Trends in US Income and Wealth Inequality: David Splinter's Reply To Saez And Zucman (2020)

Trends in US Income and Wealth Inequality: Revising After the Revisionists. David Splinter. November 17, 2020. http://www.davidsplinter.com/Splinter2020-SaezZucmanReply.pdf

Abstract: When estimating income inequality with tax data, accounting for missing income presents many challenges. Researchers have adopted different approaches to address these challenges. Saez and Zucman (2020) discuss differences between the national income distributions of Piketty, Saez, and Zucman (PSZ, 2018) and Auten and Splinter (AS, 2019a). Saez and Zucman also make updates to their estimates for retirement income, partially responding to one of the concerns raised in AS. In this reply, I explain that SZ only partly correct this problem and do not address other issues raised by AS. For the allocation of underreported income—the most consequential difference between AS and PSZ—I show that the AS approach conforms with special audit studies in five ways, while the PSZ approach is inconsistent with them. I also provide historical background on the two projects, respond to technical points raised, and discuss estimates of tax progressivity.

I. Historical Background

Tax data provide an important view of how incomes have changed over time, particularly among those with high incomes. Tax data, however, have many limitations. More than one third of national income is missing and the reporting of income on tax returns has changed dramatically over time. For example, the Piketty and Saez (2003) estimates show a 40 percent jump in top one percent income shares in the two years following the Tax Reform Act of 1986. These estimates also included a long-run bias due to decreasing marriage rates. In addition, Piketty and Saez (2003) only estimated pre-tax/pre-transfer income and therefore did not account for increases in tax progressivity due to refundable credits or increases in government transfers. To develop a more consistent series, PSZ and AS distribute all national income, control for falling marriage rates, and estimate after-tax/after-transfer incomes. Despite these similarities, the results diverge because of methodological differences. Between 1979 and 2014, PSZ estimated that the top one percent after-tax/after-transfer income share increased by 6.5 percentage points, while the AS increase was 1.4 percentage points.

In a recent paper revising their prior estimates, SZ (2020) disputed our methods. This reply focuses on the key methodological differences, showing why the AS approaches are correct and explaining shortcomings of the PSZ approaches. The key differences are the treatment of underreported and retirement income. These account for about 60 percent of the difference in recent top one percent pre-tax income shares (AS Table 4). I then discuss differences regarding corporate taxes, ranking of tax units, and the allocation of government consumption. Finally, I discuss implications for tax progressivity and show that AS estimates resemble other studies, while PSZ estimates diverge from them. The appendix reviews prior discussions between AS and PSZ. 

Appendix

Prior Discussions

Piketty, Saez, and Zucman (2019) previously commented on the AS estimates. However, their analysis did not directly compare differences in approaches, and instead relied on new “simplified” estimates. These were based on Piketty and Saez (2003) fiscal income shares augmented using two distributions—taxable capital and non-capital income—to allocate missing amounts and target national income. This overly simplistic methodology had significant issues. For example, the 2014 “simplified” estimates allocated about 16% of employer-sponsored insurance and payroll taxes to the top one percent, instead of what should have been about 2% and 4%, respectively. The “simplified” estimates also allocated owner-occupied imputed rent like taxable capital income, meaning 53% of imputed rent went to the top one percent, instead of what should have been about 9%. See our full response in the appendix of Auten and Splinter (2019b). In Auten and Splinter (2020), we summarized differences between AS and PSZ. In addition to the issues already discussed in this paper, we explained how we accounted for changes in the treatment of business losses. SZ’s updates still do not account for these changes. We also discussed the allocation of deficits. PSZ allocated half of deficits by transfers received, which removes transfers that were actually received that year. In addition, while PSZ only report the final effects of their assumptions (with select income sources shown), AS sequentially added income sources to provide a more transparent analysis