Macro Roundup

Matthew Smith, Owen Zidar, Princeton and Eric Zwick have a new update to Top Wealth in America: New Estimates and Implications for Taxing the Rich. Basically further highlighting that the primary driver behind rising incomes of ultra rich isn't a concentration of financial capital, but is a return to human capital

"...One of the most important takeaways from the research is that the primary driving force behind inequality between the richest Americans and everyone else isn’t, as many have argued, a concentration of financial wealth or capital. From 1980 to 2014, the rise in the top 1% share in national income due to capital income is only 2.4 out of 8.1 percentage points in total growth. Rather, the authors argue that much of the recent rise of top incomes and wealth represents a return to human capital, including the labor income of private business owners—for example consultants, lawyers, or doctors—often characterized as capital income of pass-through businesses for tax purposes...."
Matthew Smith, Owen Zidar, Princeton and Eric Zwick, "Wealth gaps are smaller than previous estimates suggest, and capital isn’t entirely to blame for rising inequality," Princeton University, April 29, 2020, https://economics.princeton.edu/2020/04/29/wealth-gaps-are-smaller-than-previous-estimates-suggest-and-capital-isnt-entirely-to-blame-for-rising-inequality/

Wealth gaps are smaller than previous estimates suggest, and capital isn’t entirely to blame for rising inequality

How rich are the richest Americans? A thorough answer to this question is necessary to address public concern over rising inequality, whether the distribution of resources is fair, and how policy ought to respond.

While over the last several years the U.S. has seen increased interest in addressing inequality through taxes on wealth or capital income (for example a capital gains tax), several questions remain. How much revenue could such taxes raise and, given the composition of wealth among the richest Americans, are these taxes the most effective way to reduce gaps in wealth and income? As the burden of coronavirus grows and policymakers start considering new tax policies, it’s important that the public have the most accurate estimates of top wealth and income available.

In a new update to their paper on measuring top wealth and inequality in the U.S. (PDF), Princeton’s Owen Zidar, Chicago Booth’s Eric Zwick, and Treasury’s Matt Smith find that the increase in wealth among the top 0.1% over the last 40 years is half as large as previous estimates would indicate.

Furthermore, they find that the financial assets and capital of the ultra-wealthy amount to a smaller share of national income than previously believed. Instead, they argue a bigger driver of top incomes is human capital and returns on labor often characterized in tax filings as private business profit.

Main findings

The authors find that the top 0.1% share of wealth increased from 7% to 14% from 1978 to 2016. While this rise is half as large as prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%. However, Americans in the 90th to 99th percentile, a group with more than $660,000 in wealth but less than $3.1 million, hold 36% of total wealth. Their wealth exceeds that of the bottom 90% or the top 1%. The chart below compares the authors’ new estimates to those produced in previous studies and using different approaches and data sources.

One of the most important takeaways from the research is that the primary driving force behind inequality between the richest Americans and everyone else isn’t, as many have argued, a concentration of financial wealth or capital. From 1980 to 2014, the rise in the top 1% share in national income due to capital income is only 2.4 out of 8.1 percentage points in total growth.

The paper also has implications for how much revenue a wealth tax might raise. These new estimates of top wealth suggest total revenues would be far less than many expect. A one percent tax on the top 0.1% in 2016 would generate $112 billion assuming taxpayers didn’t change their behavior in response. A graduated tax, which taxes wealth above $50 million at 2% and adds a surtax of 1% of wealth exceeding $1 billion, would raise $117 billion in 2016 (assuming no change in behavior). Prior estimates, calculated using an “equal-returns” approach (see next section for more detail), estimated $207 billion in revenue from such a graduated tax. The new estimates suggest a graduated tax would bring in only 57% of that estimated revenue before accounting for behavioral responses, which would lower revenue estimates further.

Why the new estimates differ from previous estimates

The approach the authors take to estimate wealth builds on an approach first employed by others (Giffen, 1913; Stewart, 1939; Saez and Zucman, 2016) to scale up or “capitalize” income observed on tax returns to estimate top wealth. That is, they take an individual’s income, reported in official fiscal statistics, and estimate how much wealth created it.

The strength in the authors’ new approach, however, is that they use new data to discipline how income maps to wealth for different groups of people. They start by looking at several types of income: fixed income (from liquid assets, deposits, bonds, etc.), public equity income, private business income, etc.

Then, in estimating the amount of wealth that creates these different types of income, they allow for the possibility that rates of returns for each income type can vary across people. Accounting for this empirically relevant variation produces different wealth estimates than earlier work that assumes equal rates of return across people.

As one example, they show that fixed income portfolios of the rich skew toward high-yield bonds and loans, whereas the fixed income portfolios of the non-wealthy are mostly bank deposits. Simply put, fixed income portfolios for the wealthy differ in nature, risk, and liquidity from those for the less wealthy. This difference in the composition of people’s portfolios means there are unequal effective returns on fixed income for the rich and everyone else.

While the authors are not the first to argue that the rich earn higher rates of return on their income (it’s a key point of Thomas Piketty’s Capital), an important contribution of the research is the extent to which they test both their assumptions and previous assumptions against administrative and survey data that does exist.

