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

Wall 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.