Measuring Income Concentration - A Guide for the Confused

Winship on Auten/Gerald/Splinter versus Saez/Zucman

"....PSZ find the top one percent share rising 6.5 points, from 9.1 percent to 15.6 percent from 1979 to 2015. In contrast, AS report it increasing only from 7.2 to 8.5 percent....how we have arrived at the present, when one set of researchers can claim that this share rose by 8.5 percentage points from 1979 to 2015, while another can claim a rise of only 1.3 points....In Figure 5, the two middle lines carry over from Figure 1 the income concentration estimates from the two research teams that examine the fiscal income of tax units. As noted earlier, those trends lie very close to one another. The two thick solid lines show trends in the top one percent’s share when using pre-tax income and assessing inequality across individuals rather than tax units. (The other dashed lines show intermediate steps in moving from tax-unit fiscal income to individual pre-tax income. For the PSZ estimates, the intermediate step moves from tax-unit fiscal income to tax-unit pre-tax income. For the AS estimates, it moves from tax-unit fiscal income to individual fiscal income.)Note that the “pre-tax” estimates use the PSZ definition, which is actually more like pre-tax, post-social-insurance income, since it counts Social Security and unemployment insurance but no other transfers. (AS do not include social insurance in their pre-tax measure, but it is possible to allocate it using their spreadsheet.) PSZ find that the top one percent’s share of pre-tax income was 12 percent in 1979 and 20 percent in 2015. The AS estimates suggest an increase from 9 percent to 13 percent in 2015. Thus, inequality is lower in the AS data than in the PSZ data, and it rises less (a four-point rather than an 8.5-point increase from 1979 to 2015). What accounts for these differences? In their paper, AS attempt to reconcile their estimates with those of PSZ. They find that over half of the difference in the 1979-to-2014 increase between the two papers (2.4 points of the 4.3-point gap) derives from differences in how underreported income and retirement income are treated. Discrepancies between how non-retirement corporate income and sales taxes are allocated explain another one point. Together, these four categories explain 80 percent of the gap in inequality growth between the two papers.That leaves the question of which team is closer to the truth. Regarding underreporting, both PSZ and AS allocate unreported income that is incorporated in the US national accounts. AS rely heavily on IRS audit studies, which they note are the basis for the national accounts estimates of underreported income. PSZ have argued that the audit studies fail to account for the underreported income of complex partnerships, citing Cooper et al. (2016). However, in their appendix, AS show that even if half of the income of such partnerships estimated by Cooper et al. was unreported and it all belonged to the top one percent, the top one percent share would only rise by 0.3 percentage points in 2014. In response to PSZ claims that accounting for income from offshore wealth would raise inequality, AS conduct a sensitivity check using estimates of offshore wealth from Saez and Zucman (2016) and rates of return the exceed estimates in the literature. They find that the top one percent’s share would be raised by only a couple of tenths of a percentage point. For their part, AS fault PSZ for allocating too little underreported business income to people with negative reported business income (and thus too much to people with already-high reported business income). PSZ has not responded to this criticism in their papers. Regarding the discrepancies related to retirement income allocation, in the online appendix to their paper,AS cite Devlin-Foltz, Henriques, and Sabelhaus (2016), who find the top one percent own 8 percent of retirement wealth—much closer to AS’s estimate of the top’s share of retirement income (6 percent) than PSZ’s (16 percent). AS note a clear error on the part of PSZ in that they include rollovers on tax returns as income when they back into aggregate retirement wealth, to which they then apply a rate of return to estimate full retirement income. Rollovers in a given year do not represent income generated by wealth in that year and received by retirees; rather they represent wealth itself being transferred between accounts. PSZ has not responded to this criticism in their papers. Regarding sales tax allocation, AS note that PSZ do so on the basis of labor and business income less savings, which takes no account of retirement income, taxes, or transfers and their impact on purchasing power. Arguably, however, rather than coming from the pockets of consumers, sales tax ultimately may come from the pockets of workers and business owners who would see higher pay or profits if not for the taxation. PSZ updated their estimates in 2019, and in their latest version they allocate 70 percent of sales taxes across consumers (taking into account retirement income, some taxes, and some transfers), and 30 percent according to labor and business income. Finally, regarding