Brad DeLong Takes on Alan Reynolds on Income Inequalty

Alan Reynolds has become income inequality’s analogue to a global warming denier. Even after Fed chairman Ben Bernanke and President Bush have acknowledged that income disparity has increased, Reynolds is still fighting a rearguard action. He wrote a series of articles, starting with a Wall Street Journal comment last December, arguing against the widely-cited finding of Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley that the income share of the top 1% (of tax filers) has increased from 8% in 1980 to 16% in 2004 (and their more recent work shows it’s getting worse).

Now it’s notoriously difficult to come up with accurate measures of income, since people at the top and bottom have both the incentive and the means to hide it. That in turn implies that any effort to measure income will be subject to legitimate questions and criticisms. But Reynolds’ comments are one-sided: as University of Oregon Professor Mark Thoma pointed out, Reynolds isn’t trying to get at a more accurate picture of what is happening, but is merely trying to debunk the evidence that income inequality is on the rise. But to do that, he focuses only on factors that might overstate the concentration of income at the top, and ignores or rejects all others.

Now Brad DeLong weighs in on Reynolds’ latest foray, an article in the Washington Times, which is a rehash of his Wall Street Journal/Cato Institute arguments:

Alan Reynolds, once again sighted in the Washington Times trying to degrade the quality of debate about economic issues:

What is income? — The Washington Times: Alan Reynolds: Two French economists, Thomas Piketty and Emmanuel Saez, can count on a flood of publicity every time they release a new estimate of the share of U.S. income supposedly received by the top 1 percent. Even veteran columnist Robert Samuelson of The Washington Post approached their latest “astonishing” estimates as unquestionable scripture. “The biggest gains occurred among the richest 1 percent,” he exclaimed. “Their share of pretax income has gradually climbed from 8 percent in 1980 to 17 percent in 2005.” Gradually? On the contrary, half of that increase happened in just two years, 1987 and 1988. The top 1 percent’s share (of what?) was 13.2 percent in 1988, 14.9 percent in 2003….

Increases in the top 1 percent’s income after the 1986 Tax Reform came from more business income being reported on individual tax returns, rather than corporate tax returns. The share of the top 1 percent income coming from business profits jumped from 11 percent in 1986 to 21 percent in 1988, and continued rising to 27 percent in 1994, the year after individual tax rates were increased. The business share was still 27 percent in 2002, but it rose to more than 29 percent in 2005 after individual tax rates were once again reduced. How and why that happened is a textbook example of why tax return data cannot be used to measure income distribution…

29% of 17% is 5% as the tax-return-estimate based share of business income reported by the top one-hundredth. If the tax law were different today, a good chunk of that 5% would be reported as capital income, and a smaller chunk as labor income. The estimates the people I talk to come up with is that the 1986 Tax Reform boosted the long-run measured share of the top one-hundredth relative to the true share by between 0 and 2 percentage points, leaving between 7 and 9 percentage points as the true underlying increase in the income share of the top one-hundredth.

Can anybody point to anything, anywhere, that Alan Reynolds has ever written that I would advise anybody who actually wants to learn stuff to read?

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One comment

  1. Anonymous

    It is the change from 11% in 1986 to 29% in 2005 that drives much of the change in the top 1 percent’s share. If the corporate tax rate was much lower than the individual tax rate then much of that income would be reported on corporate tax forms and therefore excluded from the Piketty-Saez data. This is not a unique observation but one made by Roger Gordon and Joel Slemrod, Emmanuel Saez and several studies at the Statistics of Income Division of the IRS.

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