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Saturday, July 12, 2014

Piketty's Failure to Account for Tax Law Changes Makes His Wealth Inequality Claims Worthless

CapitalWall Street Journal op-ed:  Why Piketty's Wealth Data Are Worthless, by Alan Reynolds (Cato Institute):

No book on economics in recent times has received such a glowing initial reception as Thomas Piketty's Capital in the Twenty-First Century (Harvard University Press, 2014). He remains a hero on the left, but the honeymoon may be drawing to a sour close as evidence mounts that his numbers don't add up.

Mr. Piketty's headline claim is that capitalism must result in wealth becoming increasingly concentrated in fewer hands to a "potentially terrifying" degree, on the grounds that the rate of return to capital exceeds the rate of economic growth. Is there any empirical evidence to back up this sweeping assertion? The data in his book—purporting to show a growing inequality of wealth in France, the U.K., Sweden and particularly the United States—have been challenged. And that's where the story gets interesting.

In late May, Financial Times economics editor Chris Giles published an essay that found numerous errors in Mr. Piketty's data. Mr. Piketty's online Response to FT was mostly about Europe, where the errors Mr. Giles caught seem minor. But what about the U.S.?

Mr. Piketty makes a startling statement: The data in his book should now be disregarded in favor of a March 2014 Power Point presentation, available online, by Mr. Piketty's protégé, Gabriel Zucman (at the London School of Economics) and his frequent co-author Emmanuel Saez (of the University of California, Berkeley). ...

Zucman-Saez concludes that there was a "large increase in the top 0.1% wealth share" since the 1986 Tax Reform, but "no increase below the top 0.1%." In other words, all of the increase in the wealth share of the top 1% is attributed to the top one-tenth of 1%—those with estimated wealth above $20 million. This is quite different from the graph in Mr. Piketty's book, which showed the wealth share of the top 1% (which begins at about $8 million, according to the Federal Reserve's Survey of Consumer Finances) in the U.S. falling from 31.4% in 1960 to 28.2% in 1970, then rising to about 33% since 1990.

In any event, the Zucman-Saez data are so misleading as to be worthless. They attempt to estimate top U.S. wealth shares on the basis of that portion of capital income reported on individual income tax returns—interest, dividends, rent and capital gains.

This won't work because federal tax laws in 1981, 1986, 1997 and 2003 momentously changed (1) the rules about which sorts of capital income have to be reported, (2) the tax incentives to report business income on individual rather than corporate tax forms, and (3) the tax incentives for high-income taxpayers to respond to lower tax rates on capital gains and dividends by realizing more capital gains and holding more dividend-paying stocks. ...

Mr. Piketty's premonition of soaring U.S. wealth shares for the top 1% finds no credible support in his book or elsewhere.

http://taxprof.typepad.com/taxprof_blog/2014/07/pitkettys-failure.html

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Comments

Alan Reynolds tried these arguments 7 years ago.

Saez, Piketty, and Brad Delong destroyed him then, and these recycled arguments are no better today.

http://eml.berkeley.edu/~saez/answer-WSJreynolds.pdf

http://economistsview.typepad.com/economistsview/2007/01/thomas_piketty_.html

http://delong.typepad.com/sdj/2007/01/cato_has_a_seve.html

Reynolds is a washout from a low ranked economics program. He got hired at the Cato institute, sans PhD (and without basic technical competence), by virtue of his libertarian ideological purity. The Cato institute has a personnel policy like Chairman Mao—It is better to be Red (Libertarian) than expert.

But hey, repeat a lie enough times and maybe someone will be gullible enough to believe you.

If a conservative economist with a decent academic reputation like Mankiw writes a critique, that’s newsworthy.

The output of the Cato Institute is graffiti on the wall.

Posted by: Anon | Jul 12, 2014 1:36:55 PM

A growing government and exploding regulatory state needs larger and larger businesses that can cope with the added cost and that can plead for relief. Small to medium businesses get killed and go extinct. Capitalism isn't responsible for the death of the middle class.

Posted by: Bob | Jul 12, 2014 4:57:30 PM

Trying so, so hard to kill this book--and its influence-- off.

Posted by: CHS | Jul 12, 2014 9:57:01 PM

Don't you just love it when you can predict the source just by looking at the headline?

Posted by: Bob Kamman | Jul 13, 2014 12:54:10 PM

Of course no one seems to defend Picketty in the comments. They like his conclusions, and so its errors don't matter. More "Fake but Accurate" from the left.

Posted by: DonM | Jul 13, 2014 8:36:20 PM

Berkeley... Anon... Enuf said.

