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 Washington Post columnist Robert Samuelson 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.

To calculate the top 1 percent's share of total income, we need a definition of total income. For postwar data, Piketty and Saez use a modified version of adjusted gross income (AGI). Unfortunately, the Bureau of Economic Analysis calculates that AGI is not even a good measure of AGI -- it was missing $1.1 trillion dollars in 2004, called the "AGI Gap." It is also missing income of non-filers, estimated at $479 billion in 2000.

Transfer payments of $1.5 trillion are arbitrarily excluded, too. Benefits from private pensions qualify as "market income," yet benefits from Social Security do not.

The famed Canberra Group of experts insisted that household income must include cash transfers, food stamps and everything else that "increases the recipient's potential to consume or save." Most or all transfers are included in every official measure of pretax household income from the Congressional Budget Office, Bureau of Economic Analysis, Census Bureau, Bureau of Labor Statistics and the Fed. My family will collect more than $3,000 a month from Social Security next year, but Piketty and Saez say that's not income (the IRS disagrees).

In the American Economic Review last May, Piketty and Saez explained that their top 1 percent figures for other countries "are obtained by dividing top income shares by personal income." Their U.S. figures for 2005, however, are obtained by dividing top income shares by "market income" of $6.8 trillion -- a figure 38 percent smaller than pretax personal income. Income of the top 1 percent ($1.2 trillion) was 10.8 percent of pretax personal income ($11.1 trillion).

Alan Reynolds

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