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%).”