Opinion: New data is making us rethink the narrative about runaway inequality

Editor’s Note: Jordan McGillis is economics editor at City Journal. The opinions expressed in this commentary are his own. View more opinion on CNN.

Income inequality is starker than ever — or so we’ve been told. New research by economists Gerald Auten and David Splinter indicates that the prevailing narrative of runaway inequality is not as empirically sound as believed. But in proving that the top 1% has not pulled much further ahead in terms of income, Auten and Splinter inadvertently reveal that America suffers from troubling socioeconomic fissures nonetheless.

Auten and Splinter’s analysis, accepted in November by the Journal of Political Economy, shows that the share of the nation’s income going to the top 1% of earners after taxes and transfers has increased by just 1.4% since 1979. Going back to the early 1960s, Auten and Splinter find that even the top 1%’s share of pre­-tax income has increased by just 2.6% and that its after-tax income share hasn’t budged at all.

This challenges the dominant position in the economics discourse, famously championed by Thomas Piketty. Piketty, Emmanuel Saez and Gabriel Zucman contended together in 2018 that the top 1% of the American population was earning 20% of the country’s total pre-tax income, a dramatic increase from 12% in the early 1980s. They also argued that real incomes for the bottom half of the earning distribution had stagnated since that time. Their research was believed by many to have provided empirical substantiation to the view that America’s economic gains in recent decades have only benefited the rich, an outlook that motivated the Occupy Wall Street movement of the early 2010s.

Skeptics, however, have argued that Piketty, Saez and Zucman’s eyepopping figures were a byproduct of the authors’ political inclinations. Auten and Splinter vindicate those critiques, dismantling Piketty, Saez and Zucman’s central claims. They find that economic gains have been broadly shared during this supposed period of widening inequality, with the top 1% garnering just 14% of the country’s pre-tax income. Not only has the top 1%’s share of pre-tax income risen less than Piketty and his coauthors assert, but the bottom half of American earners has benefited from a real pre-tax income rise of 40% and a real after-tax income rise of 66%.

The basis for the discrepancies in the rivals’ findings is methodological. The treatment of two key income factors, among a few lesser ones, generates this new portrait of income inequality: underreported business income and retirement savings. According to Auten and Splinter’s analysis, Piketty and his coauthors inadequately adjusted for changes in income reporting behavior incentivized by the Tax Reform Act of 1986. Moreover, they improperly considered money rolled over from one retirement account to another as income, artificially boosting the top 1%’s income share. By accounting for these issues, Auten and Splinter operate with a more consistent definition of income across time.

An income reporting issue where the rivals agree, however, is more intriguing than these academic divergences — and it helps us intuit why, despite the evidence indicating that economic gains have been broadly beneficial, Americans are rather unhappy about their financial and social footing. Piketty, Saez and Zucman, along with Auten and Splinter, evaluate per-person incomes, a change from earlier approaches made necessary by America’s unequal declines in the rate of marriage. Though the prevalence of marriage has remained very strong among rich Americans, it has plummeted among less affluent people. “Marriage rates on tax returns declined from 67 to 37 percent between 1960 and 2019,” Auten and Splinter observe. “However, marriage rates have remained high among the top one percent, decreasing only from 90 to 85 percent.”

They explain that this uneven family formation results in more observed tax units among lower-earning Americans and a subsequent distortion of the income picture in percentile terms. Because tax units at the high end of the income spectrum are much more likely to include married adults and children, a tax-unit focus gives the impression that the top 1% earns a greater share of national income than it really does. The new methodologies ensure that each income percentile has an equal number of individuals, rather than families. This apples-to-apples comparison of economic resources shows that the top 1% does not command as much national income as previous methodologies suggested.

While income inequality may not have notably escalated, the differential marriage rates that demand the methodological adjustment are themselves deeply concerning.

The exclusivity of marriage in the contemporary era has dire, compounding consequences across generations. As researchers Shelly Lundberg, Robert A. Pollak and Jenna Stearns document, in 1960, people with and without college degrees married and formed families in a similar manner, but today, just 11% of childbirths for those with college degrees are nonmarital, while 58% of childbirths for those without are. This cleavage makes possible what the Brookings Institution’s Melissa Kearney describes as “two-parent privilege,” an emerging phenomenon through which well-off couples transmit educational and economic advantages to their children. Viewed from this angle, it should not surprise us that many Americans think the rich are galloping ever further ahead.

While Auten and Splinter show that inequality in dollar terms is not as pointed as the popular narrative has held, ours is a riven society in ways that may be more important still.

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