August 3, 2018 1:52PM

The Politics and Economics of the Capital Gain Tax

The Treasury Department is said to be studying the idea of providing some sort of inflation-protection (indexing) for the taxation of capital gains.  Rep. Devin Nunes (R-CA) has introduced a bill  (H.R. 6444) to do just that.   Predictably, Washington Post writer Matt O’Brien instantly dismissed the idea as “Trump’s new plan to cut taxes for the rich.” 

O’Brien relies on a two-page memo from John Ricco which yanks mysterious estimates out of a black box – the closed-economy Penn-Wharton Budget Model.   The “microsimulation model” predicts that the Top 1 Percent’s share of federal income taxes paid could fall from 28.6% to 28.4% as result of taxing only real capital gains.  “That’s real money,” exclaims O'Brien.

No model can estimate how much revenue might be lost by indexing (if any) because that depends on such unknowable things as future asset values, future tax laws and future inflation.   Yet Mr. Rico magically “projects” future realizations to “estimate that such a policy would reduce individual tax revenues by $102 billion during the next decade [sic] from 2018-2027.”   Does that imaginary $102 billion still look like “real money” when spread over Rico’s extended 20-year “decade?”   It would be a microscopic fraction of CBO’s projected individual income taxes of $21.1 trillion over that period. 

One problem with the notion that indexing capital gains could only benefit the top 5 percent (over $225,251 in 2016) is that it wrongly assumes the capital gains tax only applies to stock market gains. Another Washington Post article said, “Researchers have estimated that the top 5 percent of households in terms of income hold about two-thirds of all stock and mutual fund investments, putting wealthier Americans in the position of benefiting much more than others from any changes to capital gains rules.”  But the capital gains most likely to be seriously exaggerated by decades of inflation are not gains from selling financial assets, but from selling real assets.  After many years of even moderate inflation, an unindexed tax may be imposed on purely illusory “gains” from the sale of real property that actually involve a loss of real purchasing power.  A 2016 report from the Congressional Budget Office and Joint Committee on Taxation, “The Distribution of Asset Holdings and Capital Gains” reports that Americans held $7.5 trillion in stocks and mutual funds in 2010, but $12.2 trillion in private businesses and $8.5 trillion in nonresidential real estate.  

A related problem with conventional distribution tables is that they add realized capital gains to income in the year in which a farm, building or business is sold, which makes it true by definition that unusually large one-time gains are received by those with “high incomes” (including those gains).

A much bigger problem is, as the first graph demonstrates, that the capital gains tax is voluntary: If you don’t sell, you pay no tax.  When the top tax rate on realized gains was 28-40%, very few gains were realized – particularly among top-bracket taxpayers. When the top tax rate fell to 20% in 1982-96 and 1997-2000, and to 15% in 2003-2007, inflation-adjusted real revenue from the capital gains tax soared for several years (market crashes in 2001 and 2009 overwhelmed taxes, of course). This is just one reason static estimates of the alleged revenue loss from indexing are not credible: The elasticity of realizations is extremely sensitive to the tax rate and indexing is one way to reduce that tax rate (and raise realizations) for assets held for a long time. 

  

Capital Gains Tax Rates and Real Revenues

If anyone wanted to cut taxes paid by the Top 1%, then raising the capital gains tax rate is the surest way to accomplish that.  The second graph shows the Top 1%'s share of individual income reported to the IRS (in data from Thomas Piketty and Emmanuel Saez) went way up whenever the tax rate on capital gains went down.  By contrast, top 1% income from realized gains remained depressed whenever the tax was 28% (1987-1996) or higher (1969-77).  The rush to sell before an increase in the capital gains tax in 1987 meant a third of all “income” reported by Top 1% taxpayers in 1986 was from bunching the realization of capital gains.  

Capital gains account for more Top 1% income when rate falls

The inverted idea that a higher tax on capital gains is an effective way to “soak the rich” has not even been politically successful, because it is not so much an assault on investing as it is an assault on aging.   