Posted by: Tom | Jul 13, 2014 8:43:48 PM

So now in addition to the vanishing data points (that all just happened to make the curve bend in the ‘right’ direction), and the amount of “Molehills into Mountains” handwaving that has to be done in order to match the theory to the bent data, we are now told to ignore all the information inside the book for a Powerpoint presentation that can’t even compare apples to apples.

If Piketty’s theory had the slightest amount of validity, the richest 1% from forty years ago would be the richest 1% from twenty years ago, and today. They aren’t.

Go peddle your socialist utopian theories elsewhere, please.

Posted by: georg felis | Jul 13, 2014 9:01:04 PM

Anon, when you try to disparage the author by attacking him personally and ridiculing his credentials (no PhD – horrors!) rather than his points, you show that you have to rely on attacks rather than valid points of your own. Besides the others without PhDs who have done their homework, there are plenty with PhDs and without an agenda, unlike economists on the left, who have documented serious errors in Piketty’s analyses.

But, if we shouldn’t take seriously someone with flaws, then you should know that Piketty, the person whose works you support, is a wife-beater…really. You know, it’s part of the left’s “war on women.”

Hey, have you read the book? Neither has almost everyone else who is praising it. -- Has anyone finished Thomas Piketty's Capital in the 21st Century? Still, here’s the cheater’s guide for those of you who specialized in Cliff’s Notes and Spark Notes in college >>> Can't be bothered to read Piketty? Here's a cheat's guide. -- …but just the introduction (35 pages) and conclusion (6 pages) are a good precis of what he's on about.

Here are a few reviews that cut to the chase:

The Systematic Errors In Thomas Piketty's New Book -- His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring.

The Most Important Book Ever Is All Wrong -- Every claim in that dramatic summing up is either unsupported or contradicted by Piketty's own data and analysis. (I'm not counting the unintelligible. The past devours the future?)

IS THOMAS PIKETTY A FRAUD? --

Piketty proposes, as a solution, a global tax on wealth. You can imagine the excitement with which Piketty has been received on the Left, especially since his book is based on actual data! It includes charts and graphs that are based on spreadsheets! … But two reporters for the Financial Times … took the trouble of checking Piketta’s numbers against the source data that he relies on. It turns out–to put it bluntly–that Piketty is a fraud … The debate over Piketty’s sources and the integrity of his conclusions is just beginning. One wonders, though: why didn’t any economists take the trouble to do what Giles and Giugliano, two reporters, did? And why did so many liberals leap to endorse Piketty’s data when they obviously had no idea whether it was valid or not? Paul Krugman, for example….

You can’t say that all the people who find mistakes and fraud in Piketty’s analyses are wrong, despite selected and narrow rebuttals by so-called “destroyers” on the left.

Posted by: Woody | Jul 13, 2014 9:22:01 PM

Marx faked his data as well, and he's still doing just fine with the left. Picketty will continue to be lionized as ideology matters to the left, not truth.

Posted by: aclay1 | Jul 13, 2014 10:44:01 PM

Math is hard for lefties. Especially if it contains numbers. Or equations.

Posted by: Dave72 | Jul 13, 2014 10:45:09 PM

"Global tax on wealth"--socialism has failed at the smallest levels, and at the state level. The response to these failures by the the left is always to go bigger. I guess they like socialist economies of scale, they can just never find a scale big enough. in any case the results keep getting more disastrous the larger the setting they are tried in. Sorta like Islam.

Posted by: teapartydoc | Jul 14, 2014 3:15:59 AM

I can only repeat my previous comment: if Piketty's claims are so transparently false, why is such an enormous effort being made to discredit them.

Posted by: michael livingston | Jul 14, 2014 5:16:47 AM

If you don't want to be taken seriously, there is hardly a better way to approach it than to make ad hominem attacks about a person's credentials and then fail to even sign the comments with your name.

Posted by: Leland | Jul 14, 2014 5:47:16 AM

@ Woody:

Anon cited several refutations of Reynolds, and he even provided links to them. Did you bother to read them before you wrote your own screed?

Posted by: Rob T. | Jul 14, 2014 7:01:43 AM

Michael Livingston, insinuating that an "enormous effort to discredit" a book must mean that the book has validity is not a very scientific method for defending the book's methods and conclusions, which are wrong but have made those on the left, who support global taxes and higher minimum wages, to wet their pants over excitement. Anyway, maybe people have jumped on discrediting the book because it's so easy.

Posted by: Woody | Jul 14, 2014 7:43:13 AM

Rob T, I read the first of anon's links and scanned the others, which is more than all the slobbering left-wing book-buyers have done with Piketty's book. When someone provides a link defending a fraud theory, you can bet that the linked article will attempt to discredit the person doing the exposing by focusing on narrow points or is also false. ... Did you read the links in my "screed" before commenting to me?

Posted by: Woody | Jul 14, 2014 7:57:38 AM