Wealth Inequality in the United States since 1913 Emmanuel Saez (UC Berkeley) Gabriel Zucman (LSE) October 2014 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 annual series of US wealth concentration since 1913 Key result: Wealth inequality has surged but phenomenon is concentrated mostly within the top .1% (=wealth above $20m) U-Shaped Wealth Concentration Top 0.1% wealth share in the United States, 1913-2012 25% 15% 10% 2013 2008 2003 1998 1993 1988 1983 1978 1973 1968 1963 1958 1953 1948 1943 1938 1933 1928 1923 0% 1918 5% 1913 % of total household wealth 20% 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. Surge in top wealth shares concentrated in top 0.1% Top wealth shares: decomposing the top 1% 14% % of total household wealth 12% Top 0.5%-0.1% 10% 8% 6% Top 1%-0.5% Top 0.1%-0.01% 4% Top 0.01% 2% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 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 I- The capitalization method To obtain wealth, we divide capital income by the rate of return How the capitalization technique works: Start from each capital income component reported on individual tax returns Compute aggregate rate of return for each asset class (using Flow of Funds and aggregate tax data) Multiply each individual capital income component by 1/rate of return of corresponding asset class Simple idea, but lot of care needed in reconciling tax with Flow of Funds data Key assumption: uniform return within asset class ⇒ Need detailed income components to obtain reliable results 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 A U-shaped wealth-income ratio The composition of household wealth in the U.S., 1913-2013 500% Pensions 300% Currency, deposits and bonds Equities 200% 100% Sole proprietorships & partnerships 2013 2008 2003 1998 1993 1988 1983 1978 1973 1968 1963 1958 1953 1948 1943 1938 1933 1928 1923 1918 Housing (net of mortgages) 0% 1913 % of national income 400% Distributional data: income tax returns Consistent, annual, high quality data since 1913: Composition tabulations by size of income 1913IRS micro-files with oversampling of the top 1962Various 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. Concentration of reported capital income has increased dramatically The top 0.1% taxable capital income share 45% % of taxable capital income 40% 35% 30% Including capital gains 25% 20% 15% Excluding capital gains 10% 5% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 How we deal with non-taxable components 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 home wealth and 80% of home mortgages Pensions Pension wealth set proportional to pension distributions and wages above 50th percentile Consistent with SCF and with direct information on IRA wealth from 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 How we deal with avoidance and evasion Tax avoidance: Systematic reconciliation exercise with national accounts to identify 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 earned through domestic banks are reported Offshore wealth: If anything increases the trend in rising wealth top wealth shares by about 2 points offshore 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 to financial globalization/innovation) → trend bias ⇓ Two checks show that return within asset class is flat and has remained flat Check 1: No evidence that the wealthy have higher returns within asset class 10.0% Returns by asset and wealth class, 2007 (matched tabulated estates and income tax data) 9.0% 8.0% Dividends + capital gains 7.0% 6.0% 5.0% 4.0% Dividends yield 3.0% 2.0% Interest yield 1.0% 0.0% up to $3.5m $3.5m-$5m $5m-$10m $10m-$20m Total net wealth at death $20m+ The very rich did collect a lot of dividends in the 1970s Dividend yield by wealth class in 1976 (matched micro estate and income tax data) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-99.99 Fractiles of the distribution of net wealth at death P99.99-100 Check 2: The capitalization method works for SCF and foundations Capitalization method can be checked with joint income and wealth 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 with information on both market value wealth and income returns We apply same rates of returns & capitalization technique as for individual tax returns ⇓ By capitalizing income we are able to reproduce the correct wealth distribution Top household wealth shares: reported SCF wealth vs. capitalized