and large stable over the past 60 years? I am sure it has similar implications to finding out that climate change is not a crisis or that COVID-19 would not have been so much worse had we not implemented lockdowns. It means that the narrative of "the super-rich continue to get richer at the expense of the poor" is a falsehood. It means that the political Left cannot propagate the politics of envy by focusing on relative gains (as opposed to everyone getting a bigger piece of the pie) or dividing people into the haves versus the have-nots. It means that such policy recommendations as the wealth tax or a global minimum tax lose justification. Ultimately, it means that the political Left loses power. I will conclude today's piece with concluding thoughts from the Financial Times:
One conclusion is that methodology matters in such research. A more profound one is that if income inequality has not risen, we have been asking the wrong questions about U.S. society. Instead of asking how to curb the power of the super-rich, perhaps there are better questions. For example, why has a rise in redistribution been so ineffective in solving the U.S. societal ills? And do we want so much of redistribution to be undertaken through healthcare rather than providing poorer households with more money?
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