Tag: thomas piketty

Why Piketty Was Mistaken for Endorsing the Zucman & Saez Slide Show

I will have more to say about this fairly soon, but this might serve as a preview.

Thomas Piketty is now advising innocent readers of his book to (1) not demand a refund or dump the book used on Amazon, and (2) ignore his own flawed estimates of top 1% U.S. wealth shares and instead utilize a PowerPoint by Gabriel Zucman and Emmanuel Saez.  Zucman and Saez use capital income reported on individual tax returns (dividends, interest, rent and capital gains) to infer ownership of capital assets, and not just greater realization of gains or portfolio shifts from tax-exempt bonds to dividend-paying stock.

That might be semi-plausible if businesses and professionals were not free to report income on either corporate or individual tax forms, and if tax rates never changed. But this methodology can’t possibly work after the huge tax rate reductions of 1986 (for partnerships & SubS corps), 1997 (capital gains) and 2003 (dividends and capital gains).  The reason it can’t work was fairly well explained by Piketty, Saez and Stantcheva in the original unsanitized version of a paper they published this February (which I have cited beforebut also critiqued):

There is a clear negative overall correlation between the [reported] top 1% income share and the top marginal tax rate: …  [T]he top 1% income share has increased significantly since 1980 after the top tax rate  has been greatly lowered… . [T]he top 1% income share more than doubled from around 8% in the late 1970s to around 18% in last five years, while the net-of-tax (retention) rate increased from 30% (when the top marginal tax rate was 70%) to 65% (when the top tax rate is 35%).”

Piketty Problems: Top 1% Shares of Income and Wealth Are Nothing Like 1917- 28

Former Treasury Secretary Larry Summers’ review of Thomas Piketty’s Capital in The Twenty-First Century, claims that Mr. Piketty and Emmanuel Saez have documented, “absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I.”  That statement is false.

Paul Krugman’s review “Why We’re in a New Gilded Age,”  claims that “since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.”  That statement is false.  

A Pew Research Center report on the same data was titled, “U.S. income inequality, on rise for decades, is now the highest since 1928.”  That too is false.

First of all, the Piketty and Saez estimates do not show top 1 percent income shares nearly as high as those of 1916 or 1928 once we use the same measure of total income for both prewar and postwar data.

Second, contrary to Summers, there is no data from Piketty, Saez or anyone else showing that the top 1 percent’s share of wealth “has risen sharply [if at all] over the last generation” – much less exhibited a “return to a pattern that prevailed before World War I.”

Dealing first with income, it is interesting that the first graph in Piketty’s book is about the top 10 percent – not the top 1 percent.  Saez likewise writes that “the top decile income share in 2012 is equal to 50.4%, the highest ever since 1917 when the series start.”  That is why President Obama said, “The top 10 percent no longer takes in one-third of our [sic] income – it now takes half.”  A two-earner New York City family of six with a pretax income of only $110,000 would be in this top 10 percent, and they are certainly not taking “our” income.  Regardless whether we examine the Top 10 percent or Top 1 percent, however, it is absolutely dishonest to compare the postwar estimates with prewar estimates. 

The Piketty and Saez prewar estimates express top incomes as a share of Personal Income, after subtracting 20% to account for tax avoidance.  Postwar estimates, by contrast, express top incomes as a share of only that fraction of income that happens to be reported on individual income tax returns – rather than being unreported, in tax-free savings or assets, or sheltered as retained corporate earnings.

 Transfer payments are not counted as income in either series (as though federal cash and benefits were worthless); this distinction is inconsequential for the prewar figures but increasingly important lately.  “Total income” as Piketty and Saez define it accounted for just 61.8 percent of personal income in 2012, down from 67 percent in 2000.

Agony of Defeat

Oh, what a burn. My tax debate with French economist Thomas Piketty was a dead heat, 50-50, for the past four days. Then just as the contest was closing, he pulled ahead to seize victory, 51-49.

The Economist editor described the tightly fought battle:

Chris Edwards got over a strong initial disadvantage to narrow what was originally a strong lead for Mr Piketty to a dead heat, but eventually Mr Piketty has prevailed: but only just—even hours before closing, the vote was split exactly down the middle. One could not have asked for a closer contest: this has been the most closely-fought of our 21 online debates, although it began with a fairly substantial lead for the proposition.

Certainly, the debate revealed high levels of interest in taxation and relative income levels. There were more than 1,100 reader comments posted, making it the “most commented” story on the Economist site for the last 10 days or so. My thanks to all the supportive voters and commenters.

Piketty won the website voting battle, but I don’t think he’ll win the war. Global tax competition has led to large cuts in top tax rates in recent decades, and will continue to exert downward pressure for years to come. However, these are dangerous times as governments press to end financial privacy, to create international tax cartels, and to substitute competition with multinational government power in various other ways.

Vote for Me!

Final statements in my tax debate with economist Thomas Piketty were posted today at the Economist.

I think I’m softening Piketty up, as he reiterated that a 60% tax on high earners might be OK, rather than the 80% that he suggested.

The voting from readers has been locked at 50%/50% for days. So it is important that you register your vote by the end of tomorrow before the magazine’s “decision” on the winner Friday.

New at Cato

Here are a few highlights from Cato Today, a daily email from the Cato Institute. You can subscribe here.

  • Malou Innocent argues that the United States should not increase its troop presence in Pakistan in a new Cato Policy Analysis.
  • Watch Tucker Carlson discuss whether a president should blame problems on past administrations on Fox News.
  • Chris Edwards is finishing his live debate with French economist Thomas Piketty over whether the rich should pay higher tax rates. Readers decide who wins, so don’t miss the chance to cast your vote.

Piketty Tax Battle: Round Two

The Economist has posted rebuttals to first-round arguments in my tax debate with French economist Thomas Piketty. Piketty seems to think that everyone with a high income has a “grabbing hand” that comes at someone else’s expense.

The debate over tax rates on the rich is important, but Piketty is important in himself because he is widely cited in the media and elsewhere as if he were a neutral authority. For example, President Obama’s budget featured a chart showing that the top 1 percent of earners have greatly increased their share of national income over the decades, using Piketty’s numbers.

But Alan Reynolds has found serious flaws in Piketty’s calculations. Piketty bases his calculations on tax return data, but reported income under the federal income tax has changed greatly over time. 

The bottom line is to be suspicious when you see a chart on income trends that is sourced to this advocate of 80 percent tax rates.

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