Alan Reynolds

In a recent New York Times column, Paul Krugman frets that we are in a "New Gilded Age" because "every available measure of income concentration shows that we've gone back to levels of inequality not seen since the 1920s."

The only estimates that go back to the 1920s are a 1953 study of income tax data by Simon Kuznets and an updated 2001 study along the same lines by Thomas Piketty and Emmanuel Saez. The Kuznets estimates can't possibly be compared with recent data, so Krugman's "every available measure" turns out to be another veiled reference to Piketty and Saez. It echoes an earlier New York Times article by David Cay Johnston, which claimed that in 2005 the top 1 percent of Americans (with incomes above $348,000) received "their largest share of national income since 1928."

Unfortunately, the estimates for 2005 can't be compared with those from 1928, because Piketty and Saez used a much broader measure of total income for 1913-1943 than they did for later years. For 1928, the top 1 percent's income was divided by 80 percent of personal income. For 2005, the top 1 percent's income was divided by a figure only 62 percent as large as personal income. If total income is measured in the same way, then the top 1 percent's share was 13.3 percent in 2005 -- not remotely close to the 19.8 percent figure for 1928.

The Piketty-Saez income figures are before taxes, yet Krugman uses them to propose that we "raise taxes on the rich." He argues, "Taxation has become much less progressive: according to estimates by the economists Thomas Piketty and Emmanuel Saez, average tax rates on the richest 0.01 percent of Americans have been cut in half since 1970, while taxes on the middle class have risen."

That claim about middle class taxes is false. Piketty and Saez show average taxes for the bottom 90 percent falling from 20.4 percent in 1970 to 18.5 percent in 2000.

As for the richest 0.01 percent, that means 7,992 taxpayers in 1970 who reported incomes above $1 million (in 2005 dollars). Piketty and Saez would have you believe those 7,992 households paid an average of 74.6 percent of their income to the federal government alone in 1970. The comparable tax estimate for 2004 is 34.7 percent, which is apparently considered to be obviously less desirable than a 74.6 percent tax, though perhaps not as perfect as 99.9 percent.


Alan Reynolds

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