"There are only two ways of telling the complete truth—anonymously and posthumously."Thomas Sowell

Monday, January 30, 2006

The New York Times misplaced $6.7 Trillion

“Corporate Wealth Share Rises for Top-Income Americans” is the January 29 headline of yet another uninformed New York Times piece by David Cay Johnston:

“New government data indicate that the concentration of corporate wealth among the highest-income Americans grew significantly in 2003, as a trend that began in 1991 accelerated in the first year that President Bush and Congress cut taxes on capital. In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent. The analysis did not measure wealth directly. It looked at taxes on capital gains, dividends, interest and rents. Income from securities owned by retirement plans and endowments was excluded . . .”

All that matters in that egalitarian gibberish is that capital gains, dividends and interest earned inside tax-deferred savings account has been simply “excluded.” The story is only about taxable investments, which are mainly held by those with high incomes because tax-deferred saving plans have income limits and contribution limits that greatly limit their use among the affluent.

The CBO fabricates income distribution data from individual income tax returns. Yet the bulk of most peoples’ capital gains, dividends and interest income have become increasingly invisible on tax returns – stashed away inside IRA, Keogh and 401(k) plans, and 529 college plans. Only the income from taxable investments shows up in tax-based income studies by the CBO, or by Thomas Piketty and Emmanuel Saez.
If you exclude nearly all the assets of middle America from the count, then those at the top must indeed appear to have a big share of whatever assets are still left for tax collectors to tax.

We aren’t talking about small change. The excluded assets of IRA, Keogh and 401 (k) plans grew from $1.9 trillion in 1990 to $6.2 trillion by 2004, when both figures are measured in constant 2000 dollars.

The 2004 figure was $6.7 trillion when measured in 2004 dollars. With a middling 7 percent return and that $6.7 trillion would generate $469 billion of capital gains, dividends and interest income in the first year alone – income that does not appear in the CBOs tax-based studies of who earns what or in Mr. Johnston’s derived estimate of who owns what. A half trillion here, a few trillion there, and pretty soon it adds up to real money.

I am trying hard to finish writing a text on income and wealth for Greenwood Press. Not a moment too soon, apparently.


Tom Van Dyke said...

Well-observed and argued, Dr. Reynolds. We shall have to expand our definition of "wealthy" to anyone who has an IRA (approximately 40% of the country, and rising).

Hunter Baker said...

Greenwood Press is a darn good press. Congrats, Alan.

David Cay Johnston said...

What Mr. Reynolds leaves out of his post is that the very issue he complains about was in my article on the Congressional Budget Office data, starting in the fourth paragraph.

I also reported on the criticism of this kind of data analysis, citing someone who broadly shares Mr. Reynolds' views:

**The analysis did not measure wealth directly. It looked at taxes on capital gains, dividends, interest and rents. Income from securities owned by retirement plans and endowments was excluded, as were gains from noncorporate assets such as personal residences.

This technique for measuring wealth has long been used in standard economic studies, though critics have challenged that tradition.

Among them is Stephen J. Entin, president of the Institute for Research on the Economics of Taxation in Washington, which favors eliminating most taxes on capital and teaches that an unintended consequence of the corporate income tax is depressed wage rates. Mr. Entin said the report's approach was so flawed that the data were useless.

He said reduced tax rates on long-term capital gains may have prompted wealthy investors to sell profitable investments. That would show up in tax data as increased wealth that year, even though the increase may have built up over decades. **

Alan Reynolds said...

Yes, Mr. Johnston did allude to the notion there might be something wrong with the CBO's "standard" approach. And, yes, he quoted the wise Steve Entin who favors no tax on capital income (I don't agree, by the way).

My complaint is not about this piece not being "fair and balanced." My complaint is that it's basic premise (that income tax data can be used to measure the distribution of wealth) is totally absurd.

If Smith says 2+2=5 getting a second opinion from Jones may be acceptable journalism, but ignoring Smith would be much better journalism.

I would have had no objection if Mr. Johnston had written that the top 1 percent are lucky to be collecting most of the taxable investment income while the rest of us poor jerks are just stuck with hundreds of billions in tax-deferred and tax-exempt investment income.