A new study says much of the rise in inequality is an illusion. Should you believe it?

Few economics findings have penetrated the public consciousness in recent years as much as this one: Income inequality has exploded in recent decades, and the top 1 percent in particular have made out like bandits.

Economists Emmanuel Saez of UC Berkeley and Thomas Piketty of the Paris School of Economics have been documenting a massive rise in income inequality since 2003 using hyper-detailed IRS records. According to their latest data, compiled with Berkeley’s Gabriel Zucman, the top 1 percent’s share of national income, after taxes are taken into account, rose from 9.1 percent in 1979 to 15.7 percent in 2014.

It’s hard to overstate the influence of this line of research. It won Saez the John Bates Clark medal, America’s most prestigious prize for academic economists, made Piketty’s Capital in the 21st Century an international best-seller, and helped frame the debate over inequality coming out of Occupy Wall Street and the Obama White House’s proposals. President Obama’s budget director, Peter Orszag, wrote in 2009 that Saez’s work “had no small influence on the President’s Budget.”

But another paper released recently suggests the spike in inequality Piketty and Saez have documented is a dramatic overestimate.

Gerald Auten and David Splinter, economists at Congress’s Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis, used the same IRS tax data as Piketty, Saez, and Zucman. They found that the top 1 percent’s share of after-tax income rose from 8.4 percent in 1979 to 10.1 percent in 2015 — an increase less than a third as large.

What looks on paper like a big increase in inequality in the 1980s and onward, Auten and Splinter argue, is really just money being shuffled around in response to Ronald Reagan-era changes to tax law. In 1980, the top individual income tax rate was 69.13 percent; by 1989, it had fallen by more than half, to 28 percent.

– Vox

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