SCF incomes 100% Top 10% 80% Wealth 60% Top 1% 40% Capitalized income 20% 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 0% 1988 Top 0.1% 1990 % of household wealth excluding pensions and owneroccupied housing Capitalization method works for the SCF 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. Capitalization works for foundations Top foundations wealth shares: reported wealth vs. capitalized income 80% Wealth Top 1% 60% 50% 40% Capitalized income Top 0.1% 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 20% 1987 30% 1985 % of foundation net wealth 70% 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. II- The US Wealth Distribution, 1913-2012 Wealth in 2012 is very concentrated Table 1: Thresholds and average wealth in top wealth groups, 2012 Wealth group Number of families Wealth threshold Average wealth Wealth share $343,000 100% A. Top Wealth Groups Full Population 160,700,000 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% $84,000 22.8% $660,000 $1,310,000 35.4% B. Intermediate Wealth Groups Bottom 90% 144,600,000 Top 10-1% 14,463,000 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% 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) Wealth has always been concentrated Top 10% wealth share in the United States, 1917-2012 90% 80% Capitalized income 75% SCF 70% 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. 2012 2007 2002 1997 1992 1987 1982 1977 1972 1967 1962 1957 1952 1947 1942 1937 1932 1927 60% 1922 65% 1917 % of total household wealth 85% Top 1% has gained more than top 10% Top 10-1% and 1% wealth shares, 1913-2012 55% Top 10% to 1% 45% 40% 35% Top 1% 30% 2013 2008 2003 1998 1993 1988 1983 1978 1973 1968 1963 1958 1953 1948 1943 1938 1933 1928 1923 20% 1918 25% 1913 % of total household wealth 50% Top 1% surge is due to the top 0.1% Top 1-0.1% and top 0.1% wealth shares, 1913-2012 30% Top 1% to 0.1% 20% 15% 10% Top 0.1% 2013 2008 2003 1998 1993 1988 1983 1978 1973 1968 1963 1958 1953 1948 1943 1938 1933 1928 1923 0% 1918 5% 1913 % of total household wealth 25% Top 0.01% share: × 4 in last 35 years Composition of the top 0.01% wealth share, 1913-2012 12% 8% Fixed income claims 6% 4% Equities 2% 2008 2003 1998 1993 1988 1983 1978 1973 1968 1963 1958 1953 1948 1943 1938 1933 1928 1923 Other 1918 0% 1913 % of total household wealth 10% The rise and fall of middle-class wealth Composition of the bottom 90% wealth share 40% 35% 25% Pensions 20% Equities & fixed claims (net of non-mortgage debt) 15% Business assets 10% 5% 2012 2007 2002 1997 1992 1987 1982 1977 1972 1967 1962 1957 1952 1947 1942 1937 1932 1927 1922 0% Housing (net of mortgages) 1917 % of total household wealth 30% Wealth is getting older, but at the very top remains younger than in the ’60s-’70s Share of wealth held by elderly households (65+) 60% % of each group's total wealth 50% Top 0.1% 40% 30% Total population 20% Bottom 90% 10% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Share of income and labor income of top wealth holders has grown a lot Share of income earned by top 0.1% wealth-holders 8% % of total pre-tax income 7% 6% National income 5% 4% 3% 2% Labor income 1% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 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. III- Robustness and comparison with existing estimates Findings are robust to different methodological 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 not ranking (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% Results robust to alternative treatment of pensions, capital gains, bond returns Figure B27: Top 0.1% wealth share, all methods 25% Top 0.1% Baseline Top 0.1% KG capitalized 20% Top 0.1% KG not capitalized Top 0.1% pensions proportional to pension distributions Top 0.1% higher bond return for the rich 15% 10% 5% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Link with previous studies using alternative 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 income concentration increases since 1989 Estate tax multiplier: No increase in top 1% wealth share since 1980s (Kopczuk-Saez 2004, SOI studies) Estate tax multiplier method fails to take into account widening mortality differential by wealth class ⇓ Our capitalization analysis can help SCF weights and estate multiplier weights Our estimate for top 0.01% is consistent with Forbes rankings 3.0% 12% 2.5% 10% Top 0.00025%, Forbes magazine (left-hand scale) 2.0% 8% 1.5% 6% Top 0.01%, capitalized income (right-hand scale) 1.0% 4% 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 0% 1988 0.0% 1986 2% 1984 0.5% 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 .01% share (% of total household wealth) 14% 1982 Top 0.00025% share (% of total household wealth) Forbes 400 (top .00025%) and top .01% Wealth Shares 3.5% Estate tax returns fail to capture rising top wealth shares Top 0.1% wealth share: comparison of estimates 25% Capitalized income SCF adjusted 15% 10% SCF baseline 5% 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. 