Are the rich getting richer?

Studies by Thomas Piketty and Emmanuel Saez claim that the top 1 per cent of income earners receive 15 per cent of all income today, compared to about 5 per cent in the 1960s and 1970s.
The claim has been repeated often. A Google search on these two economists turned up 51,700 entries including 871 that also mentioned New York Times, 814 for the Washington Post and 568 for the Wall Street Journal.

One problem is their failure to distinguish between reported and unreported income, or taxed and untaxed, measured and unmeasured:

All over the world, whenever top marginal tax rates go down, reported income of the wealthy goes up – not because they earn more, but because they have an incentive to realise and report more.

True to form, the 1986 tax cuts spurred the wealthy to report and pay taxes on more income.

However, since that time, the Congressional Budget Office finds no increase in the share of income earned by the top 1 per cent.

In focusing on the tax return data, Piketty and Saez are guilty of many errors. Among them:

The shifting of insurers income to personal income by the wealthy – in response to tax law changes.

The growth in non-taxed savings in IRAs 401(k)s, etc., by the middle class.

The growth of non-taxed transfer payments – Social Security, disability income, etc.

Source: Alan Reynolds, Has U.S. Income Inequality Really Increased? Policy Analysis No. 586, Cato Institute, January 8, 2007.

For text: http://www.cato.org/pubs/pas/pa586.pdf

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 13 February 2007