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Wealth Inequality in the United States since 1913 Emmanuel Saez (UC Berkeley) Gabriel Zucman (LSE) October 2014

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Page 1: Emmanuel Saez (UC Berkeley)

Wealth Inequality in the UnitedStates since 1913

Emmanuel Saez (UC Berkeley)Gabriel Zucman (LSE)

October 2014

Page 2: Emmanuel Saez (UC Berkeley)

Introduction

US Income inequality has increased sharply since the 1970s

Mixed existing evidence on wealth inequality changes

⇒ Is inequality increase driven solely by labor income?

We capitalize income tax return data to estimate new annualseries of US wealth concentration since 1913

Key result: Wealth inequality has surged but phenomenon isconcentrated mostly within the top .1% (=wealth above $20m)

Page 3: Emmanuel Saez (UC Berkeley)

U-Shaped Wealth Concentration

0%

5%

10%

15%

20%

25%

1913

1918

1923

1928

1933

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

% o

f tot

al h

ouse

hold

wea

lth

Top 0.1% wealth share in the United States, 1913-2012

This figure depicts the share of total household wealth held by the 0.1% richest families, as estimated by capitalizing income tax returns. In 2012, the top 0.1% includes about 160,000 families with net wealth above $20.6 million. Source: Appendix Table B1.

Page 4: Emmanuel Saez (UC Berkeley)

Surge in top wealth shares concentratedin top 0.1%

0%

2%

4%

6%

8%

10%

12%

14%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al h

ouse

hold

wea

lth

Top wealth shares: decomposing the top 1%

Top 0.01%

Top 0.1%-0.01%

Top 0.5%-0.1%

Top 1%-0.5%

Page 5: Emmanuel Saez (UC Berkeley)

Outline of the talk

I.The capitalization method

II. The distribution of wealth

III. Robustness and comparison with existing estimates

IV. Decomposing wealth accumulation: income and saving rates

Page 6: Emmanuel Saez (UC Berkeley)

I- The capitalization method

Page 7: Emmanuel Saez (UC Berkeley)

To obtain wealth, we divide capitalincome by the rate of return

How the capitalization technique works:

Start from each capital income component reported on individualtax returns

Compute aggregate rate of return for each asset class (usingFlow of Funds and aggregate tax data)

Multiply each individual capital income component by 1/rate ofreturn of corresponding asset class

Simple idea, but lot of care needed in reconciling tax with Flowof Funds data

Key assumption: uniform return within asset class

⇒ Need detailed income components to obtain reliable results

Page 8: Emmanuel Saez (UC Berkeley)

Aggregate income and wealth

Aggregate wealth

W = Total assets minus liabilities of households at market value

Excludes durables, unfunded DB pensions, non-profits

Source: Flow of Funds since 1945, Goldsmith, Wolff (1989),Kopczuk and Saez (2004) before

Aggregate income

NIPA since 1929, Kuznets (1941) and King (1930) before 1929

returns

Family unit

Top 1% = Top 1% of all family units [as in Piketty and Saez]

defs

Page 9: Emmanuel Saez (UC Berkeley)

A U-shaped wealth-income ratio

0%

100%

200%

300%

400%

500%

1913

1918

1923

1928

1933

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

% o

f nat

iona

l inc

ome

The composition of household wealth in the U.S., 1913-2013

Housing (net of mortgages)

Sole proprietorships & partnerships

Currency, deposits and bonds Equities

Pensions

Page 10: Emmanuel Saez (UC Berkeley)

Distributional data: income tax returns

Consistent, annual, high quality data since 1913:

Composition tabulations by size of income 1913-

IRS micro-files with oversampling of the top 1962-

Various additional IRS published stats (estates, IRAs, trusts,foundations)

Detailed income categories:

Dividends, interest (+ tax exempt since 1987), rents,unincorporated business profits (S corporations, partnerships,sole prop.), royalties, realized capital gains, etc.

A lot of income “flows to” individual income tax returns

Mutual funds, S corporations, partnerships, holding companies,trusts, etc.

