Demonizing the rich and condemning disparities of wealth have been pillars of Democratic Party politics for decades. Franklin Delano Roosevelt lambasted wealthy Americans who “did not want to pay a fair share” in 1936. Barack Obama pronounced income inequality “the defining issue of our time” in 2012. Few left-wing tropes are more familiar than the avarice of the well-to-do.
These days, the most fervent bash-the-rich rhetoric comes from Democratic senators Bernie Sanders and Elizabeth Warren, both of whom are proposing steep new taxes on the accumulated wealth of America’s most affluent families. Sanders denounces current levels of wealth inequality as “outrageous,” “grotesque,” and “immoral,” and declares flatly that “billionaires should not exist.” Warren accuses the rich of having “rigged the system” to “hollow out” the middle class, and insists that “runaway wealth concentration” is poisoning American society.
The idea that wealth and income inequality is off the charts — that the “1 percent” has cleaned up at the expense of everyone else — has gotten considerable support from the work of three influential economists, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. It’s their research that Warren and Sanders rely on when they decry the super-rich for amassing ever more wealth while the vast majority of Americans is losing ground.
But what if Piketty, et al., got it wrong?
“Just as ideas about inequality have completed their march from the academy to the frontlines of politics, researchers have begun to look again,” The Economist reported last month. “And some are wondering whether inequality has in fact risen as much as claimed — or, by some measures, at all.”
Two of those researchers are economists Gerald Auten of the US Treasury and David Splinter of Congress’s Joint Committee on Taxation. In a recent paper that has drawn respectful attention in the profession, they make the case that Piketty, Saez, and Zucman fumbled their data, and that their most explosive conclusions about rising inequality aren’t supported by the facts. They conclude that, once taxes and government transfer payments are properly accounted for, the share of income going to the top 1 percent in the United States has barely changed since the early 1960s.
One point critics have been making for years is that data on wealth and income ought to reflect the nearly $2 trillion paid out by the government each year via Medicare, Medicaid, and other social welfare programs. Since most taxes are paid by upper-income Americans, while most transfer payments go to lower-income Americans, a good deal of inequality is constantly being neutralized by government antipoverty spending.
To that familiar correction, Auten and Splinter add more subtle ones.
They note, for example, that Piketty and his colleagues focused on tax returns filed by households, which show the income reported by the 1 percent outstripping everyone else. But the focus on household income, as opposed to individual income, skews the bottom line. Marriage rates have fallen disproportionately among poorer Americans, which means that income is divided among more lower-income households, though not among more people. When incomes are ranked by individuals, there is a lot less inequality.
Something else those beating the class-warfare drum tend to ignore is the sharp increase in corporate profits flowing to middle-class taxpayers through pension and retirement funds. Thanks to the advent of IRAs and 401(k)s, corporate ownership has been radically democratized. In 1960, Auten and Splinter point out, retirement funds owned just 4 percent of the US stock market. Today that figure is above 50 percent.
Yet another correction has to do with the way US incomes have been reported to the IRS since 1986. A major change in tax law that year encouraged small businesses to operate as “pass-through” entities, meaning that their income — previously included in corporate returns — could henceforth be included in individual tax returns. As a result, high incomes that used to be sheltered within corporate tax filings began getting reported as individual income: a surge in personal wealth on paper, but not in reality.
Academic analyses of taxpayers’ earnings can be “fiendishly complicated,” the Economist acknowledges. Politicians and ideologues generally aren’t interested in nuance; they prefer to treat issues of income, wealth, and inequality as black-and-white morality tales. But the incessant claim by Sanders and Warren that working-class Americans are being impoverished as plutocrats in the “tippy top” grow ever richer is just not plausible.
There is more to wealth, after all, than hourly wages. “If you argue that income has shrunk you also have to claim that four decades’ worth of innovation in goods and services, from mobile phones and video streaming to cholesterol-lowering statins, have not improved middle-earners’ lives,” the Economist comments. As Don Boudreaux of George Mason University points out, the humblest working-class American today enjoys a standard of living and an array of amenities and comforts — from air travel to contact lenses to overnight package delivery — far superior to most of what even a billionaire like John D. Rockefeller could have commanded a century ago.
Perhaps this is why progressive passion for soaking the rich and closing the wealth gap rarely seem to be shared by most voters. When Gallup earlier this year asked Americans to name the “most important problem facing this country today,” just 1 percent cited the gap between rich and poor. When respondents were given a list of a dozen “priorities” for Congress and the president to tackle, “the distribution of income and wealth” tied for last place.
Contrary to progressive belief, America is not divided into rigid economic strata. The incomes of the wealthy often decline, while many taxpayers go from being poor at one point to not-poor at another. Research shows that more than one-tenth of Americans will make it all the way to the top 1 percent for at least one year during their working lives.
The very rich, wrote F. Scott Fitzgerald, “are different from you and me.” Are they, though? You’d never know it to hear Warren and Sanders fulminate, but the gaping inequality they rail against might just be an illusion.
Jeff Jacoby can be reached at [email protected].