When the authors produce wealth estimates using their assumption that the rich earn higher rates of return, their results line up nicely with estate tax data and the wealth data reported by the Federal Reserve’s Survey of Consumer Finance (SCF). When they produce estimates using the assumption that everyone earns equal rates of return, their results overstate fixed income assets reported by the SCF, especially at the top. For more detail on how the authors’ new approach differs from the 2016 study by Emmanuel Saez and Gabriel Zucman, read section 10.1 of the full paper or the authors’ response to comments on their earlier draft.

Another contribution of the Research is showing how the authors’ updated wealth estimates change what we know about income inequality and how national income is distributed across income groups. For more detail on how wealth estimates relate to distributional national accounts and inequality statistics, read Eric Zwick’s recent testimony before the Joint Economic Committee of the U.S. Senate (PDF).

Conclusion

While there are many ways to continue improving estimates of wealth and income, this Research further improves our understanding of why inequality has increased and the most effective ways to address growing gaps in wealth and income.

To learn more about the findings and methodology, please download the full paper.

Matthew Smith, Owen Zidar, Eric Zwick, " Top Wealth in America: New Estimates and Implications for Taxing the Rich," National Bureau of Economic Research, April 24, 2020, https://scholar.princeton.edu/sites/default/files/zidar/files/szz-wealth.pdf

“….This paper uses administrative tax data to estimate top wealth in the United States. We build on the capitalization approach in Saez and Zucman (2016) while accounting for heterogeneity within asset classes when mapping income flows to wealth. Our approach reduces bias in wealth estimates because wealth and rates of return are correlated. We find that the top 0.1% share of wealth increased from 7% to 14% from 1978 to 2016. While this rise is half as large as prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%.However, the “P90-99” class holds more wealth than either group after accounting for heterogeneity. Private business and public equity wealth are the primary sources of wealth at the top, and pension and housing wealth account for almost all wealth of the bottom 90%. Our approach substantially reduces estimates of mechanical wealth tax revenue and top capital income in distributional national accounts, which depend on well-measured estimates of top wealth. From 1980 to 2014, capital income accounts for 2.4 out of 8.1 percentage points of the rise of the top 1% income share…. Figure 1A shows how our preferred approach alters estimated wealth for the top 0.1%. The top 0.1% wealth share in 2016 is 14% when accounting for return heterogeneity, and around 20% when assuming equal returns. Top 1% and 0.01% shares fall by 22 percent and 36 percent, respectively. The growth in top wealth shares is also less dramatic. Our approach reduces the growth in top shares since 1978 by half, leaving the recent wealth estimates above the estate tax series and closer to the SCF. Overall, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%.However, the “P90-99” class holds more wealth than either group.Our approach also alters the composition of top wealth. We find a larger role for private business wealth and a smaller role for fixed income wealth, consistent with the composition of top wealth in the SCF and estate tax data. Private business and public equity wealth are the primary sources of wealth at the top, and pension and housing wealth account for almost all wealth of the bottom 90%...”

Just an FYI, Smith/ Zidar/Zwickupdated Top Wealth in Americathatwe looked at over the summer. Basically further highlighting that the primary driver behind rising incomes of ultra rich isn't a concentration of financial capital, but is a return to human capital

Continued decrease in supervision for low skilled men

"... marriage rates hit an all-time low in 2018, the most recently recorded year. The national marriage rate fell from 6.9 to 6.5 marriages per 1,000 people from 2017 to 2018. The dip was the first noticeable change in a fairly-stable trend over the past decade, following a long decline starting in the mid-1980s. As recently as 2001, the national rate was 8.2 marriages per 1,000 people.... There may be some compositional effects at work - as the U.S. population ages, more people move out of what we might consider “prime age” for marriage. Since 2005, the fraction of the U.S. population between the ages of 18 and 54 as a share of the total population has fallen from 52.1 to 48.6 percent. If we control for that dynamic, we can see that some - but not all - of the recent decline in marriage is attributable to demographic factors…..There was even an increase in the adjusted marriage rate, controlling for demographic shifts, from 2009 to 2016. But drop in recent years is noticeable across the board, no matter the analysis….. rates have particularly declined among minorities and those in middle and lower economic quintiles. Decreased marriage is associated with increases in unwed childbearing over the last several decades, particularly for these groups...."

U.S. Marriage Rates Hit New Recorded Low

Data released yesterday shows wedding bells are growing ever-fainter in states across America. This decline in marriage can be seen in the data even before any potential impact of the coronavirus, which is expected to lower the numbers even further due to social distancing-related delays.

According to the latest data from the National Center for Health Statistics, marriage rates hit an all-time low in 2018, the most recently recorded year. The national marriage rate fell from 6.9 to 6.5 marriages per 1,000 people from 2017 to 2018. The dip was the first noticeable change in a fairly-stable trend over the past decade, following a long decline starting in the mid-1980s. As recently as 2001, the national rate was 8.2 marriages per 1,000 people.

One of the goals of the Social Capital Project is straightforward: “We want more children in happy married-parent families.” This goal is potentially made more difficult as marriage becomes rarer and more selective. Recognizing the social and economic barriers that cause more couples to put off marriage should be a priority for policymakers, and the SCP will continue to study these trends in detail.