It is certainly true that people who have not yet accumulated much capital – which means most young people regardless of their current income – have also not yet accumulated capital gains.  It takes time to accumulate capital, so vulnerability to capital gains taxes rises with age.  And the U.S. has a rapidly-aging population.

Capital gains by age group

When it comes to political arguments for high capital gains taxes on capital gains, the redistributionist left has never grasped that the people who are most fearful of high capital gains taxes are not “the rich” but seniors.  The table, from the CBO/JCT study, shows that net capital gains accounted for only 1% of income among those age 35-44, 3% at age 55-64, and 6% for taxpayers 75 or older.  This little-known fact makes the politics of advocating a high tax on capital gains more suicidal as a campaign issue than many politicians have supposed.

George McGovern’s seemingly clever 1972 campaign slogan that “money earned by money should be taxed as much as money earned by men” meant he favored a minimum tax of 75% on large capital gains (e.g., from selling the family farm or firm before retirement).  That frightened seniors who counted on selling-off accumulated savings to finance retirement.  Senator McGovern won only 36% of the vote of those age 50 or more.   A high tax on realizing capital gains turned out to be bad politics as well as bad economics.

October 19, 2017 3:41PM

Competing Analyses of the Republican Tax Reform Framework

The media’s favorite analysis of the Big Six tax reform framework comes from the Urban-Brookings Tax Policy Center (TPC), which purports to estimate that the plan would increase individual income taxes by $471 billion over a decade (by slashing exemptions and deductions), while cutting business taxes by $2.6 trillion.  Predictably, this generated a tidal wave of outraged editorials and TV ads claiming the plan would do nothing for economic growth and benefit only “big corporations and the top 1%” (which is redundant, because individual taxes aren’t cut and the TPC wrongly attributes nearly all corporate tax cuts to the top 1%).

The Wall Street Journal has offered a powerful corrective to the TPC’s concealed analysis in “Where Critics of Tax Reform Go Wrong”, by Larry Kotlikoff of Boston University. It draws on his working paper with Seth Benzell of MIT and Guillermo Lagarda of the Inter-American Development Bank, which found “The [corporate] tax reform produces enough additional revenues to permit a reduction in personal income tax rates.”

The Tax Policy Center opines there will be “little macroeconomic feedback effect on revenues,” Kotlikoff explains, because they rely on an antique closed-economy model in which (1) investment can only be financed from some domestic “pool” of savings, and (2) higher taxes are equivalent to more savings because they supposedly reduce government deficits without reducing private savings. If government borrows more, this supposedly raises interest rates and “crowds out” private investment.

In reality, U.S. interest rates do not rise and fall with budget deficits, partly because arbitrage ensures the global bond yields move in tandem. Japan ran large chronic budget deficits for decades with super-low interest rates.  

The TPC nevertheless claims that lower corporate tax rates must add to the deficit because they will not raise investment and economic growth. And the reason lower corporate tax rates will not raise economic growth is because they will add to the deficit. Run those two sentences back and forth a few times to appreciate the magnificent circularity of this rhetorical trap for the unwary.

Unfortunately, Kotlikoff’s policy advice is not quite as careful as his analysis. He and his co-authors apparently “share critics concerns that [some unspecified aspect of] the plan would disproportionately benefit the top 1%. One way to rectify the fairness problem and address the country’s long-term fiscal gap would be to add, as the framework foresees, a fourth personal tax bracket for those with very high incomes.”   

Congress might take a clue from the Clinton-Gore campaign, for example, and add a 10% surtax on taxable income above $1 million. That would leave us with a 38.5% tax rate on income reported on individual income tax returns and a 20% tax rate on income reported on corporate tax returns. Contrary to Kotlikoff, that would not raise more revenue (to “address the fiscal gap”) for reasons explained by Kotlikoff himself: “If corporate tax rates are lower than personal income tax rates, people have an incentive to shelter their self-employment income (lower their personal tax bill) by incorporating.”  