Page 11: Emmanuel Saez (UC Berkeley)

Concentration of reported capital incomehas increased dramatically

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tax

able

cap

ital i

ncom

e

The top 0.1% taxable capital income share

Including capital gains

Excluding capital gains

Page 12: Emmanuel Saez (UC Berkeley)

How we deal with non-taxablecomponents

Owner-occupied housing

Home values set proportional to property tax paid

Home mortgages set proportional to mortgage interest paid

We assume (based on SCF) that itemizers have 75% of homewealth and 80% of home mortgages

Pensions

Pension wealth set proportional to pension distributions andwages above 50th percentile

Consistent with SCF and with direct information on IRA wealthfrom IRS (IRAs ≈ 30% of pension wealth)

⇓Only matters for top 10% but irrelevant for top 1% and

above, because pensions and housing very small there

Page 13: Emmanuel Saez (UC Berkeley)

How we deal with avoidance and evasion

Tax avoidance:

Systematic reconciliation exercise with national accounts toidentify potential gaps in tax data kinc

E.g., trust income → imputations on the basis of distributions(Retained trust income ≈ 2% of household capital income)

trusts charitable

Tax evasion:

Third-party reporting means all dividends and interest earnedthrough domestic banks are reported

Offshore wealth: If anything increases the trend in rising wealthtop wealth shares by about 2 points offshore

Page 14: Emmanuel Saez (UC Berkeley)

Is the return constant within asset class?

Two potential issues:

Maybe the very rich have higher equity/bond returns (e.g.,better at spotting good investment opportunities) → level bias

Maybe this differential has increased since the 1970s (e.g., due tofinancial globalization/innovation) → trend bias

⇓Two checks show that return within asset class is flat and has

remained flat

Page 15: Emmanuel Saez (UC Berkeley)

Check 1: No evidence that the wealthyhave higher returns within asset class

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

up to $3.5m $3.5m-$5m $5m-$10m $10m-$20m $20m+ Total net wealth at death

Returns by asset and wealth class, 2007 (matched tabulated estates and income tax data)

Dividends + capital gains

Dividends yield

Interest yield

Page 16: Emmanuel Saez (UC Berkeley)

The very rich did collect a lot ofdividends in the 1970s

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-99.99 P99.99-100 Fractiles of the distribution of net wealth at death

Dividend yield by wealth class in 1976 (matched micro estate and income tax data)

Page 17: Emmanuel Saez (UC Berkeley)

Check 2: The capitalization methodworks for SCF and foundations

Capitalization method can be checked with joint income andwealth micro-data:

1) SCF Data: provides individual micro-data for both wealth and(tax return) income component by component since 1989

2) Foundation Data: publicly available IRS micro-data withinformation on both market value wealth and income returns

We apply same rates of returns & capitalization technique as forindividual tax returns

⇓By capitalizing income we are able to reproduce the correct

wealth distribution

Page 18: Emmanuel Saez (UC Berkeley)

Capitalization method works for the SCF

0%

20%

40%

60%

80%

100%

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

% o

f hou

seho

ld w

ealth

exc

ludi

ng p

ensi

ons

and

owne

r-oc

cupi

ed h

ousi

ng

Top household wealth shares: reported SCF wealth vs. capitalized SCF incomes

Top 0.1%

Top 1%

Top 10%

Wealth

Capitalized income

The figure compares direct SCF wealth shares to wealth shares estimated by capitalizing SCF income. Wealth excludes pensions and owner-occupied net housing. Source: Appendix Table C1.

Page 19: Emmanuel Saez (UC Berkeley)

Capitalization works for foundations

20%

30%

40%

50%

60%

70%

80%

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

% o

f fou

ndat

ion

net w

ealth

Top foundations wealth shares: reported wealth vs. capitalized income

Capitalized income

Wealth

Top 0.1%

Top 1%

The figure compares top foundation wealth shares obtained by using balance sheet wealth data as reported to the IRS and obained by capitalizing IRS-reported income. Source: Appendix Tables C11 and C13.

