Capital Formation

by Tom Billings

The current wealth distribution efforts are premised to a great extent on the estimates in changes of the percentage of income of the Top 1 Percent of US taxpayers. In short, the current budget justifications say these percentages have risen dramatically, using graphs and data supplied by 2 French Economists, Thomas Picketty, and Emmanuel Saez.

There's some problems with that, though. In a PJM piece Roger Kimball makes a statement about this source of economic wisdom that is less enthusiastic, quoting a part of their study:

"The 'findings,' or rather the tendentious inventions of Piketty-Saez have been exposed by the Cato Institute's Alan Reynolds. But facts do not matter in a morality play. Emotions do. And a villain called 'Mr. Greedy Richman' is far too satisfying to sacrifice for the sake of such a fungible thing as accuracy or truth. No, what we have here is less a budget than a rationale for the redistribution of wealth. Mr. Henninger calls our attention to some of the commentary accompanying the Piketty-Saez tableau (page 5 in your text, class): 'While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not.'

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected.

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few ... It's a legacy of irresponsibility, and it is our duty to change it."

Indeed, the Cato piece noted by Kimball does have damning criticisms of their work:

"'Taxes and Business Strategies,' an advanced text by Nobel Prize winner Myron Scholes and others, notes: 'During the early 1970s ... many doctors, lawyers and consultants incorporated to escape the high personal tax rate and to shelter income at the lower corporate tax rate. After the Economic Recovery Act was passed in 1981, many of the corporations converted to partnerships (or Sub-chapter corporations or limited liability companies). This movement accelerated with the 1986 Tax Reform Act."

When the gap between the individual tax rate and the corporate rate narrowed, in 1982-88, and again in 2003, the previous 1970s rush to incorporate shifted into reverse. More professionals and private firms set up S-corporations, partnerships and limited liability companies, which pass company profits through to the tax returns of individual owners.

Since Piketty and Saez data only track income reported on individual tax returns, top incomes were artificially understated in the '70s and artificially overstated when individual tax rates were reduced. Moving income from the corporate tax to the individual tax shows up as brand new income in the individual tax return data of Piketty and Saez, but that it is a statistical illusion.

The endless journalistic misuse of the dubious Piketty-Saez data is often driven by a policy agenda. A recent New York Times editorial about the Piketty-Saez statistics, says, "Part of the reason for the shared prosperity of the late 1990s was ... a big expansion of the earned income tax credit (EITC)." But Piketty and Saez exclude transfer payments, so tripling the EITC would have no effect on their income shares.

The same editorial claims: "Bush ... tax cuts have overwhelmingly benefited the richest. As a result, the tax code does less to narrow the income gap now than it did as recently as 2000." But Piketty and Saez exclude taxes, so even a huge increase in tax rates on salaries, dividends and capital gains would have no direct effect on their data.

One would seek to understand this difference of opinion, or, as Kimball characterizes it, this bit of indirection by the Administration's economic data sources.

One place to go is Wikipedia. In doing so we must be careful to separate fact from opinion there, as all know now. However, a search on Thomas Picketty did reveal this link in the Wikipedia article on "Analytical Marxism":

In it, there is a section:

"The September Group (also known as the No-Bullshit Marxism Group) is a small circle of scholars interested in Analytical Marxism. Its original members included G.A. Cohen, Jon Elster, Adam Przeworski, Erik Olin Wright, Robert Brenner, Hillel Steiner, Philippe Van Parijs, Robert Van Der Veen, Samuel Bowles and John Roemer. The group, so-called because it traditionally meets in September, reconvenes every other year in varying locations. Meetings are usually also attended by a guest scholar who is not a permanent member of the group.

"Although all the members of the September Group share an interest in Marxism, some of them, like Van Parijs and Steiner, have never described themselves as Marxists. Elster and Przeworski were notable departures from the group in the early 1990s. Latecomers include Thomas Piketty and, more recently, Joshua Cohen."

While Picketty is a "latecomer" to this marxist group, that in no way detracts from his political economic orientation. Notably, Picketty is not included among those who "have never described themselves as marxists".

So, we see current Administration wealth distribution policies largely based on studies done by European Marxists. If nothing else, this does add another datum to any analysis of which way this frog is going to jump in the future. It seems they may be aiming us to jump from that nice warm pot with the flame underneath to another, that just happens to be boiling.

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