Following up on last week's post, Thomas Piketty Thinks America Is Primed For Wealth Redistribution: Wall Street Journal op-ed: Inequality and the Piketty Accounting Error, by Phillip W. Magness (American Institute for Economic Research; Google Scholar) & Vincent Geloso (George Mason; Google Scholar):
The political left’s love affair with steep progressive taxation got an academic boost with the publication of Thomas Piketty’s bestselling 2014 book, Capital in the Twenty-First Century. Appealing to the New Deal era, Mr. Piketty proposed a simple explanation and remedy for rising economic inequality: The concentration of income among the top 1% could be mitigated by strategically targeting wealth with the tax system.
Mr. Piketty based his theory on a historical argument taken from his own empirical work with fellow economist Emmanuel Saez. When Congress and President Franklin D. Roosevelt hiked the top marginal income-tax rate to 91% during the New Deal and World War II, they allegedly broke up the concentration of the capital stock at the top of the income ladder. Inequality declined to a midcentury trough, where it remained until the Reagan tax cuts in the 1980s. Inequality then rebounded to form a centurylong U-shaped pattern. The solution, then, is to restore tax rates to their FDR levels.
But the Piketty-Saez theory is less a matter of history than an accounting error caused by their misunderstanding of World War II-era tax statistics. That’s the main conclusion of a new analysis of top income concentration in the U.S. between 1917 and 1960, which we recently published in the Economic Journal [How Pronounced Is the U-curve? Revisiting Income Inequality in the United States, 1917-1960].
Progressives embraced Messrs. Piketty and Saez’s historical account after it appeared in an influential academic paper in 2003. …
It’s true that income inequality declined in the early part of the 20th century, but the cause had more to do with the economic devastation of the Great Depression than the New Deal tax regime. …
The nearby chart shows the results for the top 1% of income earners. In our series, inequality rose between 1917 and 1928, confirming the “Roaring ’20s” boom. The crash of 1929 emerges as the precipitating event of the “great leveling”—mainly due to severe capital losses among the wealthy during the Depression.
These findings should provide a warning to policy makers who imagine that they can design a more equitable distribution of income by simply pulling the levers of fiscal policy. The assumed relationship between high rates and low inequality has attained a position of dogma among those who seek to rationalize a preference for tax hikes. In reality, it may be an artifact of poor statistical methodology and careless data treatment.
