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The top 1 percent's real income fell by 36.3 percent from 2007 to 2009, then rose by only 31.4 percent from 2009 to 2012. The 36.3 percent decline, of course, was calculated from a much larger base than the subsequent 31.4 percent recovery.
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The Truth About the 1 Percent
Cato Institute
Every year, new estimates of the incomes of the "top 1 percent" are reported with the requisite fanfare from Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley. And every year the press gets the numbers all wrong.

"Worry Over Inequality Occupies Wall Street," writes Justin Lahart of the Wall Street Journal. An odd worry, when stocks keep hitting record highs. In reality, top income shares always rise and fall with the stock market because of capital gains, stock options, and bonuses and fees tied to stocks.

"Messrs. Piketty and Saez," says Lahart, "show the top 1 percent captured 19.3% of US income in 2012. The only year in the past century when their share was bigger was 1928, at 19.6%." That comparison is incredibly misleading. Piketty and Saez don't include $2.3 trillion of transfer payments in "US income," even though transfers accounted for over 16 percent of personal income in 2009 and almost zero in 1928.

Extolling Piketty and Saez as "everyone's favorite inequality-tracking researchers," Dylan Matthews of the Washington Post writes, "Shockingly -- shockingly -- what [Piketty and Saez] found is that while only 49 percent of the decline in incomes during the recession was born [sic] by the top 1 percent (whose income share fell to 18.1 percent due to the recession), 95 percent of income gains since the recovery started have gone to them."

There is an interesting story in these numbers, but it is not a story journalists choose to report. It turns out that the same table Matthews reprinted from Piketty and Saez shows the top 1 percent's real income fell by 36.3 percent from 2007 to 2009, then rose by only 31.4 percent from 2009 to 2012. The 36.3 percent decline, of course, was calculated from a much larger base than the subsequent 31.4 percent recovery.

Since top incomes fell more than they rose, you might expect the Post's Mr. Matthews to note that over the whole period, the net change was a decline in top incomes rather than an increase. Down is not up, even in economic journalism. Yet every major media outlet, even The Economist and the Wall Street Journal, gullibly reported the data -- adding up to a five-year decline -- as evidence the rich are continually getting richer.

The table shown here -- which uses Piketty and Saez's data -- shows the top 1 percent's average real income fell by 16.3 percent from 2007 to 2012, and ended up 6.4 percent lower than it was back in 2000:

Average Real Income of the Top 1 Percent (2012 dollars)

2000: $1,350,006
2001: 1,063,706
2002: 933,878
2003: 964,989
2004: 1,143,104
2005: 1,323,935
2006: 1,414,985
2007: 1,510,932
2008: 1,213,199
2009: 961,785
2010: 1,076,379
2011: 1,056,640
2012: 1,264,065

What about the "other 99 percent," whose income supposedly rose by only 0.4 percent from 2009 to 2012? Piketty and Saez compare real incomes at different income levels without including Social Security, unemployment and disability benefits, food stamps, Medicaid, etc. Government transfers totaled $2.3 trillion in 2012, up 24.6 percent in real terms from 2007 and up 68 percent since 2000. Because Piketty and Saez estimate only pre-tax, pre-transfer income, they also ignore $149 billion in Treasury checks to lower-income families from refundable tax credits. They'll also ignore huge Obamacare subsidies next year.

Once transfers and taxes are properly taken into account, my own research for the Cato Institute shows no clear trend toward greater inequality after 1989, aside from the tech-stock boom of 1998–2000. Instead of any predictable trend, data on income shares are dominated by cyclical variations in which rich and poor rise or fall together: When the top 1 percent's share rises, the poverty rate falls, and when the top 1 percent's share falls, the poverty rate rises.

There are numerous conceptual and measurement problems with attempting to judge the relative living standards of the rich, middle-class, and poor by relying on income reported on individual tax returns (ignoring, for a start, income that's unreported or reported on corporate returns).

Saez himself has hinted that the seemingly strong surge in top-percentile incomes in 2012, for example, was largely a matter of strategic tax timing -- reporting bonuses and capital gains in 2012 to avoid higher tax rates in 2013. The same thing happened in late 1992, when professionals and executives arranged to cash in bonuses and stock options in December rather than in January 1993, when income-tax rates went up. It also happened in 1986, when investors rushed to cash in capital gains before the capital-gains tax went up, briefly inflating reported real income of the top 1 percent by 34.6 percent in a single year.

Because reported capital gains and bonuses were similarly shifted forward from 2013 to 2012, we can expect a sizable drop in the top 1 percent's reported income when the 2013 estimates come out a year from now. The befuddled media will doubtless figure out some way to depict that drop as an increase.

Alan Reynolds, a senior fellow with the Cato Institute, was the economics editor at National Review from 1971 to 1975. Refer to original article for related links and important documentation.

READ FULL SOURCE ARTICLE: 11/12/2013








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