Page 20: Emmanuel Saez (UC Berkeley)

II- The US Wealth Distribution,1913-2012

Page 21: Emmanuel Saez (UC Berkeley)

Wealth in 2012 is very concentrated

Wealth group Number of families Wealth threshold Average wealth Wealth share

A. Top Wealth Groups

Full Population 160,700,000 $343,000 100%

Top 10% 16,070,000 $660,000 $2,560,000 77.2%

Top 1% 1,607,000 $3,960,000 $13,840,000 41.8%

Top 0.1% 160,700 $20,600,000 $72,800,000 22.0%

Top .01% 16,070 $111,000,000 $371,000,000 11.2%

B. Intermediate Wealth Groups

Bottom 90% 144,600,000 $84,000 22.8%

Top 10-1% 14,463,000 $660,000 $1,310,000 35.4%

Top 1-0.1% 1,446,300 $3,960,000 $7,290,000 19.8%

Top 0.1-0.01% 144,600 $20,600,000 $39,700,000 10.8%

Top .01% 16,070 $111,000,000 $371,000,000 11.2%

Table 1: Thresholds and average wealth in top wealth groups, 2012

Notes: This table reports on the distribution of household in the United States in 2012 as obtained by capitalizing income tax returns. The unit is the family (either a single person aged 20 or above or a married couple, in both cases with children dependents if any). Fractiles are defined relative to the total number of families in the population. Source: Appendix Table B1.

Page 22: Emmanuel Saez (UC Berkeley)

Wealth inequality is making a comeback

Main long-run trends in the distribution of wealth:

Long run U-shaped evolution for the very rich(top 0.1%: >$20 million today)

Long run L-shaped evolution for the rich(top 1% to 0.1%: between $4 million and 20 million today)

Long-run ∩-shaped for the middle-class(top 50% to 90%: less than $650K today)

(Memo: Bottom 50% always owns ≈ 0 net wealth)

Page 23: Emmanuel Saez (UC Berkeley)

Wealth has always been concentrated

60%

65%

70%

75%

80%

85%

90%

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

% o

f tot

al h

ouse

hold

wea

lth

Top 10% wealth share in the United States, 1917-2012

The figure depicts the share of total household wealth owned by the top 10%, obained by capitalizing income tax returns versus in the Survey of Consumer Finances. The unit of analysis is the familly. Source: Appendix Tables B1 and C4.

Capitalized income

SCF

Page 24: Emmanuel Saez (UC Berkeley)

Top 1% has gained more than top 10%

20%

25%

30%

35%

40%

45%

50%

55%

1913

1918

1923

1928

1933

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

% o

f tot

al h

ouse

hold

wea

lth

Top 10-1% and 1% wealth shares, 1913-2012

Top 1%

Top 10% to 1%

Page 25: Emmanuel Saez (UC Berkeley)

Top 1% surge is due to the top 0.1%

0%

5%

10%

15%

20%

25%

30%

1913

1918

1923

1928

1933

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

% o

f tot

al h

ouse

hold

wea

lth

Top 1-0.1% and top 0.1% wealth shares, 1913-2012

Top 0.1%

Top 1% to 0.1%

Page 26: Emmanuel Saez (UC Berkeley)

Top 0.01% share: × 4 in last 35 years

0%

2%

4%

6%

8%

10%

12%

1913

1918

1923

1928

1933

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

% o

f tot

al h

ouse

hold

wea

lth

Composition of the top 0.01% wealth share, 1913-2012

Other

Equities

Fixed income claims

Page 27: Emmanuel Saez (UC Berkeley)

The rise and fall of middle-class wealth

0%

5%

10%

15%

20%

25%

30%

35%

40%

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

% o

f tot

al h

ouse

hold

wea

lth

Composition of the bottom 90% wealth share

Pensions

Business assets

Housing (net of mortgages)

Equities & fixed claims (net of non-mortgage debt)

Page 28: Emmanuel Saez (UC Berkeley)

Wealth is getting older, but at the verytop remains younger than in the ’60s-’70s

