A new study refutes the theory of rising inequality

The views and opinions expressed are solely those of the author.

If you type “growing inequality” into Google, you'll get over 75 million hits. Can such a widespread thesis be wrong?

If a thesis is repeated hundreds of times, many people believe it; if it is repeated millions of times, hardly anyone doubts it. The United States in particular is repeatedly cited as an example of how the “gap between rich and poor” is constantly widening. But two experts from the US Treasury Department's Office of Fiscal Analysis and the US Congress' Joint Committee on Taxation have shown it in a nearly 50-page essay in the famous Journal of Political Economy that this thesis is simply not true.

the left French economist Thomas Pikettywho is considered the leading proponent of the thesis, calculated that the income share of the top one percent of the wealthiest Americans has more than doubled since 1962. Among other things, he uses it to to justify calls for taxes on the rich to be collected up to 90 percent and for all young people to “give away” a global sum of 120,000 euros in initial state money.

The two authors present a figure that sounds much less dramatic. The top one percent's share of pretax income in the United States rose from 11.1 percent (1962) to 13.8 percent (2019), or 2.7 percentage points percentages However, after taking into account taxes and transfer payments, the increase was only 0.2 percentage points (from 8.6 to 8.8 percent).

And even with these figures, it is important to note that it is by no means the same people whose wealth or share of wealth increases over the years or decades. Only about 40 percent of the top earners retained their position over the next three years. This is a common mistake in the discussion of inequality, where statistical categories are often conflated with individuals.

There are several reasons why the Piketty and Auten & Splinter figures diverge. First, Piketty failed to consider the impact of changes in the tax system. Before Ronald Reagan massively cut taxes, many wealthy Americans preferred to retain their earnings in C corporations rather than receive dividends. As a result, that income didn't show up on their tax returns, making wealthy Americans appear poorer than they are. After tax reforms, many shifted to S corporations (pass-through entities), where income is directly attributable to individual shareholders and reported directly on the tax returns of high-income taxpayers.

Another reason is that Piketty compared tax returns rather than people. In 1960, two-thirds of Americans still filed their tax returns as married couples, but that share has fallen by nearly half. Among the top one percent, however, the share filing as a couple has barely budged. This effect alone makes the increase in the top one percent's income share look significantly higher than it really is, if you're comparing forms (income tax returns) rather than people.

Many statistics do not take into account taxes and transfer income. Although taxes in the US have been greatly reduced, especially during the Reagan era, numerous exemptions and tax saving models have been abolished at the same time. The result, as Phil Gramm, Robert Ekelund, and John Early recently demonstrated in their excellent book The Myth of American Inequality: How Government Biases Political Debate: The actual percentage of their income paid by the top one percent of tax income in the US was only 16.1 percent in 1962, when the top marginal rate was 91 percent. Yet by 1988, when the top rate was only 28 percent, the percentage paid by the top one percent of workers had risen to 21.5 percent! As the top tax rate fell by two-thirds, the percentage of their income that the top one percent of tax filers paid in federal income and payroll taxes rose by one-third.

Since the 1960s, the welfare state in the US has been steadily expanded, so that the share of the population receiving transfer payments and the amount of transfer payments have continuously increased. If you take into account taxes on the one hand and transfer payments on the other, it becomes clear that real income, i.e. what a citizen is left with after taxes and transfer payments, is very lower for the rich and much higher for those with low resources. income

I would like to add: in my opinion, the debate about inequality is much less important than the debate about how to eradicate it poverty. We know from many countries where the fight against poverty has been successful that initially inequality has increased greatly, for example in China and Vietnam. However, in my travels to these once very poor countries, I have never met anyone who wanted to go back to a time when people were more equal but poorer.

Rainer Zitelmann is the author of the book In defense of capitalismwhich contains a chapter that addresses the inequality debate in great detail.

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