Another (Over-) Dramatic Portrayal of the Rise in Income Inequality

Berkeley economist Emmanuel Saez has published his latest estimates on income concentration in the United States, extending a series he has produced with Thomas Piketty. He concludes that the top 1 percent captured 91 percent of the income gains from 2009 to 2012. These types of results are some of the most popular depictions of inequality trends, but it is not clear that they are saying what people think they are.

Arguably, a better estimate is that 47 percent of income gains went to the top 1 percent. However, it is strange for Saez to focus on the trend through 2012, as the 2012 top income estimates are artificially inflated. As he himself notes, an increase in top tax rates after 2012 induced many at the top to shift income to 2012 in anticipation of higher rates. If we extend the analysis to 2013, the most recent year in Saez’s data, the best estimate is that 30 percent of income gains went to the top 1 percent in the first four years of the recovery. 

While 30 percent of gains going to the top one percent sounds like unbalanced growth, it is not as much of a deviation from equally-shared growth as it might seem. Even if both the bottom 99 percent and top one percent had seen their incomes grow by the same percentage, the top one percent would have received 18 percent of the gains between 2009 and 2012 (or 2013).

Going further back, while the Saez method indicates that 79 percent of the gains from 1979 to 2013 went to the top one percent, I would argue that 22 percent is a more informative estimate. In a world of equally shared growth, the top one percent would have received 10 percent of income gains.

Let us walk through this step by step. But first, let me say as clearly as I can that nothing below refutes the idea that inequality is high and rising. The top 1 percent seeing 30 percent of post-recession gains is still an outsized share. What my analyses do show is that some dramatic presentations of inequality facts are not quite so striking when you understand them.

1. What is an “income gain”?

An income gain is simply the increase in income between one year and another. If I make $50,000 this year and $52,000 next year, my income gain from 2015 to 2016 is $2,000. If I have $50,000 this year and $54,000 in 2017, my income gain from 2015 to 2017 is $4,000. 

The same subtraction obviously can be applied to an entire country. In America the total gain in income from 2009 to 2012, according to the Piketty/Saez data, was $9.12 trillion minus $7.62 trillion, or $1.50 trillion. The same holds for the top one percent. From 2009 to 2012, its income rose from $1.38 trillion to $2.08 trillion, so the income gain was $700 billion. Note that the specific people in the top one percent in 2009 and 2012 differ; the gain is not that received by specific taxpayers, it is the gain that the tail of the income distribution sees without regard to who is at the tail.

2. What is the “share” of income gains received by some group?

This is straight arithmetic. Having defined “income” and “the top” clearly, the share of income gains received by the top is the change in income among those at the top divided by the change in income among everyone in the country. The top one percent received 47 percent of the income gains from 2009 to 2012 and 30 percent of the gains from 2009 to 2013.

3. Doesn’t Saez say the top 1 percent received 91 percent of the gains?

One source of “income gains” between years is population growth. If average income does not change and the population increases by 10 percent, that will create an income gain of 10 percent. Rather than my calculation, Saez holds population constant by looking at how average income changes overall and at the top. Assuming a constant population size, the calculation to find the share of gains going to the top works out to 55 percent. For 2009-2013, the estimate is 36 percent.

4. That’s still not 91 percent…

To get to 91 percent, Saez makes another adjustment. I have calculated nominal growth figures. But his 91 percent growth figure comes from first adjusting all incomes to constant inflation-adjusted dollars before calculating the share of gains going to the top. In other words, Saez estimates the share of real gains going to the top. Under this approach, the share of real gains going to the top between 2009 and 2012 was 91 percent. The share of gains going to the top from 2009 to 2013 was 76 percent.

5. So what’s the “share of income gains going to the top” from 2009-2012—47 percent, 55 percent, or 91 percent?

It seems questionable to hold population growth constant. Intuitively, the actual income growth to be distributed to a growing population is not the change in mean income under the assumption that the population did not grow. Similarly, while it is usually crucially important to adjust incomes for inflation, in the case of computing income growth shares, inflation adjustment actually removes the analysis from its real-world basis. “Inflation-adjusted income” is not distributed, nominal income is. Furthermore, if we want to adjust incomes for inflation first, we need to pick an index to use, and different ones will produce different estimates of the share of gains going to the top.

I suspect there isn’t a single “right” answer to this question, but it would be nice if more researchers presented all of the competing estimates as I’ve done here rather than just the most alarming ones.

6. What would the range of estimates look like for the share of gains going to the top 1 percent from 1979 to 2013?

Saez would compute the share as 79 percent, adjusting for household size and inflation. Without the inflation adjustment, the share was 24 percent. Without either adjustment it was 22 percent.

These still seem to indicate pretty grossly unbalanced income growth. 

Even if income growth were distributed equally, the percent gained would not be the same among different income groups. If any inequality exists initially, then when both the bottom 99 percent and the top 1 percent see their incomes rise by the same percentage, mathematically the top 1 percent will enjoy more than 1 percent of the income gains. 

The top 1 percent received $1.38 trillion in income in 2009. The bottom 99 percent received $6.24 trillion. The $7.26 trillion the bottom received in 2013 was a 16 percent nominal increase. The top 1 percent saw a 32 percent increase over that period. If the top 1 percent had seen a 16 percent increase, like the bottom 99 percent, it would not have received 30 percent of income gains. But it still would have received 18 percent. By the same math, if there had been equally shared growth from 1979 to 2013, the top 1 percent would have received 10 percent of income gains instead of 22 percent.

Saez’s figures and the much-heralded “Charts of Doom” are striking because they “dramatize the trend” in inequality. But at the end of the day we want to understand trends as they really are, not present misleadingly unambiguous estimates from analyses that start with the “problem” and then determine how best to demonstrate it.

For more information see Have 91% of Gains During the Recovery Gone to the Top? 

Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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