Income inequality is a hot-button issue right now. Some economists say that it’s skyrocketing, while others argue that it’s hardly changed at all. What’s the truth? At the center of this debate are three French economists—Thomas Piketty, Emmanuel Saez, and Gabriel Zucman—who claim that American income inequality is soaring. Their research has influenced politicians who have promised to combat these trends with higher taxes and spending.
But not everyone is convinced by these findings. In fact, there’s a lot of back-and-forth among economists. Gerald Auten and David Splinter, for example, have challenged the French trio’s work and have come to a very different conclusion: American post-tax income inequality has hardly risen at all since the 1960s. This debate has caused quite a stir, with both sides digging in and defending their stance.
You might think that analyzing trends in income inequality would be straightforward. After all, researchers can simply look at people’s tax returns, right? Well, it turns out that it’s not that simple. Tax returns can be misleading, especially when it comes to estimating the incomes of millions of people over several decades. Not to mention, tax returns don’t account for the 30-40% of national income that goes unreported, such as employer-provided benefits and government welfare. The choices that researchers make in their methodology can have a huge impact on the results.
Auten and Splinter have focused on the distorting impact of an important tax reform in 1986 and have made other adjustments to their research. They found that after tax, the top 1% command about 9% of national income, compared with the 15% or so reported by Piketty, Saez, and Zucman. Their paper, which was accepted for publication in the Journal of Political Economy, has caused quite a stir in the academic world.
But of course, their methodology has its own difficulties. There’s a lot of debate and discussion about whose findings are accurate. Mr. Piketty argues that Auten and Splinter’s assumptions about non-taxed labor income, pension income, and capital income are unrealistic, while Mr. Saez is generally frustrated with the ongoing battle. The once self-evident truth that inequality is rising is now far from certain.
The debate about income inequality is complex, and there’s still a lot to uncover. For more information on economics and finance, check out our column on economics. Happy reading!
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