In the 1980s, as the top tax rate on individual income fell from 70% to 28%, professionals and owners of closely-held businesses shifted en masse from reporting most of their income on corporate tax forms to reporting it on individual tax returns, as pass-through partnerships, proprietorships, Subchapter S corporations and LLCs.

A 2015 study by five Treasury economists and two Chicago scholars finds, “'Pass-through' businesses like partnerships and S-corporations now generate over half of U.S. business income and account for [41%] of the post-1980 rise in the top- 1% income share.” If we now slam that process into reverse – by cutting corporate tax rate to 20% while leaving top individual rates of 35-40% – that would soon result in massive income-shifting out of pass-through entities back into C-corporations that pay no dividends and compensate owners with tax-free perks, company cars and condos, and lavish expense accounts rather than large salaries.  

In short, the wider the gap between top tax rates on individual and business income (including self-defined pass-through income on Schedule C) the more futile it would become to raise top tax rates on income reported on individual tax returns above 30% much less 38-40%. The fourth tax bracket is a really bad idea based on really bad estimates of who wins and loses from a lower corporate tax rate.

Kotlikoff, Benzell and Lagarda have no basis for evaluating the “fairness” of proposed tax changes for individuals because they explicitly “do not model” such changes – they are exclusively concerned with the corporate tax. But, their model estimates that cutting the corporate tax raises tax revenue and also raises real wages by about 8 percent.

Kotlikoff’s endorsement of a fourth individual tax rate higher than 35% is not because he believes the GOP Framework adds much to budget deficits, but because he apparently accepts the Tax Policy Commission’s static estimates that the top 1% benefits most, as shown in the Table.

TPC Estimated Static Change in Federal Taxes by Income Group from Republican Framework Tax Plan

Lowest Quintile

-10.4%

Second Quintile

-9.3%

Middle Quintile

-7.2%

Fourth Quintile

-5.5%

Top Quintile

-9.6%

     
Top 1%  

-17.6%

The reason the top 1% appears to get the largest tax cut is not because of the plan's trivial rejiggering of individual deductions and taxes (which go up rather than down), but because the Tax Policy Center arbitrarily “assumes” that owners of capital bear 80% of the corporate tax, and most capital is owned by people with high incomes.

The trouble is, the TPC assumption that labor bears only 20% of the burden of the corporate tax is totally inconsistent with Kotlikoff’s model predicting an 8% rise in real wages from cutting the corporate tax.  It is also totally inconsistent with all recent empirical studies on that issue. Congressional Budget Office economist William C. Randolph, for example, estimated U.S. labor bears 70% of the corporate tax, once we drop the TPC closed-economy fiction and allow capital to gravitate to countries with lower marginal tax rates. For tax-friendly countries attracting U.S. business and investment, Randolph explains, “Foreign workers benefit because an increased foreign stock of capital raises their productivity and their wages. Domestic workers lose because their productivity falls and they cannot emigrate to take advantage of higher foreign wages.”

A Tax Policy Center survey of the evidence likewise concluded that “Recent empirical studies. . . all conclude that wage earners bear most of the ultimate burden of the corporate tax.”  That means everything you have been reading about “Trump Plan Delivers Massive Tax Cuts to the 1%” is just made-up fiction – based on a key assumption the source (the Tax Policy Center) knows to be false.

December 5, 2016 4:30PM

TPC “Experts” Don’t Know Who Gets What Share of Trump Tax Cuts

According to Wall Street Journal writer Laura Saunders, future Treasury Secretary Mnuchin must be wrong because Tax Policy Center experts say so. Actually, Mr. Mnuchin may be partly right, but the experts are almost entirely wrong.

“Steven Mnuchin, the likely next Treasury secretary, this week said rich U.S. taxpayers won’t get “an absolute tax cut” under President-elect Donald Trump,” writes Ms. Saunders; “But that is not what Mr. Trump says in his taxation plan. In fact, under his approach the wealthy would receive an average tax cut of about $215,000 per household, experts say.” 

“What Mr. Trump says” is not at all the same as what some “experts say.” Expert or not, Tax Policy Center (TPC) estimates of who pays what under different tax rates are distressingly capricious.