0%  

10%  

20%  

30%  

40%  

50%  

60%  

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

% o

f eac

h gr

oup'

s to

tal w

ealth

Share of wealth held by elderly households (65+)

Top 0.1%

Total population

Bottom 90%

Page 29: Emmanuel Saez (UC Berkeley)

Share of income and labor income of topwealth holders has grown a lot

0%

1%

2%

3%

4%

5%

6%

7%

8%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al p

re-ta

x in

com

e

Share of income earned by top 0.1% wealth-holders

National income

Labor income

This figure shows the share of total pre-tax national income and pre-tax labor income earned by top 0.1% wealth-holders. Labor income includes employee compensation and the labor component of business income. Source: Appendix Tables B25 and B28.

Page 30: Emmanuel Saez (UC Berkeley)

III- Robustness and comparisonwith existing estimates

Page 31: Emmanuel Saez (UC Berkeley)

Findings are robust to differentmethodological choices

Robustness checks:

Different treatment of capital gains

Capitalizing dividends only (Bill Gates world)

Capitalizing dividends plus capital gains (Warren Buffet world)

Capitalizing dividends plus capital gains for shares but notranking (the best of both worlds)

Allowing for bond yield rising with wealth

Different imputations for pension wealth

⇓All show wealth inequalities rising fast at the very top, but

not below the top 0.1%

Page 32: Emmanuel Saez (UC Berkeley)

Results robust to alternative treatment ofpensions, capital gains, bond returns

5%

10%

15%

20%

25%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Figure B27: Top 0.1% wealth share, all methods

Top 0.1% Baseline

Top 0.1% KG capitalized

Top 0.1% KG not capitalized

Top 0.1% pensions proportional to pension distributions

Top 0.1% higher bond return for the rich

Page 33: Emmanuel Saez (UC Berkeley)

Link with previous studies usingalternative data

Forbes 400 rich list: large increase in wealth concentration

Surveys: SCF shows increase in top 10% but less in top 1%

SCF excludes Forbes 400 and under-estimates capital incomeconcentration increases since 1989

Estate tax multiplier: No increase in top 1% wealth sharesince 1980s (Kopczuk-Saez 2004, SOI studies)

Estate tax multiplier method fails to take into account wideningmortality differential by wealth class

⇓Our capitalization analysis can help SCF weights and estate

multiplier weights

Page 34: Emmanuel Saez (UC Berkeley)

Our estimate for top 0.01% is consistentwith Forbes rankings

0%

2%

4%

6%

8%

10%

12%

14%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Top

.01%

sha

re (%

of t

otal

hou

seho

ld w

ealth

)

Top

0.00

025%

sha

re (%

of t

otal

hou

seho

ld w

ealth

)

Forbes 400 (top .00025%) and top .01% Wealth Shares

The figure depicts the top .00025% wealth share as estimated from the Forbes 400 list on the left axis. For comparison, the figure reports our top 0.01% wealth share obtained by capitalizing income tax returns (on the right axis). Source: Appendix Table C3.

Top 0.00025%, Forbes magazine (left-hand scale)

Top 0.01%, capitalized income (right-hand scale)

Page 35: Emmanuel Saez (UC Berkeley)

Estate tax returns fail to capture risingtop wealth shares

0%

5%

10%

15%

20%

25%

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

% o

f tot

al h

ouse

hold

wea

lth

Top 0.1% wealth share: comparison of estimates

The figure depicts the top 0.1% wealth share obained by capitalizing income, by using the Survey of Consumer Finances (SCF baseline and adjusted), and by using estate tax data (Kopczuk and Saez, 2004). Source: Appendix C4 and C4b.

Capitalized income

SCF baseline

Estate multiplier

SCF adjusted

Page 36: Emmanuel Saez (UC Berkeley)

SCF does not fully capture rising topcapital income share

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% ta

xabl

e ca

pita

l inc

ome

Top 0.1% Capital Income Share in the SCF and Tax Data

The figure compares the top 0.1% capital income shares estimated with the SCF data vs. the income tax data. Capital income includes realized capital gains, dividends, interest, net rents, and business profits. Source: Appendix Table C2.

