Cato Has a *Severe* Quality Control Problem

Hoisted from Comments: Thomas Piketty and Emmanuel Saez Give Their Current View on American Income Inequality

Alan Reynolds replies to Piketty and Saez:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Thomas Piketty and Emmanuel Saez Give Their Current View on American Income Inequality: Mick Slam wonders where I am. Well, I'll be in D.C. at Cato Thurdsay explaining, among other things, why the Piketty-Saez reply (though helpful in some respects) misses most of my main points. Most obviously, they do not even deal with the fact they too previously emphasized -- namely, that about half of the increase in the top percentile share from 1980 to 2004 took place in just two years -- 1987 and 1988.

I'm going to call an intellectual foul here. Reynolds's characterization of Piketty-Saez is simply and knowingly false.

Piketty-Saez do deal with the 1986-1988 increase: they believe that the concentration of the increase into those two years is a consequence of the 1986 TRA, but that if that tax reform was all that was going on then the upper-percentile income share would have shrunk down to its 1986 level over the following decade. Needless to say, the share did not.

Piketty and Saez might be wrong in their judgment that the 1986 tax reform drove a temporary but not a permanent wedge between true and reported incomes--although I don't think that they are. But Piketty and Saez definitely do deal with it. Alan Reynolds simply lies when he claims that they do not.

For example, in their most recent comment they write:

Alan Reynolds points out that reported incomes may not reflect true incomes because of tax evasion or tax avoidance. This is a legitimate concern and we, along with a number of colleagues, have actually spent substantial time investigating this issue. Alan Reynolds has picked some of the facts in order to provide a very skewed view. Most of the scenarios described by Alan Reynolds, such as a shift from corporate income to individual income or from qualified stock-options to non-qualified stock options, would imply that high incomes used to receive capital gains instead of ordinary income. For example, a closely held C-corporation which does not distribute its profits increases in value and those accumulated profits would appear as realized capital gains on the owner individual tax return when the business is sold. Yet, our top 1% income share series including realized capital gains has also doubled from 10.0% in 1980 to 19.8% in 2004....

The emerging consensus is that there can be substantial responses in the short-run due to retiming of income... but that the long-term response is small.... Austan Goolsbee... [shows that] the Clinton 1993 top rate increase... did induce executives to exercise their stock-options in 1992 instead of 1993, but executive pay resumed its dramatic surge after 1994...