A Key Lesson From Piketty: You Can’t Reverse Inequality or Provide Broad-Based Prosperity While Ignoring the Top 1 Percent

EPI was lucky enough to co-host the first American event for Thomas Piketty to discuss his new book Capital in the Twenty-First Century (video from the event is online if you missed it). Piketty’s book is getting justly deserved praise, and his work suggests a dizzying array of political and policy implications.

Chief among them is something that remains surprisingly controversial, even among those genuinely concerned with the rise in American inequality: the idea that ameliorating this inequality and providing decent living standards growth, for the bottom and middle requires braking income growth at the very top.

The logic is pretty simple: given overall income growth, more income being claimed by the very top must necessarily come at the expense of families at the bottom and middle. So, when the top 1 percent’s share of income doubled between 1979 and 2007, this meant that there was much less room to provide income growth to the bottom and middle. The objection to this logic is, of course, that income growth is not given, and attempts to steer more income growth away from the top and towards the bottom and middle would have just led to slower overall growth.

But there are plenty of reasons to doubt this. Let me start with an appeal to authority: Piketty put it pretty bluntly in the EPI/WCEG event yesterday, saying “we don’t need 19th century inequality to generate 21st century growth.” And, appealing to the same authority, but this time relying on empirical evidence, Piketty and co-authors have shown that cutting taxes for the top 1 percent actually increases their own pre-tax income growth and reduces income growth at the bottom.

piketty chart

This strongly suggests that much of the rise in top 1 percent incomes is simply redistribution of fixed overall income. Piketty and co-authors refer to this as the “bargaining channel” or “rent-seeking” explanation for rising top income shares, and it is consistent with lots of other evidence showing that large redistributions towards the top do not improve overall economic growth, and hence just come out of the hide of those in the bottom and middle of the distribution. Larry Mishel and I reviewed lots of this evidence in our recent paper on the rise of the top 1 percent.

So no, there is no compensating growth bonanza that accompanies large upward redistributions. This means those who want to boost incomes at the bottom and the middle really need to start looking to reduce income growth at the top because, as Willie Sutton apocryphally said, “that’s where the money is.”

How much money are we talking about? The graph below is from a paper I co-wrote with Hilary Wething at the end of last year. It simply shows average incomes for households between the 20th and 80th percentile of the household income distribution—call this the broad middle-class. It charts both actual income growth for this group, as well as what income growth could have been had it simply risen at the same pace as average income growth (i.e., had inequality not risen over this time). The implied “inequality tax” is large—by 2007, incomes for the broad middle class could have been nearly a quarter higher had inequality not kept them down. And more than 60 percent of the gap between actual income growth and growth that could have occurred absent inequality is driven solely by the rising concentration of the top 1 percent.


Household income for the broad middle class, actual and projected assuming it grew at overall average rate, 1979–2007

 Year Actual Projected
1979 $60714 $60714
1980 $58732.64 $58855.12
1981 $58384.47 $58638.72
1982 $57315.84 $58452.08
1983 $56369.14 $58858.63
1984 $59640.16 $61965.16
1985 $59771.71 $62928.76
1986 $61559.08 $67679.99
1987 $60628.18 $65471.77
1988 $61439.69 $68299.36
1989 $62293.88 $68904.05
1990 $62520.53 $68244.5
1991 $61589.53 $66612.67
1992 $61979.35 $68436.4
1993 $62702.69 $68834.39
1994 $63091.57 $69660.42
1995 $65054.18 $72338.97
1996 $65769.78 $74795.34
1997 $66911.57 $77662.68
1998 $69113.65 $81250.76
1999 $70948.66 $84688.06
2000 $70731.34 $86063.02
2001 $70771.07 $81558.64
2002 $69163 $78177.02
2003 $69349.78 $79418.73
2004 $71651.95 $84002.48
2005 $72760.86 $88145.3
2006 $73381.6 $90812.04
2007 $75411.56 $93276.63
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The data below can be saved or copied directly into Excel.

Note: Data are for comprehensive income, and cover between the 20th and 80th percentiles of the income distribution.

Source: Authors' analysis of Congressional Budget Office (2012)

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It’s worth noting that the figure above may be telling too benign a story about the impact of inequality. This figure takes income growth as given. I referenced evidence above that upward redistribution almost certainly doesn’t aid overall economic growth. But what if it actually harms overall growth? Then the income penalty imposed by rising inequality would be even larger—average income on the figure above would have grown even faster and the resulting wedge that constitutes the “inequality tax” would be wider. My own read of the evidence on this is that it’s a possibility, but it has not been nailed to the wall yet empirically (and frankly it may not ever be—it’s a tough empirical question).

All in all, a key takeaway of the Piketty work is that if you want a better life for those at the bottom and middle of the income distribution, it absolutely will require checking the explosive income growth at the top.