SCF

Tax data

Page 37: Emmanuel Saez (UC Berkeley)

Estate multiplier issue: mortality gradientby wealth within top 10%

0%

20%

40%

60%

80%

100%

30-49 50-64 65-79 80+ Mor

talit

y (r

elat

ive

to fu

ll po

pula

tion)

Age groups

Relative Mortality by Age and Wealth Group, Men, 1999-2008

top 10%

top 5%

top 1%

Kopczuk-Saez

The figure depicts the relative mortality rate by age and wealth group for men in 1999-2008. E.g., male top 1% wealth holders aged 30-49 mortality rate is 40% of males aged 30-49 population wide. Kopczuk-Saez is based on the mortality of white college goers relative to population in the 1980s. The graph shows that mortality decreases with wealth (even within the top 10%) and that the wealth mortality advantage decreases with age. Source: Appendix Table C7.

Page 38: Emmanuel Saez (UC Berkeley)

Estate multiplier issue: mortality gradientby wealth widens over time

40%

60%

80%

100%

1979-­‐1984   1984-­‐1988   1989-­‐1993   1994-­‐1998   1999-­‐2003   2004-­‐2008  Mor

talit

y (r

elat

ive

to fu

ll po

pula

tion)

Evolu&on  of  Mortality  Advantage,  Men,  Aged  65-­‐79  

top 10%

top 5%

top 1%

Kopczuk-Saez

The figure depicts the relative mortality rate for men aged 65-79 by wealth group and period. E.g., male top 1% wealth holders aged 65-79 mortality rate is 90% of males aged 65-79 population wide in 1979-1984. Kopczuk-Saez is based on the mortality of white college goers relative to population in the 1980s. The graph shows that the wealth mortality advantage increases overtime and more so for the top 1% wealthiest. Source: Appendix Figure C7.

Page 39: Emmanuel Saez (UC Berkeley)

IV- Decomposing Wealth Accumulation:Saving Rates and Income Shares of TopWealth Holders

Page 40: Emmanuel Saez (UC Berkeley)

Top 1% vs. bottom 90% wealth growth

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000 19

46

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

Bot

tom

90%

real

ave

rage

wea

lth

Top

1% re

al a

vera

ge w

elat

h

Real average wealth of bottom 90% and top 1% families

Top 1% (left y-axis)

Bottom 90% (right y-axis)

Real values are obtained by using the GDP deflator, 2010 dollars. Source: Appendix Tables B3.

Page 41: Emmanuel Saez (UC Berkeley)

Wealth distribution Dynamics

Individual i wealth accumulation can always be written:

W it+1 = (1 + qi

t) · (W it + s it · Y i

t )

where W it is wealth, Y i

t is income, s it is net savings rate, 1 + qit is

pure price effect on assets in year t

We define synthetic savings rate spt for fractile p (e.g., top 1%):

W pt+1 = (1 + qp

t ) · (W pt + spt · Y p

t )

where 1 + qpt is price effect for fractile p based on W p

t composition

⇒ long-run steady state: shpW = shpY ·sp

s

where shpW is fractile p share of wealth, shpY is fractile p share ofincome, and sp/s is relative savings rate of fractile p

Page 42: Emmanuel Saez (UC Berkeley)

Saving rates typically rise with wealth

-15% -10%

-5% 0% 5%

10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

1917

-19

1920

-29

1930

-39

1940

-49

1950

-59

1960

-69

1970

-79

1980

-89

1990

-99

2000

-09

2010

-12

% o

f eac

h gr

oup'

s to

tal p

rimar

y in

com

e

Saving rates by wealth class (decennial averages)

Top 10 to 1%

Top 1%

Bottom 90%

Page 43: Emmanuel Saez (UC Berkeley)

The bottom 90% massively dis-saved inthe decade preceding the crisis

-10%

-5%

0%

5%

10%

15%

1975 1980 1985 1990 1995 2000 2005 2010

% o

f bot

tom

90%

prim

ary

inco

me

Saving rate of the bottom 90%

Page 44: Emmanuel Saez (UC Berkeley)

Bottom 90% wealth share decline due to(a) savings collapse, (b) income share fall

0%

10%

20%

30%

40%

50%

60%

70%

1917

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

Share of income and wealth of bottom 90% wealth holders

Income share

Observed wealth share

Since the 1980s the share of total household wealth owned by families in the bottom 90% of the wealth distribution has fallen proportionally more than the share of total pre-tax national income earned by these families. Source: Appendix Tables B1, B25 and B33c.

