The US is Less Unequal Than We Think But Top Income Inequality Rose Just as Rapidly

• In Event: Lightning Session: Methods and Tools of Analysis

Abstract

Piketty, Saez and Zucman (2018) argue that top income shares in the U.S. have soared between 1980 and the present, while the share of the bottom 50% has plummeted, while Auten and Splinter (2024) argue that, in contrast, the U.S. income distribution has changed much less over this time period. We propose alternative estimates of the level and trend of U.S. pretax and posttax income inequality to reconcile the debate between Piketty, Saez and Zucman (2018)
and Auten and Splinter (2024). To do so, we adjust Census / ACS individual reported incomes using an elasticity of underreporting that we estimate by comparing state and local area incomes in the Census / ACS with similar measures in the BEA, following our approach in Pinkovskiy, Sala-i-Martin, Chatterji-Len and Nober (2024). This approach provides an empirical method of testing assumptions about the allocation of income concepts that are not featured in the tax records, which has been a first-order issue in the debate about trends in U.S. inequality.
We find that the rates of increase of the top 10% share of posttax income are closer to those found in Piketty et al. 2018 than in Auten and Splinter 2024. In contrast, the levels of top 10% income shares tend to be closer to those found in Auten and Splinter 2023, with the Piketty et al. 2018 estimates closely approximated by the top 10% shares of GDP rather than by the top 10% shares of personal income. We exploit the richness of the Census / ACS data to show that our results are robust to allowing differential underreporting in areas that differ by urban, racial and ethnic, industrial and educational composition as well as to topcoding in the survey data.
Looking at the entire U.S. income distribution, we further find that the rise in top income shares was primarily reflected in the declining income share of the middle class, while the bottom half of the distribution experienced only a small drop in its share since 1969 and may have seen its share grow during the 2010s. This pattern is driven by the effect of taxes and transfers, with pre-tax, pre-transfer income being distributed very similarly to the findings of Piketty, Saez and Zucman (2018). Our work showcases the importance of the U.S. tax and transfer system to ensuring that the fruits of economic growth are distributed to the bottom of the U.S. income distribution.

Author

• Maxim L. Pinkovskiy, Federal Reserve Bank of New York
  Presenting Author