As I explained in my last column, labor's share always rises in recessions (it peaked in 2001) because recessions shrink profits and capital gains. That does not mean workers should welcome recessions just to get a larger share of a smaller pie.
Unlike Pearlstein's untenable claim that "labor's share of the economy is shrinking," the source of his favorite statistic is not a mystery. It comes from a 10-page paper on "retrospective income" prepared for an academic conference by Michael Strudler and Tom Petska from the Statistics of Income division of the IRS, and Ryan Petska from Ernst and Young. But estimates are just estimates, and estimates derived from tax returns (including those from the CBO) are among the worst.
For anyone determined to show that the top 10 percent has a much larger share of total income than the CBO or Census Bureau could find, the trick is to stuff as much as possible into the incomes of the top 10 percent and then exclude as much as possible from everyone else's income. Strudler, Petska and Petska know how to pad the numerator of this ratio, but also how to shrink the denominator.
They explain, for example, that "Social Security benefits were omitted because they were not reported on tax returns until 1984." Those dependent on Social Security benefits may be surprised to find that they are counted as having no income at all. But the more income that can be excluded at the bottom, the larger the share left to be assigned to the top.
Piketty and Saez exclude all transfer payments, not just Social Security. Everyone excludes the Earned Income Tax Credit, the largest cash transfer to the poor, by pretending a Treasury check for a few thousand dollars only needs to be mentioned in after-tax income. In an online discussion, Pearlstein wrote, "Liberals like to decry ... the increasing inequality being generated in pre-tax earnings. So the government, at their urging, enacts policies that use the tax code to make things fairer in what really counts, after-tax earnings. But then the liberals keep using the data on pre-tax earnings, to suggest nothing has gotten better. That's disingenuous." That's right. Yet his favorite statistic is for pre-tax earnings.
Strudler, Petska and Petska also add capital gains that are realized on tax returns to the incomes of the top 10 percent, and so does the CBO. But nobody counts capital gains on investments inside the IRA and 401(k) plans of Middle America because those gains do not show up on income tax returns until we're very old. The amount of money going into these tax-deferred plans is vastly larger than the tiny amount being taken out.
The highest incomes are also boosted by adding "depreciation in excess of straight-line depreciation." Since your neighbor is unlikely to be claiming accelerated depreciation on business equipment, this trick reveals that much of the "household" income among the top 10 percent is really business profit. Many businesses switched to filing under the individual income tax after those tax rates came down in 1987, so their incomes moved from corporate to individual tax returns. Most hedge funds are limited liability corporations, and many banks are now Subchapter S corporations and their profits are counted as "household" income.
Pearlstein will soon offer his favorite solutions to problems described by his favorite statistics. But picking favorite statistics to advance a policy agenda only works if nobody is paying attention to what those statistics really mean.