Simulated 1985-2012 wealth share (constant 3% saving rate and constant income share)

Simulated 1985-2012 wealth share (constant 3% saving rate)

Page 45: Emmanuel Saez (UC Berkeley)

Real growth rate of wealth

per family

Real growth rate of

income per family

Private saving rate (personal

+ retained earnings)

Real rate of capital gains

Total pre-tax rate of return

gwf gyf s = S/Y q r + q

All 1.8% 0.5% 10% 0.9% 9.0%Bottom 90% -0.4% 0.0% 1% 0.2% 7.9%

Top 10% 2.3% 1.2% 23% 1.0% 9.2%Top 1% 3.6% 1.4% 28% 1.5% 10.5%

All 1.5% 2.0% 12% -0.6% 6.6%Bottom 90% 3.0% 2.3% 6% -0.2% 6.2%

Top 10% 1.0% 1.4% 24% -0.9% 6.8%Top 1% 0.3% 0.5% 24% -1.1% 7.2%

All 1.9% 1.3% 9% 0.9% 7.5%Bottom 90% 0.1% 0.7% 0% 1.3% 7.5%

Top 10% 2.7% 2.3% 22% 0.7% 7.5%Top 1% 3.9% 3.4% 36% 0.9% 7.9%

Table 2: Rates of growth, saving and return by wealth group

1917-1929

1929-1986

1986-2012

Notes: Nominal values are deflated by using the GDP deflator. Saving rates are expressed as a percentage of NIPA national income accruing to each group. Pre-tax rates of returns are gross of all taxes (including the fraction of product taxes that falls on capital).

Page 46: Emmanuel Saez (UC Berkeley)

Effects of Savings and Income Inequality

Bottom 90%: Since mid-1980s, plummeting savings rate sp forbottom 90% relative to aggregate s [due to surge in debt]

⇒ Decline in bottom 90% wealth share, and expected to continue

Top 1%: Since mid-1970s, surge in income share held by topwealth holders and solid savings rate sp (relative to aggregate s)

⇒ Short-run: Large increase in top wealth shares, and expected tocontinue

⇒ Long-run: Self-made wealth could become inherited wealth andlead to the “patrimony society” of Piketty (2014)

Page 47: Emmanuel Saez (UC Berkeley)

Policies to Reduce Wealth Inequality

Top 1%: Progressive taxation (income, wealth, inheritance) is aproven historical tool to reduce income/wealth concentration

Progressive income and wealth tax reduce income and savingsincentives at the top

Estate taxation can prevent self-made wealth from becominginherited wealth

Bottom 90%: Collapse in savings due to surge in debt [due topresent bias for consumption? stagnating incomes? financialde-regulation?]

⇒ Middle class income support + financial regulation

⇒ Need to encourage savings / discourage debt [= nudged savings +borrow against yourself?]

Page 48: Emmanuel Saez (UC Berkeley)

Conclusion

Page 49: Emmanuel Saez (UC Berkeley)

A first step toward DINA

We are constructing new, consistent series on the distribution ofwealth W and income Y = YK + YL fully consistent with flow offunds and national accounts

Next step: construct a microfile with individual-level income(pre-tax and post-tax) and wealth consistent with macro flow offunds and national income accounts

= distributional national accounts (DINA), reconcilingmacro growth and inequality studies

Page 50: Emmanuel Saez (UC Berkeley)

Need for better wealth and savings data

Using additional data would enable us to refine our estimates:

E.g., matched property and individual income tax data

Modest additional administrative data collection effort couldhave high value:

401(k) taccounts balance reporting (and not only IRAs)

