WHEN NARRATIVES FAIL: The Collapse Of The Income And Wealth Inequality Argument.

via taxprof:

Wall Street Journal, Collapse of the Inequality Argument?:

Leftist politicians have been saying for years that a dramatic rise in wealth and income inequality is the central economic problem of our time. It remains the go-to explanation among Democratic presidential candidates for their myriad schemes to increase federal taxation. But the claim of an inequality surge is getting much harder to make. And even for those who cling to the belief that recent decades have led to record levels of inequality, they will have to explain why wages in the Trump era have lately been moving a little closer to equality.

On the latter point, the inconvenient truth for the inequality-obsessed appears in the most recent employment report from the federal Bureau of Labor Statistics. For the past year, average hourly earnings for employees on private nonfarm payrolls have increased 3.2%. But looking beyond that overall average, we see that wages for production and non-supervisory employees are rising slightly faster. In other words, workers’ wages have lately been rising faster than their bosses’ wages. Don’t expect Bernie Sanders to credit Trumponomics. …

Even accounting for the Obama inequality spike, it seems the distribution of wealth and income really hasn’t changed all that much. This column has chronicled significant flaws in the claim that recent decades have seen a massive surge in U.S. income inequality [U.S. Income More Equal than Advertised]. This already shaky thesis may not survive the upcoming formal publication of a working paper by Gerald Auten of the U.S. Treasury and David Splinter of the congressional Joint Committee on Taxation [Income Inequality in the United States: Using Tax Data to Measure Long-term Trends]. They find “there has been relatively little change since 1960” in the income share received by the top 1% of U.S. earners.

Top 0.1%

Top 10%

As for wealth inequality, economic historian Phillip Magness recently reported that based on data from the Federal Reserve, the richest 1% of Americans today own only a slightly higher percentage of the nation’s wealth than the one-percenters of the early 1960s [A Wealth Tax on the Rich Won’t End Deficits].

Top 1%

The truth is that at least some economic inequality is necessary for our prosperity—inventors and entrepreneurs have to know they will be rewarded for their creations.

Vox, A New Study Says Much of the Rise in Inequality Is an Illusion. Should You Believe it?:

Few economics findings have penetrated the public consciousness in recent years as much as this one: Income inequality has exploded in recent decades, and the top 1 percent in particular have made out like bandits.

Economists Emmanuel Saez of UC Berkeley and Thomas Piketty of the Paris School of Economics have been documenting a massive rise in income inequality since 2003 using hyper-detailed IRS records. According to their latest data, compiled with Berkeley’s Gabriel Zucman, the top 1 percent’s share of national income, after taxes are taken into account, rose from 9.1 percent in 1979 to 15.7 percent in 2014.

It’s hard to overstate the influence of this line of research. It won Saez the John Bates Clark medal, America’s most prestigious prize for academic economists, made Piketty’s Capital in the 21st Century an international best-seller, and helped frame the debate over inequality coming out of Occupy Wall Street and the Obama White House’s proposals. President Obama’s budget director, Peter Orszag, wrote in 2009 that Saez’s work “had no small influence on the President’s Budget.”

But another paper released recently suggests the spike in inequality Piketty and Saez have documented is a dramatic overestimate.

Gerald Auten and David Splinter, economists at Congress’s Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis, used the same IRS tax data as Piketty, Saez, and Zucman. They found that the top 1 percent’s share of after-tax income rose from 8.4 percent in 1979 to 10.1 percent in 2015 — an increase less than a third as large.

What looks on paper like a big increase in inequality in the 1980s and onward, Auten and Splinter argue, is really just money being shuffled around in response to Ronald Reagan-era changes to tax law. In 1980, the top individual income tax rate was 69.13 percent; by 1989, it had fallen by more than half, to 28 percent. …

The literature on income inequality is growing rapidly, and is fraught with political implications. Auten and Splinter are serious, nonpartisan researchers, but you could easily imagine conservative politicians latching onto their findings to argue that inequality isn’t that big of a deal. Their work is not the last word on the subject, and there’s plenty of analysis left to do. But it illustrates just how tricky it is to get a complete picture of what’s happening with inequality.