Mr. Mnuchin appeared to be talking only about individual income taxes. That is why he suggested that lower marginal tax rates for high earners “will be offset by less deductions.” So long as we focus only on non-business taxes (including high salaries and dividends), Mr. Mnuchin was probably right. Indeed, according to Ms. Saunders’ experts, the lost revenue from lower tax rates over 10 years totals $1.49 trillion plus $145 billion from eliminating the 3.8% Obamacare surtax.  Yet those individual tax cuts are more than offset by $2.6 trillion in added revenue from Trump’s cap on itemized deductions and the loss of personal exemptions. More than doubling the standard deduction loses considerable revenue, but not from high-income taxpayers.

Ms. Saunders mentions only the loss of itemized deductions—not exemptions—and concludes “these limits don’t fully offset the effects of income- and estate-tax cuts for high earners proposed by Mr. Trump, according to experts.” 

Repealing the estate tax loses very little revenue, but it is arbitrary for the TPC to assign that lost revenue to people with high incomes because the estate tax is borne by heirs and charities—not dead people.

With estate tax repeal included, only 22% of the Trump tax cut goes to households (including investors) according to the TPC, with 44% of Trump tax cuts going to corporate earnings (and the rest to unincorporated business). 

In the estimates Ms. Saunders presents as facts, her experts claim to estimate how the corporate income tax is distributed among households, even though they know they have no proof of the actual incidence of the corporate tax. If the corporate tax reduces capital formation, for example, then the relative scarcity of capital would raise pretax returns to capitalists while reducing productivity and real wages.  

Those squeamish about watching sausage being made should not look closely at how distribution estimates are concocted.  

A suspicious hint (from the Wall Street Journal graph) is that the Top 1% are defined as those earning more than $699,000 in 2017. By contrast, the Top 1% in the famed Piketty and Saez estimates started at $442,900 in 2015. The $699,000 figure is 24% larger than TPCs estimate of Adjusted Gross Income needed in 2017 to be among the Top 1%. That huge difference is because the TPC has lately opted to compare taxes with a big stew called Expanded Cash Income (ECI)

The main reason TPC estimates of “Expanded” Top 1% income are 24% larger than AGI is that the TPC assumes that 60% of the corporate tax is borne by owners of capital. Before 2012 they assumed 100% was borne by capital. It’s all quite hypothetical and arbitrary:

“We define ECI to be adjusted gross income (AGI) plus: above-the-line adjustments (e.g., IRA deductions, student loan interest, self-employed health insurance deduction, etc.), employer paid health insurance and other nontaxable fringe benefits, employee and employer contributions to tax deferred retirement savings plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income, accruals within defined benefit pension plans, inside buildup within defined contribution retirement accounts, cash and cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability” [emphasis added].

It takes a lot of “imputation” (heroic guesswork) to assemble this plump sausage. Nobody has credible data on the ever-changing “inside buildup” within private IRA and 401(k) plans, or how all that unseen wealth is distributed among constantly changing annual income groups.  

Nobody knows how to “impute corporate income tax liability” and the related corporate income to income groups either.

Since TPC claims 60% or 100% of the corporate tax is born by domestic (not foreign) owners of capital, this assumption invites them to add most corporate profits to the pretax incomes of the Top 1%. To do that, TPC (and CBO) examine shares of capital income reported on income tax forms to infer that most capital must be owned by the Top 1%. Emmanuel Saez and Gabriel Zucman made a similar mistake when basing wealth estimates on individual income tax returns.

The trouble is that most middle-income Americans keep trillions of dollars in tax-free retirement accounts, which means taxable investment income reported on their tax returns tell us absolutely nothing about what assets they own. As Tax Foundation economist Alan Cole noted, “Much capital income—especially capital income in tax-free middle-class retirement accounts—goes uncounted in income data, heavily distorting the measurement and making people appear poorer than they are. Thomas Piketty’s income inequality data leaves out $19 trillion of pension assets, which are yet to be attributed to any individual.” 

