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The Wall Street Journal Defends the Super-Rich

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The headline amounts to a “dog bites man” story, expect for the stridency and incongruities of the Journal’s editorial position, and the increasing number of super rich themselves begging to differ.

A WSJ editorial page commentary by Alan Reynolds, a senior fellow at the Cato Institute, titled “The Top 1%….of What?,” takes issue with the idea that income disparity is growing. Amusingly, an editorial a few days later, “The Top 1% Pay 35%,” discussed how the top 1% of tax filers paid 35% of all federal income taxes in 2004.

Somehow, this attempt to posit that the rich really aren’t all that rich but are nevertheless oppressed reminds me of Desmond Morris’ comment in “The Naked Ape” on the contradictory message presented by women wearing bras: “I am not available for sex, but I am nevertheless very sexy.”

The Reynolds article is a critique of the work of Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley, whose studies on income distribution are generally considered the most thorough in this field, and are the source of the widely cited factoid that the income share of the top 1% (of tax filers) has increased from 8% in 1980 to 16% in 2004.

Reynolds highlights a number of flaws in the Piketty-Saez analysis: it excludes transfer payments like Social Security, which make up a larger share of total income now than in the early 1980s, and doesn’t allow for non-taxable income, non-filers, or underreporters. Reynolds notes,

For such reasons, personal income in 2004 was $3.3 trillion, or 34.4%, larger than the amount included in the denominator of the Piketty-Saez ratio of top incomes to total incomes. Because that gap has widened from 30.5% in 1988, the increasingly gigantic understatement of total income contributes to an illusory increase in the top 1%’s exaggerated share.

Citing other Piketty/Saez failings (such as not allowing for the effects of the 1986 Tax Reform Act on the propensity of executives to take non-qualified stock options, which are treated as W-2 income, other tax law changes that favored the use of S-corps and LLCs, which again shifted income reporting from corporate to individual returns), Reynolds concludes:

In a forthcoming Cato Institute paper I survey a wide range of official and academic statistics, finding no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%’s alleged share of something-or-other.

Now it is difficult to respond to a paper that hasn’t been published, but Reynolds’ complaints in his WSJ piece lump together things that could possibly be adjusted for with reasonable accuracy (like the failure to include Social Security payments) with ones that are difficult to parse (how much of business earnings in the 1980s really should have been attributed to compensation of the owners?) and ones that are inherently impossible (like the size of the cash economy over time and its impact on income distribution).

The underlying problem is that any analyst is put in the position of not having the right information (the rich are notoriously chary about revealing the extent of their wealth), and like the drunk looking under the light for his keys, winds up searching where the data, rather than the answer, lies.

Nevertheless, Reynolds (with the exception of municipal bond income) overlooks factors that understate income at the very top. Piketty and Saez note that the current top strata is a working elite, deriving nearly 90% of its income from pay packets and entrepreneurial earnings. By contrast, in 1937, the top 1% took almost half its income from rents, interest income, and dividends.

This situation may sound more egalitarian, but consider the ways a Wall Street partner, corporate CEO, or hedge fund manager can derive economic benefits that are not taxable and hence not captured in the Piketty-Saez data. Corporate expense accounts provide considerable untaxed largesse. If you attend an opera gala as a donor, the value of the performance is excluded from your contribution, and thus you have effectively paid for it out of your after-tax earnings. If you go to the opera with a client and your employer reimburses you, on the other hand, you get a freebie. Other top corporate perks include club memberships, legal and accounting services, sometimes even home decoration if it is can be argued to be related to business. Private jet rental is also an allowable expense, even when it is a matter of convenience and comfort than necessity. And low interest loans (often forgiven if the executive retires or is jettisoned, and thus counted as income later) are another tax-free windfall.

And we haven’t gotten to the high-earner analogue to the cash economy, namely, keeping funds offshore (if you don’t think this happens, I can introduce you to a man who used to move money for Marc Rich).

As much as one hates meeting analysis with anecdote, the reason the public at large is aware of income disparity is that they can see the trappings of ludicrous lucre. The mega yacht industry shows “huge growth,” mansions in Beverly Park are of Gilded Age proportions , and art is trading at record prices. Former professionals are increasingly seeking and getting six figure jobs as managers, and even butlers to the wealthy. A few days after the “top 1%” pieces cited above, the Journal ran a page one story on how “hedge funds moguls…are reshaping the world of wealth.”

Unexpected sources, members of the top 1%, are calling for restraint, fearing a backlash. Stephen Schwarzman, co-founder and CEO of Blackstone Group, commented in a recent Financial Times article ,

America is a place where people like to have the American dream, everybody successful. The middle class in the United States hasn’t done as well over the last 20 years as people at the high end and I think part of the compact in America is everybody has got to do better.

Jeffrey Immelt, the chief executive of General Electric, who made a comparatively modest $3.2 million in 2005, argued that CEO pay, one of the most visible elements of burgeoning income at the top, is out of line:

The key relationship is the one between the CEO and the top 25 managers in the company, because that is the key team. Should the CEO make five times, three times or twice what this group makes? That is debatable, but 20 times is lunacy.

As these comments show, the debate over income disparity in the US has centered on equity, but is still couched in economic terms: is it fair and productive for people to earn such lofty sums?

Interestingly, in the Financial Times, which is unquestionably pro-capitalism, the coverage of income disparity doesn’t focus on just the economic considerations, but also from time to time considers the viewpoint of social psychologists, namely, that a wide gulf between the rich and poor is not only bad for the happiness of all, but also has a negative impact on health. But we’ll explore that in future posts.

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