Income Inequality in the United States

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Income Inequality in the United States

• Thomas Piketty and Emmanuel Saez

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Introduction

• Kuznets hypothesis
• Income inequality should follow an inverse-U
  shape along the development process
• Belief that the Kuznets curve has doubled back on
  itself

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Purpose

• Primary contribution of the paper is to provide
  new series on income and wage inequality

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Summary of Findings

• Top capital incomes severely hit by major shocks
  in the first part of the century
• Top capital incomes never fully recovered due to
  progressive taxation
• The working rich have replaced the
  coupon-clipping rentiers
• Both the downturn and upturn of top wage shares
  too sudden to be caused by technological change
  alone
• Labor market institutions, fiscal policy, social
  norms

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Data and Methodology

• Relied on tax returns compiled annually by the
  IRS
• Only top decile of income distribution
• Before 1944, only a small fraction had to file
  tax returns
• Based on tax units and not individuals
• Income computed before individual income taxes
  and individual payroll taxes but after employers
  payroll taxes and corporate income taxes

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Income Composition of Top Groups within the Top
Decile
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The Role of Progressive Taxation

• Progressive taxation of capital income has
  dynamic effects because it reduces the net return
  on wealth generating tomorrows wealth
• Difficult to determine magnitude
• Need to know savings rates

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Top Wage Shares

• The drop in top wage shares is significantly
  lower than the overall drop in top income shares
• Capital income played a key role in the decline
  of top income shares during the first half of the
  century

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Increase in Top Shares since 70s

• In the short run, sharp increase caused by fiscal
  manipulation (Tax Reform Act of 1986)
• But, top wage shares stayed constant from 1988 to
  1994
• In the long run, changing tax rates may have no
  effect

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Criticisms

• Presents interesting data, but does not make a
  solid point
• Does not present enough evidence to show effects
  of progressive taxation