Another big problem is that the expensing of business investment and deep cuts in business tax rates are sure to have huge dynamic effects on investment and economic growth, yet “by convention, TPC distributes only the static impacts of tax changes.” An OECD study finds “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.” It makes no sense to talk about who benefits from lower tax rates without including workers who benefit from “large productivity gains.”

Even the static distribution is another arbitrary guess. “Although firms pay the corporate income tax, the economic incidence of the tax falls on individuals. TPC’s tax model therefore distributes the burden of the tax to individuals. The incidence of the corporate tax, however, is an unsettled theoretical issue. The tax could be borne by the owners of corporate stock, or passed on in part to labor in the form of lower real wages, to consumers in the form of higher prices, or to the owners of some or all capital in the form of lower real rates of return.”  

The TPC static estimate of the Trump tax cut is twice as large for corporations as it is for individuals, yet their allocation of the corporate tax is (1) completely static “by convention,” and (2) completely erroneous in using shares of taxable capital income as a proxy for wealth, and (3) completely arbitrary in assuming corporate taxes are mostly born by capital. For such reasons, the TPC distribution estimates cannot be credibly cited to “prove” Trump or House Republican tax plans are too generous to those who pay the most taxes or too stingy to those who pay the least. 

The truth is these “experts” simply do not know who will benefit most from a low corporate rate. What they do know, or should, is that a low corporate tax cut will greatly improve the growth of jobs and real wages for many ordinary Americans. Unfortunately, their static methodology stubbornly refuses to take that into account.

 

 

 

 

 

 

 

 

February 23, 2016 1:03PM

More Evidence That Lower Marginal Tax Rates Speed Up Economic Growth

An important and timely paper from Columbia University economist Karl Mertens finds that amount of income reported on tax returns is highly sensitive to marginal tax rates, and that the effect is mainly from changes in real activity not tax avoidance.

Mertens estimates "elasticities of taxable income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. . . . Marginal rate cuts lead to increases in real GDP and declines in unemployment."  Other recent research also shows that "higher marginal tax rates reduce income mobility" while eliminating higher tax brackets improves upward mobility.

Both Democratic candidates for the presidency, Sanders and Clinton, want to greatly increase marginal tax rates on high incomes and on realized capital gains. By contrast, all Republican candidates propose to reduce marginal tax rates.

Mertens' research unambiguously predicets that economic growth would slow or stop under the Democrats' proposed tax increases, but accelerate under Republicans' tax reforms.

January 8, 2016 10:28AM

High Turnover Among America’s Rich

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000 per annum) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners—a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover … But economic reality is very different—people move up and down the income quintiles and percentile groups throughout their careers and lives

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees and their heirs lost their top 400 status between 1982 and 2014.

label

So, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of U.S. income-earners, you’re still quite possibly part of the global top 1 percent.

April 14, 2015 3:04PM

Can Inequality Get Worse If Poverty Gets Better?

Jim Tankersley of the Washington Post believes he has discovered “The Big Issue With Hillary Clinton Running Against Inequality”:

“Inequality got worse under Bill Clinton, not better. That's true if you look at the share of American incomes going to the 1 percent, per economists Emmanuel Saez and Thomas Piketty. It's also true when you look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”

What this actually reveals is the absurdity of (1) defining inequality solely by top 1% shares of pretax income less government benefits, and (2) judging any strong economic expansion as a failure because top 1% income shares always rise during strong economic expansions.

The graph uses the Congressional Budget Office estimates of top 1% shares, because (unlike Piketty and Saez) they include government benefits as income and subtract federal taxes.  What it shows is that both affluence and poverty are normally highly cyclical. When the top 1 percent’s share of after-tax income jumped from 11.2% in 1996 to 15.2% in 2000, the poverty rate simultaneously dropped from 11% to 8.7%.  Meanwhile, median income, after taxes and benefits, rose from $50,900 in 1993 to $61,400 by 2001, measured in 2011 dollars. 

