It Seems Piketty Got it Wrong: They Forgot to Include Government Freebies in their Calculations

Hmm it seems that the wealth gap between the rich and the poor hasn't yawned as far as these academics think.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

What is interesting is that the things the left out are the cornerstones of middle class living. Leaving out taxes which many Americans get back in the form of a sizable check every April 15th is an big miss in their calculations. Also the sale of a house is usually a massive transfer of wealth for many Americans who didn't turn their houses into a piggy bank. Some prudent families bought a house at reasonable rates 20 years ago and end up selling them for 10x or more gain. They kept building their home equity year after year and paid their mortgages off and suddenly they are sitting on $500K tax free. As housing recovers this kind of thing might happen again 20 years from now.