nonretirement corporate income, Smith, Zidar, and Zwick (2019) point out that PSZ likely overstate income concentration by allocating corporate retained earnings on the basis of dividends and realized capital gains (both forms of taxable income from C-corporations), since only some—perhaps a minority—of realized gains come from sale of corporate stock (real estate sales being a primary alternative source of gains). In effect, they are giving corporate retained earnings to well-off people who don’t have ownership in corporations. In the online appendix to their 2018 paper, PSZ enumerated several issues with an earlier draft of the AS paper. Most of these objections were addressed in the latest AS paper. In some cases AS changed their methods in response; in others (noted above) they defended their choices. PSZ’s revised appendix no longer includes the section addressing the earlier AS paper, and it has not been replaced by a new response. Instead, PSZ (2019) approach the revised AS paper through several general criticisms. First, they compare the aggregate amount of national income AS estimate going to the top one percent in 2015 to the amount of fiscal income Piketty and Saez (2003) estimate going to it. They note that AS find less income going to the top than Piketty and Saez, despite national income being more comprehensive than fiscal income. But this is an inappropriate comparison because the Piketty-Saez estimates they cite include realized capital gains. Realized gains reflect undistributed retained earnings (included in national income) but also pure price changes in assets that are unrelated to production (excluded from national income). The latter constitute a substantial amount of fiscal income. PSZ also conduct a back-of-the-envelope exercise suggesting that AS must be allocating untaxed income (as opposed to fiscal income) in ways that imply dramatically falling inequality in untaxed income over time. However, their exercise proceeds from the Piketty-Saez fiscal income estimates (looking at tax units ranked by tax-unit income) as if AS were also looking at tax units ranked by tax-unit income. In actuality, the AS national income estimates report the share of income received by the tax units containing the top one percent of individuals, ranked by size-adjusted tax unit income. The estimates in AS’s Table 1 suggest that a sizable proportion of the reduced rise in inequality they find, relative to the Piketty-Saez estimates, can be attributed to this change in the unit of analysis and ranking methodology—roughly one-fourth of reduction from 1960 to 2015. In their response to PSZ, AS show that the assumptions PSZ use in their back-of-the-envelope exercise about how untaxed income is distributed in the AS estimates are simply wrong. PSZ’s exercise assumes that the share of 2016 untaxed capital income not earned on pension plans that AS give to the top one percent is 10 percent (versus the 40 percent that PSZ use to reproduce their own estimates in a similar exercise). But AS report that this amount is actually 29 percent in their data in 2015. Using the equation on page 26 of AS’s online appendix, one can confirm that the PSZ exercise produces the result that it does (low concentration of untaxed capital income outside pension plans) because they ignore that AS are looking at individuals ranked by size-adjusted income. Setting the top one percent shares of imputed rent and private capital (which, together, constitute capital income outside pension plans) to 10 percent, as in the PSZ exercise, and zeroing out the decline in the top share that is attributable to the change of units and ranking methodology, the aggregate income amount going to the top one percent is consistent with the amount AS actually allocate to them. PSZ have only shown one way to produce, from the distribution of fiscal income by tax unit, a national income concentration trend that happens to align with the AS trend based on ranking individuals by size-adjusted income. To close out this primer, Figure 6 carries over the pre-tax trends from Figure 5 and also displays the post-tax estimates from PSZ and AS. Most of the difference between the post-tax series, in terms of how much inequality rises, is due to the pre-tax estimates diverging. The way that AS allocate government consumption (non-transfer expenditures) and government deficits leads their inequality measure to decline by around one point more than it would if they used the PSZ approach. AS argue that by allocating government consumption strictly by after-tax income, PSZ reject the possibility that public goods benefit everyone equally or that some government consumption expenditures redistribute well-being downward. Regarding (non-Social Security) deficits, AS allocate by federal income taxes. PSZ allocate half by government transfers and half by taxes, which seems a compromise between allocating by who pays for deficits and by who benefits from them...."

Winship, Scott, "Measuring Income Concentration - A Guide for the Confused," United States Congress Joint Economic Committee," October 16, 2019, https://www.jec.senate.gov/public/index.cfm/republicans/analysis