Alan Reynolds writes The Truth About the One Percent in The National Review Online

Excerpt:

The table shown here — which uses Piketty and Saez’s data — shows the top 1 percent’s average real income fell by 16.3 percent from 2007 to 2012, and ended up 6.4 percent lower than it was back in 2000:

Average Real Income of the Top 1 Percent (2012 dollars)
2000 $1,350,006
2001 1,063,706
2002 933,878
2003 964,989
2004 1,143,104
2005 1,323,935
2006 1,414,985
2007 1,510,932
2008 1,213,199
2009 961,785
2010 1,076,379
2011 1,056,640
2012 1,264,065

What about the “other 99 percent,” whose income supposedly rose by only 0.4 percent from 2009 to 2012? Piketty and Saez compare real incomes at different income levels without including Social Security, unemployment and disability benefits, food stamps, Medicaid, etc. Government transfers totaled $2.3 trillion in 2012, up 24.6 percent in real terms from 2007 and up 68 percent since 2000. Because Piketty and Saez estimate only pre-tax, pre-transfer income, they also ignore $149 billion in Treasury checks to lower-income families from refundable tax credits. They’ll also ignore huge Obamacare subsidies next year.

Once transfers and taxes are properly taken into account, my own research for the Cato Institute shows no clear trend toward greater inequality after 1989, aside from the tech-stock boom of 1998–2000. Instead of any predictable trend, data on income shares are dominated by cyclical variations in which rich and poor rise or fall together: When the top 1 percent’s share rises, the poverty rate falls, and when the top 1 percent’s share falls, the poverty rate rises.

There are numerous conceptual and measurement problems with attempting to judge the relative living standards of the rich, middle-class, and poor by relying on income reported on individual tax returns (ignoring, for a start, income that’s unreported or reported on corporate returns).

Saez himself has hinted that the seemingly strong surge in top-percentile incomes in 2012, for example, was largely a matter of strategic tax timing — reporting bonuses and capital gains in 2012 to avoid higher tax rates in 2013. The same thing happened in late 1992, when professionals and executives arranged to cash in bonuses and stock options in December rather than in January 1993, when income-tax rates went up. It also happened in 1986, when investors rushed to cash in capital gains before the capital-gains tax went up, briefly inflating reported real income of the top 1 percent by 34.6 percent in a single year.

Because reported capital gains and bonuses were similarly shifted forward from 2013 to 2012, we can expect a sizable drop in the top 1 percent’s reported income when the 2013 estimates come out a year from now. The befuddled media will doubtless figure out some way to depict that drop as an increase.

HKO

Alan Reynolds has done an extensive job challenging the income disparity data in his book Income and Wealth. You can find excerpts in the search feature in this blog. In short the data is manipulated depending on what is included in the wealth distribution data, what is measured (household income vs individual income), and what periods are selected. For example much of the growth in income in the 1980’s had much to do with changes in the tax law that caused Subchapter C corps to convert to Subchapter S status. Income data that used to show up on corporate returns now showed up on personal returns via K-1 reports. Similarly wealth that resided in tangible assets during the inflationary 1980’s returned to reportable financial statements in the 1980s as inflation was tamed.

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