Estimates from Emmanuel Saez (professor of economics at the University of California at Berkeley) and Thomas Piketty (of Ecole Normale Supérieure in Paris) indicate substantial responsiveness (“elasticity”) of reported income among high‐income taxpayers. When top tax rates fall, on salaries or capital gains, a much larger fraction of high incomes shows up on tax returns. This is consistent with international comparisons of top percentile income shares, which rose most where top tax rates were most reduced (the U.S., U.K., and India) and rose least where top tax rates remained very high (France and Japan). Aside from executive and nonexecutive stock option windfalls during the 1997–2000 stock boom, there is little evidence of a significant and sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth between 1986–88 and 2002-03.
Tax return data provides a highly misleading comparison of income distribution before and after such dramatic changes in tax law as those that occurred in the U.S. from 1981–86. Practically every major newspaper and magazine in the U.S. and U.K. repeatedly has reported that the share of national income received by the top one percent has increased enormously and continuously since the 1970s. Of the many difficult statistics used to influence public perception and policy, this one surely is the most often repeated and the least often understood.
Piketty and Saez are not the only economists who have assembled estimates of income distribution based on a sample of individual income tax returns. The Congressional Budget Office has been doing that since 1979, and other economists have since put together quite different estimates in different ways. These varied estimates of the ratio of top incomes to total incomes differ significantly from each other with respect to what is included as income among the top one percent (the numerator) and also what is counted as total income (the denominator). By adopting the broadest conceivable measure of income at the top and the narrowest possible measure of everyone else’s income, the share going to the top one percent can be made to appear deceptively large.