"Resenting the Rich - Rebutting Thomas Piketty" by Chris Edwards (Cato Institute: Commentary)

"Resenting the Rich - Rebutting Thomas Piketty" by Chris Edwards (Cato Institute: Commentary): "Piketty's understanding of the nature of income is very European. He implies that there is a fixed income pie, such that any income that high earners receive must come at the expense of others. Because the share of income earned by the top 1 percent has increased, he says that there has been 'an income transfer of about 14 points of national income' to the top group. But high earners did not take that money from other people, they generated it by their own efforts.

In a market economy, there is no central pile of money that is distributed out to the citizens. Each person produces value and earns income by voluntary exchange in a decentralised fashion. Compensation follows from people producing items of value to others. Of course there are exceptions, such as those high-earning CEOs who perform poorly, but it doesn't make economic sense to impose exorbitant tax rates because of the exceptions.
Those at the top end—the entrepreneurs, doctors, and others with unique skills—often generate benefits that are greater than their reward in compensation. One reason is that there is scope for innovation in top-end jobs like heart surgery that there isn't in lower-income jobs. The trash collector's wage matches his contribution, but when the surgeon invents a new medical technique, it can create long-lasting benefits for the rest of us that will only be partly reflected in compensation."

"Piketty's work is based on income as reported on tax returns, but there have been huge changes in the American tax system since the 1970s that make measuring income over time very difficult. My colleague Alan Reynolds has tackled some of these problems with the Piketty data.1 One issue is that the top federal income tax rate fell from 70% in the late 1970s to 35% today, with the result that high-income taxpayers are avoiding and evading taxes less, and reporting more income on their returns.

If you look at Piketty's data showing the share of income received by the top 1% since the 1970s, you will see sudden upward spikes after major tax rate cuts. That suggests that a portion of the income gains at the high end are not based on structural factors, such as globalisation as Piketty suggests, but are simply expected responses to changes in tax law."

"In the United States, half of all business income is reported on individual returns, not corporate returns, and a lot of that business income is reported by people at the top end. If you raise individual income taxes at the top end, you hit a large amount of small business income. And empirical research has shown that small businesses are sensitive to income tax changes. A series of studies by economists Robert Carroll, Douglas Holtz-Eakin, Mark Rider and Harvey Rosen explored, for example, the effect of marginal income tax rates on small business hiring, investment, and growth.4 They found substantial effects, such as that a five percentage point cut in marginal tax rates would cause a 10% increase in capital expenditures."