Paul L. Caron

Sunday, September 1, 2019

WSJ: The Collapse Of The Income And Wealth Inequality Argument

Wall Street Journal, Collapse of the Inequality Argument?:

Leftist politicians have been saying for years that a dramatic rise in wealth and income inequality is the central economic problem of our time. It remains the go-to explanation among Democratic presidential candidates for their myriad schemes to increase federal taxation. But the claim of an inequality surge is getting much harder to make. And even for those who cling to the belief that recent decades have led to record levels of inequality, they will have to explain why wages in the Trump era have lately been moving a little closer to equality.

On the latter point, the inconvenient truth for the inequality-obsessed appears in the most recent employment report from the federal Bureau of Labor Statistics. For the past year, average hourly earnings for employees on private nonfarm payrolls have increased 3.2%. But looking beyond that overall average, we see that wages for production and non-supervisory employees are rising slightly faster. In other words, workers’ wages have lately been rising faster than their bosses’ wages. Don’t expect Bernie Sanders to credit Trumponomics. ...

Even accounting for the Obama inequality spike, it seems the distribution of wealth and income really hasn’t changed all that much. This column has chronicled significant flaws in the claim that recent decades have seen a massive surge in U.S. income inequality [U.S. Income More Equal than Advertised]. This already shaky thesis may not survive the upcoming formal publication of a working paper by Gerald Auten of the U.S. Treasury and David Splinter of the congressional Joint Committee on Taxation [Income Inequality in the United States: Using Tax Data to Measure Long-term Trends]. They find “there has been relatively little change since 1960” in the income share received by the top 1% of U.S. earners.

Top 0.1%

Top 10%

As for wealth inequality, economic historian Phillip Magness recently reported that based on data from the Federal Reserve, the richest 1% of Americans today own only a slightly higher percentage of the nation’s wealth than the one-percenters of the early 1960s [A Wealth Tax on the Rich Won’t End Deficits].

Top 1%

The truth is that at least some economic inequality is necessary for our prosperity—inventors and entrepreneurs have to know they will be rewarded for their creations.

Vox, A New Study Says Much of the Rise in Inequality Is an Illusion. Should You Believe it?:

Few economics findings have penetrated the public consciousness in recent years as much as this one: Income inequality has exploded in recent decades, and the top 1 percent in particular have made out like bandits.

Economists Emmanuel Saez of UC Berkeley and Thomas Piketty of the Paris School of Economics have been documenting a massive rise in income inequality since 2003 using hyper-detailed IRS records. According to their latest data, compiled with Berkeley’s Gabriel Zucman, the top 1 percent’s share of national income, after taxes are taken into account, rose from 9.1 percent in 1979 to 15.7 percent in 2014.

It’s hard to overstate the influence of this line of research. It won Saez the John Bates Clark medal, America’s most prestigious prize for academic economists, made Piketty’s Capital in the 21st Century an international best-seller, and helped frame the debate over inequality coming out of Occupy Wall Street and the Obama White House’s proposals. President Obama’s budget director, Peter Orszag, wrote in 2009 that Saez’s work “had no small influence on the President’s Budget.”

But another paper released recently suggests the spike in inequality Piketty and Saez have documented is a dramatic overestimate.

Gerald Auten and David Splinter, economists at Congress’s Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis, used the same IRS tax data as Piketty, Saez, and Zucman. They found that the top 1 percent’s share of after-tax income rose from 8.4 percent in 1979 to 10.1 percent in 2015 — an increase less than a third as large.

What looks on paper like a big increase in inequality in the 1980s and onward, Auten and Splinter argue, is really just money being shuffled around in response to Ronald Reagan-era changes to tax law. In 1980, the top individual income tax rate was 69.13 percent; by 1989, it had fallen by more than half, to 28 percent. ...

The literature on income inequality is growing rapidly, and is fraught with political implications. Auten and Splinter are serious, nonpartisan researchers, but you could easily imagine conservative politicians latching onto their findings to argue that inequality isn’t that big of a deal. Their work is not the last word on the subject, and there’s plenty of analysis left to do. But it illustrates just how tricky it is to get a complete picture of what’s happening with inequality.