2012 2007 2002 1997 1992 1987 1982 1977 1972 1967 1962 1957 1952 1947 1942 1937 1932 1927 0% 1922 Estate multiplier 1917 % of total household wealth 20% SCF does not fully capture rising top capital income share Top 0.1% Capital Income Share in the SCF and Tax Data 45% Tax data 40% % taxable capital income 35% 30% 25% 20% SCF 15% 10% 5% 0% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 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. Estate multiplier issue: mortality gradient by wealth within top 10% Mortality (relative to full population) Relative Mortality by Age and Wealth Group, Men, 1999-2008 100% 80% 60% top 10% 40% top 5% top 1% 20% Kopczuk-Saez 0% 30-49 50-64 65-79 80+ Age groups 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. Estate multiplier issue: mortality gradient by wealth widens over time Mortality (relative to full population) Evolu&on of Mortality Advantage, Men, Aged 65-­‐79 100% 80% top 10% 60% top 5% top 1% Kopczuk-Saez 40% 1979-­‐1984 1984-­‐1988 1989-­‐1993 1994-­‐1998 1999-­‐2003 2004-­‐2008 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. IV- Decomposing Wealth Accumulation: Saving Rates and Income Shares of Top Wealth Holders Top 1% vs. bottom 90% wealth growth Real average wealth of bottom 90% and top 1% families 140,000 Top 1% (left y-axis) 120,000 Bottom 90% (right y-axis) 10,000,000 100,000 8,000,000 80,000 6,000,000 60,000 4,000,000 40,000 2,000,000 20,000 Real values are obtained by using the GDP deflator, 2010 dollars. Source: Appendix Tables B3. 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 1966 1962 1958 1950 0 1946 0 1954 Top 1% real average welath 12,000,000 Bottom 90% real average wealth 14,000,000 Wealth distribution Dynamics Individual i wealth accumulation can always be written: i Wt+1 = (1 + qti ) · (Wti + sti · Yti ) where Wti is wealth, Yti is income, sti is net savings rate, 1 + qti is pure price effect on assets in year t We define synthetic savings rate stp for fractile p (e.g., top 1%): p Wt+1 = (1 + qtp ) · (Wtp + stp · Ytp ) where 1 + qtp is price effect for fractile p based on Wtp composition p ⇒ long-run steady state: shW = shYp · sp s p where shW is fractile p share of wealth, shYp is fractile p share of income, and s p /s is relative savings rate of fractile p Saving rates typically rise with wealth Top 1% Top 10 to 1% 2010-12 2000-09 1990-99 1980-89 1970-79 1960-69 1950-59 1940-49 1930-39 1920-29 Bottom 90% 1917-19 % of each group's total primary income Saving rates by wealth class (decennial averages) 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% The bottom 90% massively dis-saved in the decade preceding the crisis Saving rate of the bottom 90% % of bottom 90% primary income 15% 10% 5% 0% 1975 -5% -10% 1980 1985 1990 1995 2000 2005 2010 Bottom 90% wealth share decline due to (a) savings collapse, (b) income share fall Share of income and wealth of bottom 90% wealth holders 70% Income share 60% 50% Simulated 1985-2012 wealth share (constant 3% saving rate and constant income share) 40% 30% 20% Simulated 1985-2012 wealth share (constant 3% saving rate) 10% 2012 2007 2002 1997 1992 1987 1982 1977 1972 1967 1962 1957 1952 1947 1942 1937 1932 1927 1922 1917 0% 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. Table 2: Rates of growth, saving and return by wealth group Real growth Private saving Real growth rate of rate (personal Real rate of Total pre-tax rate of wealth income per + retained capital gains rate of return per family family earnings) gwf gyf 1.8% -0.4% 2.3% 3.6% 0.5% 0.0% 1.2% 1.4% s = S/Y q r+q 0.9% 0.2% 1.0% 1.5% 9.0% 7.9% 9.2% 10.5% -0.6% -0.2% -0.9% -1.1% 6.6% 6.2% 6.8% 7.2% 0.9% 1.3% 0.7% 0.9% 7.5% 7.5% 7.5% 7.9% 1917-1929 All Bottom 90% Top 10% Top 1% 10% 1% 23% 28% 1929-1986 All Bottom 90% Top 10% Top 1% 1.5% 3.0% 1.0% 0.3% 2.0% 2.3% 1.4% 0.5% 12% 6% 24% 