Distribution of U.S. Wealth

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The Distribution of U.S. Wealth, Capital Income and Returns since 1913. Presentation by Emmanual Saez of the University of California Berkeley and Gabriel Zucman of the London School of Economics and UC Berkely. Slides as prepared by the speakers.

Published in: Economy & Finance, Technology

Distribution of U.S. Wealth

  1. The Distribution of US Wealth, Capital Income and Returns since 1913 Emmanuel Saez (UC Berkeley) Gabriel Zucman (LSE and UC Berkeley) March 2014
  2. Is rising inequality purely a labor income phenomenon? Income inequality has increased sharply since the 1980s yet surveys show modest increase in wealth concentration One possible explanation: rising inequality is a pure labor income phenomenon - Rise in top incomes due to top wage earners/entrepreneurs only - The working rich may not have had enough time to accumulate - Or they may have low saving rates, face very high tax rates, give a lot to charities, have low returns on their assets ... preventing them from accumulating large fortunes ⇒ Is this view well-founded? Our answer is “No”
  3. We find that capital inequality is also rising, albeit only at the very top so far Based on new estimates of wealth and capital income distributions, we find: - Large increase in top 0.1% wealth share since 1980s (top 0.1% = wealth above $20 million today) - Even larger proportional increase for top 0.01% (top 0.01% = wealth above $100 million today) - Rising top capital income shares - No increase below the top 0.1% ⇓ At very top, US back to early 20th century wealth concentration levels
  4. Back to the roaring 1920s 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 Top 0.1% wealth share in the U.S., 1913-2012
  5. No increase in wealth inequalities below top 0.1% so far 0% 2% 4% 6% 8% 10% 12% 14% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Top wealth shares: decomposing the top 1% Top 0.01% Top 0.1%-0.01% Top 0.5%-0.1% Top 1%-0.5%
  6. We develop a new technique to estimate the distribution of wealth We capitalize income tax returns Use IRS data on individual dividends, interest, rents... Compute rates of return by asset class (Flow of Funds / NIPA) Combine income and rates of return to obtain wealth The capitalization method works for foundations For which we observe both income and wealth We are not the first but we have better data: King (1927), Stewart (1939), Atkinson & Harrison (1978), Greenwood (1983) They did not have micro data, or no breakdown by category of income, or only provided estimates for some years in isolation
  7. Other methods obtain conflicting results and face data limitations Forbes rankings: large increase in wealth concentration, but methodological issues Forbes Surveys: SCF shows increase in top 10%, less in top 1% SCF Every 3 years, starts in 1980s, difficult to capture very top accurately (2007 SCF: 4,422 itw, of which top 0.01% ≈ 100 with response rate of ≈ 10% ⇒ large s.e.), Estate tax: No increase in top 1% share since 1980s Estates But only 1/1,000 decedents pays tax today, val. discounts, uncertainty on mortality multipliers (pb. for young wealth) ⇓ Capitalization method only way to have long run, yearly series covering the full distribution including the very top
  8. A consistent study of income and wealth Capitalization method forces us to jointly study distrib. of: Total net household wealth at market value W Total capital income in the economy YK (memo: national income Y = YK + labor income YL) The rate of return on wealth - Pure yield (with retained earnings) on wealth r = YK /W - Total return on wealth r + q = pure yield + real price effects (q = net realized plus unrealized capital gains) ⇓ Well-defined, comprehensive, and coherent income and wealth concepts + micro/macro consistency
  9. Outline of the talk 1) Aggregate wealth, capital income, and rates of returns 2) The capitalization method 3) The distribution of wealth 4) Decomposing wealth accumulation: the distribution of saving rates and rates of return 5) Conclusion
  10. I- Aggregate wealth, capital income, and rates of returns in the U.S. over the last century
  11. Aggregate income and wealth: concepts and data Wealth W = Total assets minus liabilities of households at market value Excludes durables, unfunded DB pensions, non-profits Flow of Funds since 1945 Before 1945: Goldsmith, Wolff (1989), Kopczuk & Saez (2004): based on same concepts and methods as Flow of Funds Income NIPA since 1929 Kuznets (1941) for 1919-1929 and King (1930) before defs
  12. Capital is back in the U.S. Key facts about U.S. capital: Long-run U-shape pattern in wealth-to-income ratio β = W /Y (450% early 20c, ↓ 300% mid-20c, ↑ 450% today and rising fast) Long-run U-shape pattern in the capital share α = YK /Y (30% early 20c, ↓ 25% mid-20c, ↑ 30% today and rising fast) With β = 450% and α = 30% then yield r = α/β = 6.66% (pre-tax; with tax rate τ ≈ 33%, after tax yield r(1 − τ) ≈ 4.5%) Total return r + q ≈ r in the long run (but huge short run volatility of q and large diff. across assets)
  13. 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 %ofnationalincome The composition of household wealth in the U.S., 1913-2013 Housing (net of mortgages) Sole proprietorships & partnerships Currency, deposits and bondsEquities Pensions
  14. A U-shaped capital income share 0% 5% 10% 15% 20% 25% 30% 35% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 %offactor-pricenationalincome The composition of capital income in the U.S., 1913-2013 Housing rents (net of mortgages) Noncorporate business profits Net interestCorporate profits Profits & interest paid to pensions
