Economists Debate the Impact of Inequality

It's been stated that academic disputes can be quite heated due to the lack of importance of the subject matter. But when it comes to the debate over inequality, the implications are much greater. The work of three French economists--Thomas Piketty, Emmanuel Saez and Gabriel Zucman--has made it apparent that inequality in America is increasing. Numerous scholars have done their own research based on the trio's results, and politicians have vowed to take action through increased taxes and public spending. A majority of people consider the phrase "inequality is rising" to be an undeniable truth.

 Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation, a nonpartisan group in Congress, have both expressed their doubts about the trio's findings. In 2019, our team conducted a comprehensive analysis of the trio's methodology as part of a cover story and came to a very different outcome - there has been very little increase in post-tax income inequality in the US since the 1960s. Recently, their paper has been accepted by the Journal of Political Economy (JPE), a highly regarded source in the field.

 This has not resolved the argument. On the contrary, both sides are becoming entrenched. "I do not think that refuting inequality (after refuting climate change) is a wise path to take," Mr Piketty said to the columnist. "We have been granted various awards from the mainstream for our research on this specific topic," Mr Saez added. Some suggest that the JPE paper has won the battle. "It appears to be clearly accurate to me," Tyler Cowen from George Mason University commented. In contrast, James Heckman, a Nobel laureate from the University of Chicago, stated, "The work of Piketty and Saez is careless and politically biased."

 It may appear that researching trends in income inequality would be a simple process; however, tax returns are not always reliable. Individuals who are a partner in a business or have investments can have difficulty accurately predicting their own income. This complexity is compounded when attempting to document millions of people's income over a prolonged period, taking into consideration any changes in the tax code. Furthermore, it is also essential to consider the 30-40% of national income that is not reported on tax returns, such as employer-provided benefits and welfare. The methodological decisions researchers make have a significant impact on the results obtained.

 Auten and Splinter have studied the consequences of a particular tax reform in 1986. Before the reform, wealthy people had the capacity to report less income on their tax return and thus pay fewer taxes to the IRS. In the television show "Mad Men", the characters use their expenses to provide for their luxurious lifestyles. This reform made it harder for them to do so, as well as providing incentives to report income by reducing rates. Based on a person's tax return, it might look like their income increased after 1986, although their actual income did not. Accounting for this, the rise in top incomes is not as staggering as it first appears. In some research, one-third of the long-term inequality is linked to 1986.

 Auten and Splinter have made other changes in the way they analyze data. Piketty and Saez have been looking at "tax units" which may not be an accurate representation of the population given the decreasing rate of marriage among people of lesser means. This may lead to the incorrect conclusion that wealthier households have experienced an increase in income due to their incomes being pooled, while poorer households are spread out across many households. To prevent this, Auten and Splinter have elected to rank individuals rather than households.

 Employer-provided benefits such as health insurance lower the share of the top 1% in 2019 by around one percentage point. Taking into account varying assumptions on government spending and misreported income, the authors determine that the top 1% earn approximately 9% of national income after taxes, a figure much lower than the 15% reported by Piketty, Saez, and Zucman. Auten and Splinter's findings are contrary to the trio's conclusion that the share of the top 1% has drastically grown since the 1960s, as they find that there has been virtually no change.

 Greg Kaplan of the University of Chicago, who edited it, highlights the value of the paper which had gone through a thorough review process with four expert referees and two rounds of revisions that he had overseen. The authors of the paper have demonstrated their extensive knowledge of the tax code with their in-depth scholarship (including points such as "the deduction for loss carryovers is limited to 80% of taxable income computed without regard to the loss carryover"). It is evident that they are exceedingly passionate about the history of the tax code

 However, their strategies come with their own obstacles. Wojciech Kopczuk of Columbia University noted: "What's striking is that almost all of their changes are heading in the same direction, which is something you wouldn't anticipate beforehand." At a 2021 seminar, Mr Splinter did not seem to have given much consideration to the possible distorting effects of the downfall of the US informal economy. The transition from cash payments to direct deposits could have induced those in lower income brackets, such as cleaners and cab drivers, to declare more income on their tax returns, which would make them look wealthier than they actually were.