24% 1986-2012 All Bottom 90% Top 10% Top 1% 1.9% 0.1% 2.7% 3.9% 1.3% 0.7% 2.3% 3.4% 9% 0% 22% 36% Effects of Savings and Income Inequality Bottom 90%: Since mid-1980s, plummeting savings rate s p for bottom 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 top wealth holders and solid savings rate s p (relative to aggregate s) ⇒ Short-run: Large increase in top wealth shares, and expected to continue ⇒ Long-run: Self-made wealth could become inherited wealth and lead to the “patrimony society” of Piketty (2014) Policies to Reduce Wealth Inequality Top 1%: Progressive taxation (income, wealth, inheritance) is a proven historical tool to reduce income/wealth concentration Progressive income and wealth tax reduce income and savings incentives at the top Estate taxation can prevent self-made wealth from becoming inherited wealth Bottom 90%: Collapse in savings due to surge in debt [due to present bias for consumption? stagnating incomes? financial de-regulation?] ⇒ Middle class income support + financial regulation ⇒ Need to encourage savings / discourage debt [= nudged savings + borrow against yourself?] Conclusion A first step toward DINA We are constructing new, consistent series on the distribution of wealth W and income Y = YK + YL fully consistent with flow of funds and national accounts Next step: construct a microfile with individual-level income (pre-tax and post-tax) and wealth consistent with macro flow of funds and national income accounts = distributional national accounts (DINA), reconciling macro growth and inequality studies 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 could have 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 and consumption) ⇒ Necessary to obtain fully accurate distributional national accounts Supplementary Slides Wealth categories definition Equities: corporate equities, including S corporation equities, and money market fund shares (treated as dividend-paying for income tax purposes) Fixed claims: currency, deposits, bonds, and other interest-paying assets, net of non-mortgage debts Business assets: sole proprietorships, farms (land and equipment), partnerships, intellectual property products Housing: owner- and tenant-occupied housing, net of mortgage debt Pensions: funded pension entitlements, life insurance reserves, IRAs. Excludes social security and unfunded defined benefit pensions back Rates of returns on wealth around 7% No long-run price effects Figure A8: Yield and total return on U.S. private wealth (decennial averages) 14% 12% Pure yield 10% 8% 6% 4% back 2010-13 2000-09 1990-99 1980-89 1970-79 1960-69 1950-59 1940-49 1920-29 1913-19 0% 1930-39 Total return = pure yield + asset price effect 2% What tax data miss From reported to total capital income, 1920-2010 0.35 Retained earnings % of factor-price national income 0.3 0.25 0.2 0.15 0.1 0.05 Non-filers & unreported sole prop. profits Corporate income tax Income paid to pensions & insurance Imputed rents Didivends, interest, rents & profits reported on tax returns 0 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 back Most trusts generate income taxable at the individual level Wealth held in estates & trusts 12% % net household wealth 10% 8% Total estate & trust wealth 6% 4% 2% 0% 1952 back Estate & trust wealth that does not generate distributable income 1962 1972 1982 1992 2002 2012 Charitable giving follows top incomes ⇒ Surge in top incomes is real 25% 80% 60% 15% 50% 40% 10% 30% Mean charitable giving of top 1% divided by mean income [leA y-­‐axis] 20% 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 0% 1966 Top 1% Income Share [right y-­‐axis] 10% Top 1% income share 20% 70% 1962 Mean charitable giving of top 1% incomes / mean income Charitable Giving of Top 1% Incomes, 1962-­‐2012 90% 5% 0% 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). back Off-Shore Tax evasion, if anything, has probably increased since the 1970s U.S. equities held by tax haven firms and individuals % of U.S. equity market capitalization 10% 8% 6% 4% 2% 0% 1940 1950 1960 1970 1980 1990 2000 2010 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. back Total returns of foundations grow with wealth but realized returns do not Figure C4: Return on foundation wealth, 1990-2010 average Returns including realized & unrealized gains 7% Realized return 6% Unrealized capital gains 5% 4% 3% 2% 1% 0% 1m-10m back 10m-100m 100m-500m 500m-5bn 5bn+