0.4 Income distribution  (Page 15/18)

The CBO study is but one of the recent publications that counsels caution in interpretation of reports of sharply increasing income inequality in the U.S. One highly reported, award winning study published in 2012 argues convincingly that because studies such as that of Piketty, and Piketty and Saez, that exclude the effects of taxes, transfers and in-kind benefits to middle-income earners overstates the growth of income inequality since 1980. Richard V. Burkhauser, Jeff Larrimore&Kosali I. Simon (2012, March), “A Second Opinion on the Economic Health of the American Middle Class”, National Tax Journal , 65(1): 7-32.

This study clearly shows that while the pre-tax, pre-transfer income series used by Piketty (and collaborators) may be a useful starting point for measuring how American workers are compensated in the labor market, the policy implications of Piketty’s results are rather limited. Indeed the Piketty results even understate the pre-tax returns to work, because they ignore the sharp increases in middle income workers income coming from sharply growing values of employer-provided health insurance.

The critical issues is, however, what has been happening to the overall economic resources available to individuals. Burkhauser, Larrimore&Kosali, p.19. This can be determined only by examining income measures that reflect after-tax, after-transfer income as well as the value of employer health insurance, so as to reflect the total financial resources available to individuals.

The Burkhauser, Larrimore and Korali study does show that income inequality in the U.S. increased, but not for the same reasons or by nearly as much as indicated by Piketty. Rather they show that income inequality increased not just because the rich got richer, the poor got poorer and the middle class stagnated. Instead “the rich got richest quintile at a faster rate than the middle and lower quintiles”. Growth was substantial in all quintiles once researchers account for the effects of government tax and transfer policy and the shift in composition from wages to employer provided health insurance.

The study by Burkhauser et al. concludes that, by this income measure, while income growth for the top 10 percent in the U.S. was indeed rapid, at 56%, income growth over the period 1979-2007 was significant for all quintiles (see Table 4-2).

And while the Gini Coefficient, on this measure did increase over the period, the increase was moderate, from 0.330 to 0.362, much less than in studies using the most restrictive definitions of income. In any case, the Piketty results are not as relevant for public policy as would first appear.

Nevertheless, Piketty proposes radical changes in public policy to rectify the income inequalities he reports for the U.S. and Europe. The most striking of these proposals pertain to taxation. Piketty proposes a very high rate of income tax on 80% or more on top incomes, Piketty, Capital in the 21st Century , p.512. together with enactment of progressive taxes on net wealth that reach 10% on the largest fortunes. These proposals reflect a degree of ignorance of the history both of income and net wealth taxes. In Chapter___ particular worldwide experience with both taxes has clearly shown that tax rates of this magnitude are unenforceably high.