Scholarship, Tax, Tax News, Tax Scholarship | Permalink


Dear TaxProf,

The presumption that income (or wealth) inequality is a bad thing for an economy must be destroyed at the root. Otherwise, free-market economic policies will be undercut whenever the economy is measured as having more or growing income inequality. Scholarship in studying and writing more about inequality in the present framework of economics only works to strengthen the Marxist view of the world. But in fact, at root, economic inequality is compatible with liberty.

Thankfully, a retired professor of economics from Laguna Hills, CA has demonstrated the falsity of the presumption. Professor Emeritus George Reisman at Pepperdine University has written a relatively short essay that extracts Thomas Piketty's neo-Marxist argument found in his impressively long book ~Capital in the 21st Century~ (2013) and that counterargues each of the latter's premises. The essay goes on to show that inequality in income (as well as in wealth) is a good thing for everyone in the economy and should actually be celebrated.

Dr. Reisman's essay can be purchased on Amazon (in Kindle format), and it is also located in his blog's archive. (Go to georgereismansblog dot blogspot dot com, and look for the essay posted in July 28, 2014, entitled "Piketty’s Capital: Wrong Theory/Destructive Program.")

A summary of the Professor Reisman's counterargument to Piketty (and may be considered one of his most important of original contributions to economics) can be found earlier in the blog's archive. See the second through fourth sections of his speech given at Universidad Francisco Marroquin, archive-posted February 21, 2014. It's his demolition of the Marxian exploitation theory.

Briefly, Piketty et al. (including Keynesians) measure the economy with the national income formula: Y = sum(P) sum(W). [P is capitalist profit, and W is worker's wage.] (This national income formula is the foundation for present-day GDP = C + G + nX + nI.) Dr. Reisman notes that this formula implies an irreconcilable conflict between capitalists and workers. Per any given yearly income, if one side gains more, then the other side loses. Hence capitalists and workers can never be on the same side. Hence government (or unions) must have an active role in the economy to equalize justice.

So why, allegedly, is there exploitative injustice? Because whereas workers spend all their wages for the sake of subsistence, capitalists only spend a relatively small portion of profits on consumption and then squirrel away the rest as capital. And over time, capital is accumulated more and more. And the more capital there is in an economy, the more it extracts some percentage cut (return on investment, ROI) of the produced yearly income, such that even if national income stays constant year over year, the accumulated capital by capitalists eventually gives them a bigger sum(P) than the prior year. And any increase in sum(P) implies a decrease in sum(W). The more capital there is, the more there is of exploitation of workers by capitalists.

Dr. Reisman destroys this national income formula. It's false. He notes that national income, Y, is entirely sum(profit). The reason is that wage exists only in the context a business. So, if every man is a businessman, then there are two categories of businessmen: those who produce while deploying their capital and those who produce without deploying their own capital. Since businessmen run businesses to gain profits, the generic formula is P = sales revenue - costs of production.

Every man has this formula to measure his success in life. The key difference between the two categories of businessmen is that the laboring producer has zero costs of production. It is with capital that the enterprising producer expends costs of production with the hope of later gaining sales revenues. By contrast, the laboring producer gains immediate sales revenues, and per the profit formula of zero costs, his revenue becomes pure profit. Everyone is a profiteer; both categories of businessmen are on the same side, aiming for profit, rooting for success.

Finally, scrapping Y == GDP as an economic measure, GDP = C + G + nX + nI, Dr. Reisman replaces it with a gross national revenue, GNR = sum(sales revenue) = Y + sum(business costs) = sum(profit + costs of production) + sum(wage). GNR is the more complete measure of an economy than GDP because the latter focuses primarily on consumption (e.g. C + G). What's neglected is the hidden part behind net investment nI. GNR enables economists to revel in our productive activities. GNR = consumption expenditure + productive expenditure.

With the demolition of the Y == GDP national income formula, we can see that income (or wealth) inequality is not inherently antagonistic. Indeed, the more capital there is in an economy, the more advanced it is, the longer its chain of production is, and the more complex its division of labor is. And this fact is readily revealed in comparing GNRs, whereas it is hidden behind nI in comparing GDPs. That is, a country's GDP does not tell us whether it is consuming its seed corns, relative to another country with the same GDP; or whether it has a limited government but with a vast infrastructure of capital goods as captured in terms of a tiny net investment.

Posted by: Tom | Sep 3, 2019 1:56:59 AM