Capital Gains: Up and Taking Inequality Up Also

I was really hoping someone would respond to the Tax Foundation inequality claim.  Enter Paul Krugman:




Zombie Straw Menby Paul Krugman, July 24 2012

http://krugman.blogs.nytimes.com/2012/07/25/zombie-straw-men/?smid=tw-NytimesKrugman&seid=auto

One of the occupational hazards of trying to debate policy issues with the right (it happens occasionally on the left, but much less so) is the way you constantly face charges of attacking a strong man. Lay out some conservative position, and you’re sure to get the plausible-sounding wing of the movement declaring that “nobody is claiming that ..” where “that” might be that government spending can never create jobs, or that the planet isn’t warming, or — the subject of this post — that there hasn’t actually been any rise in income inequality.

And meanwhile, another wing of the disinformation machine keeps on making exactly those allegedly straw man claims, no matter how many times they’ve been refuted.

So today I was informed that the Tax Foundation was claiming that there has been no long-run upward trend in income inequality. My immediate question was, how did they fudge the data to get that result? Well, the answer is here. Actually, the whole post is kind of a classic of disinformation: pretense that income taxes are the only taxes? Check. Bemoaning the rising share paid by the rich, while ignoring their rising share of income? Check. Whining that the lucky duckies with low incomes don’t pay enough? Check.

But what about that claim that there’s no trend in inequality? Here’s the chart:

OK, what’s going on here? First of all, they’re using CBO data, which only go up to 2009; we do, as it happens, have estimates from Piketty and Saez that go up to 2010, and they show inequality already rebounding.

Rebounding from what? Well, what major income source does the top 1 percent have that is major for them but minor for everyone else? Capital gains. And what was happening to capital gains in 2009? Financial crash, anyone?

In fact, even the chart the Tax Foundation gives us shows an obvious cyclical component to the top 1 percent’s share. That slide in the early 2000s was not a fundamental change in the rising trend; why imagine that the aftermath of the 2008 crisis was any different?

Now, it’s not just capital gains; other income sources for the upper tier, such as bonuses, are also closely associated with financial booms and busts. But at the very least one should look at income shares ex capital gains.

I don’t have the time to produce an exactly corresponding chart from Piketty-Saez, but here’s their chart for the top .01 percent:

Does this look to you like a situation in which you would declare that there is no long-run upward trend in income inequality?

The thing is, I’m quite sure that this is a deliberate attempt to obfuscate. The Tax Foundation people have to have known what they were doing.

Actually, there’s one place where you can easily catch them red-handed. When they want to claim that those poor rich people are bearing too high a tax burden compared with the lucky duckies, they pretend that federal income taxes are the only taxes. But when they calculate Tax Freedom Day, which is supposed to show how terribly overtaxed we all are, somehow all those taxes that don’t make it into the distribution calculation are front and center.

But back to my main point: when the reasonable-sounding guys declare that “nobody is saying that”, rest assured, there are big movement conservative organization saying exactly that.