 

Conversely, when the top 1% share fell from 16.7% in 2007 to about 12% in 2013 (my estimate), the poverty rate rose from 9.8% to 15%.  If we adopt the egalitarians’ top 1% mantra, must we conclude that inequality “got better” lately as poverty got worse?

Top 1% and Poverty

The income peak of 2000 is a tough act to beat, and few of us are ahead of it today -- least of all the top 1%. The brief surge in top incomes of 2006-2007, like the related speculative surge in housing prices, proved unhealthy and unsustainable. But weak economic performance and high poverty in the past four years is no reason to dismiss the 3.7% average economic growth of 1983-2000 simply because such prolonged prosperity made more people rich.

Tankersley also asks us to “look at the share of American wealth going to the super-super-rich, the top 0.1%, per research by Saez and Gabriel Zucman.”  As I’ve explained in The Wall Street Journal, however, the Saez-Zucman estimates misinterpret shrinking shares of capital gains and investment income still reported on individual tax returns, or shifted from the corporate tax to a pass-through firm, rather than (like most middle-class savings) sheltered in IRA, 529 and 401(k) plans.

It is easy to envision Republican partisans welcoming and adopting the Tankersley theme that Hillary Clinton should now be ashamed of the strong economy of 1996-2000 because “inequality got worse” as many new firms were created and stock prices soared. Yet whenever stocks crashed and the top 1% share fell (making inequality "better"?) the poverty rate rose and median incomes were flat or down.

Some Republican candidates have already alluded to the same pretax, pre-transfer “top 1%” figures to claim inequality worsened under Obama -- meaning since 2009.  According to Piketty and Saez, real average incomes of the top 1% were indeed higher in 2013 ($1,119,315) than in the crash of 2009 ($975,884).  Before crashing below $1 million in 2009, though, top 1% incomes had been much higher in 2007 (the equivalent of $1,533, 064 in 2013 dollars) and in 2000 ($1,369,780). The rising tide has not lifted many small boats or big yachts since 2009, because the tide hasn’t risen much; higher tax rates in 2013 certainly didn’t help.

The trouble with Republicans using highly cyclical top 1% statistics as a political weapon against Democrats is that doing so requires capitulating to the divisive and dishonest leftist fallacy that poor people and middle-income people do best when the top 1% is doing badly.

The truth is that the poverty rate fell sharply and middle-incomes rose briskly in President Clinton’s second term, and the top 1% gladly reported more taxable income and paid more taxes as the tax on capital gains was cut from 28% to 20%.  There is a lesson to be learned here, but it is not to denigrate the so-called rising inequality of the late 1990s.

March 3, 2015 10:38AM

Bottom 90% Pretax Pretransfer Income is no Proxy for Median After‐​Tax Income

bottom 90 percent vs CBO median

This graph illustrates a few points made in my recent Wall Street Journal article.  First of all, the Piketty & Saez mean average of bottom 90% incomes per tax unit is not a credible proxy for median household income, particularly since the big reductions in middle-class taxes from 1981 to 2003.

Second, the red bars claiming bottom 90% incomes in the past six years have been no higher than they were in 1980 (Sen. Warren) or even 1968 (see the graph) is literally unbelievable.  If that were true then all other income statistics -- including GDP -- would have to be completely false.  



The Piketty & Saez estimates before 1944 describe total income as Personal Income less 20% (because not all income is reported).  Postwar data use a modified version of Adjusted Gross Income as a proxy for personal income, with no transfer payments or health benefits, and that measure has become less and less credible over time. This makes the estimates of bottom 90% incomes simply worthless, as well as related claims that the top 1% "captured" all the cyclical gains (and losses!).  If total income were calculated the same way it was in 1928, the the top 1% share would drop from 17.5% to 13.3%.  Grossly underestimating total income by greater and greater amounts created an artificial increase in top 1-10% shares of such increasingly understated income.


As the blue line in the graph shows, many measures of income in 2012 or 2013 were not yet back to the peak levels of 2007 or 2000.  But that definitely includes real incomes of the top 1%, which were 20.6% lower in 2012-2013 than they were in 2007.