Mortgage balances on forms 1098

Market value of portfolio securities on forms 1099

Purchases and sales of securities (to measure saving andconsumption)

⇒ Necessary to obtain fully accurate distributional nationalaccounts

Page 51: Emmanuel Saez (UC Berkeley)

Supplementary Slides

Page 52: Emmanuel Saez (UC Berkeley)

Wealth categories definition

Equities: corporate equities, including S corporation equities,and money market fund shares (treated as dividend-paying forincome tax purposes)

Fixed claims: currency, deposits, bonds, and otherinterest-paying assets, net of non-mortgage debts

Business assets: sole proprietorships, farms (land andequipment), partnerships, intellectual property products

Housing: owner- and tenant-occupied housing, net of mortgagedebt

Pensions: funded pension entitlements, life insurance reserves,IRAs. Excludes social security and unfunded defined benefitpensions

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Page 53: Emmanuel Saez (UC Berkeley)

Rates of returns on wealth around 7%No long-run price effects

0%

2%

4%

6%

8%

10%

12%

14%

191

3-19

192

0-29

193

0-39

194

0-49

195

0-59

196

0-69

197

0-79

198

0-89

199

0-99

200

0-09

201

0-13

Figure A8: Yield and total return on U.S. private wealth (decennial averages)

Total return = pure yield + asset price effect

Pure yield

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Page 54: Emmanuel Saez (UC Berkeley)

What tax data miss

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

% o

f fac

tor-

pric

e na

tiona

l inc

ome

From reported to total capital income, 1920-2010

Didivends, interest, rents & profits reported on tax returns

Imputed rents

Retained earnings

Income paid to pensions & insurance

Non-filers & unreported sole

prop. profits

Corporate income tax

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Page 55: Emmanuel Saez (UC Berkeley)

Most trusts generate income taxable atthe individual level

0%

2%

4%

6%

8%

10%

12%

1952 1962 1972 1982 1992 2002 2012

% n

et h

ouse

hold

wea

lth

Wealth held in estates & trusts

Total estate & trust wealth

Estate & trust wealth that does not generate distributable income

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Page 56: Emmanuel Saez (UC Berkeley)

Charitable giving follows top incomes ⇒Surge in top incomes is real

0%  

5%  

10%  

15%  

20%  

25%  

0%  

10%  

20%  

30%  

40%  

50%  

60%  

70%  

80%  

90%  1962  

1966  

1970  

1974  

1978  

1982  

1986  

1990  

1994  

1998  

2002  

2006  

2010  

Top  1%

 income  share  

Mean  charita

ble  giving  of  top

 1%  incomes  /  

mean  income  

Charitable  Giving  of  Top  1%  Incomes,  1962-­‐2012  

Mean  charitable  giving  of  top  1%  divided  by  mean  income  [leA  y-­‐axis]  

Top  1%  Income  Share  [right  y-­‐axis]  

Source: The figure depicts average charitable giving of top 1% inomes (normalized by average income per family) on the left y-axis. For comparison, the figure reports the top 1% income share (on the right y-axis).

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Page 57: Emmanuel Saez (UC Berkeley)

Off-Shore Tax evasion, if anything, hasprobably increased since the 1970s

0%

2%

4%

6%

8%

10%

1940 1950 1960 1970 1980 1990 2000 2010

% o

f U

.S. e

quity

mar

ket c

apita

lizat

ion

U.S. equities held by tax haven firms and individuals

In 2012, 9% of the U.S. listed equity market capitalization was held by tax haven investors (hedge funds in the Caymans, banks in Switzerland, individuals in Monaco, etc.). Source: Zucman (2014) using US Treasury International Capital data.

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Page 58: Emmanuel Saez (UC Berkeley)

Total returns of foundations grow withwealth but realized returns do not

0%

1%

2%

3%

4%

5%

6%

7%

1m-10m ���10m-100m 100m-500m ���500m-5bn 5bn+

Figure C4: Return on foundation wealth, 1990-2010 average Returns including realized & unrealized gains

Realized return

Unrealized capital gains

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