Thursday, May 15, 2014

The US Inequality Problem Is Not High Income Earners: The US Inequality Problem Is The Persistence Of Poverty

From The Wall Street Journal, Opinion, "Piketty's Numbers Don't Add Up: Ignoring dramatic changes in tax rules since 1980 creates the false impression that income inequality is rising." by Martin Feldstein:
His [Thomas Piketty's] conclusion about ever-increasing inequality could be correct if people lived forever. But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.

The result is that total wealth grows over time roughly in proportion to total income. Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%.
The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of the Journal's board of contributors.
Please read the entire article for Feldstein's critique of Piketty's analysis of tax return data. Feldstein discusses how the changes in the tax law and rules affected the income shown on personal tax returns and how Piketty misinterpreted tax law changes for economic changes that made the wealthy wealthier.

For example, tax law changes caused business owners to shift income from taxable corporations (Subchapter C) to Subchapter S corporations. Subchapter S corporate income is included in an individual's personal tax return and not in a separate taxable corporation tax return. The shift increased the income shown on personal tax returns, used by Piketty for his conclusions, but the shift did not increase the total income of the business owners who had previously filed separate business tax returns. The shifting of the income to the personal return led Piketty to conclude that there was a much bigger increase in income of the wealthy than there was.

Likewise, a lowering of tax rates caused a shift from tax free municipal bonds into investments paying taxable dividends. The change in investments did not increase total investment income, but it did increase the taxable income on personal tax returns analyzed by Piketty.

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