  15. Returns volatility is back -10% -5% 0% 5% 10% 15% 20% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Yield and total return on U.S. private wealth 1913-2013 Total return = pure yield + asset price effect Pure yield = capital income (including retained earnings) / wealth
  16. In the long run pure price effects tend to wash out 0% 2% 4% 6% 8% 10% 12% 14% 1913-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-13 Yield and total return on U.S. private wealth 1913-2013 (decennial averages) Total return = pure yield + asset price effect Pure yield
  17. II- The capitalization method
  18. To obtain wealth, we multiply reported capital income by inverse of rate of return How the capitalization technique works: Start from capital income reported on individual tax returns Compute aggregate capitalization factor for each asset class (Flow of Funds) Multiply each individual income component by aggregate capitalization factor of corresponding asset class Simple idea, but lot of care needed in reconciling tax with Flow of Funds data Key assumption: constant return within asset class ⇓ Need detailed income categories to obtain reliable results
  19. Key data source: 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...
  20. How we deal with non-taxable income Pensions Published IRS data on market-value of IRAs (≈ 30% of pension wealth) Imputations for other forms of pension wealth (based on wages & pension distributions) Owner-occupied housing Property tax paid Mortgage interest paid ⇓ Only matters for top 10% but irrelevant for top 1% and above, because pensions and housing very small there
  21. How we deal with avoidance and evasion Tax avoidance: Systematic reconciliation exercice with national accounts to identify potential gaps in tax data kinc E.g., trust income → imputations on the basis of distributions (Retained trust inc. ≈ 2% of household capital income) trusts Tax evasion: Third-party reporting means all dividends and interest earned through domestic banks well declared Problem with offshore wealth If anything increases the trend in rising wealth inequalities Attempt at quantifying this issue by using time series estimates of offshore wealth in Switzerland [in progress]
  22. 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
  23. Check 1: No evidence that the wealthy have 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
  24. The very rich did collect a lot of dividends 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)
  25. Check 2: The capitalization method works for foundations How we check the validity of the capitalization method with foundations data: Use publicly available, quasi-exhaustive IRS micro-data Micro-files include information on wealth at market value and income Apply same rates of returns & capitalization technique as for individuals (Memo: foundation wealth = 0.8% of household wealth mid-1980s, 1.2% today) ⇓ By capitalizing foundation income we are able to reproduce the correct foundation wealth distribution
  26. The capitalization method works for foundations 20 30 40 50 60 70 80 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 %offoundationnetwealth Top foundations wealth shares: observed (from balance sheet data) vs. estimated (by capitalizing income) Top 1% (estimated by capitalizing income)Top 1% (observed) Top 0.1% (observed) Top 0.1% (estimated by capitalizing income)
  27. III- The US Wealth Distribution, 1913-2012
  28. 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%: btw $4 million and 20 million today) Long-run ∩ for the middle-class (top 50% to 90%: less than $500K today) (Memo: Bottom 50% always owns ≈ 0 net wealth)
  29. Wealth has always been very concentrated 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Top 10% wealth share vs. bottom 90% in the U.S., 1917-2012 Top 10% Bottom 90%
  30. The top 10% is climbing back 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 Top 10% wealth in the U.S., 1917-2012
  31. Top 1% has gained more than top 10% 20% 25% 30% 35% 40% 45% 50% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Top 1% wealth share in the U.S., 1913-2012
  32. The middle rich are losing ground 20% 25% 30% 35% 40% 45% 50% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Top 10-1% wealth share in the U.S., 1917-2012
  33. 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 Top 0.1% wealth share in the U.S., 1913-2012
  34. Almost no recovery for the merely rich 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 Top 1-0.1% wealth share in the U.S., 1913-2012
  35. Top 0.01% share: × 4 in last 35 years 0% 2% 4% 6% 8% 10% 12% 14% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 %ofnethouseholdwealth Composition of the top 0.01% wealth share, 1913-2012 Other Equities Fixed income claims
  36. The rise and fall of middle-class wealth 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 %ofnethouseholdwealth Composition of the bottom 90% wealth share Pensions Business assets Housing (net of mortgages) Equities & fixed claims (net of non-mortgage debt)
  37. 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% graph
  38. IV- Decomposing Wealth Accumulation: The Distribution of Rates of Returns and Saving Rates
  39. What is driving the dynamics of the wealth distribution? Wealth accumulation can always be written: Wt+1 = Wt · [1 + r · (1 − τK ) + q] + YL · (1 − τL) − C Forces potentially pushing toward more wealth concentration: Pre-tax rate of return r + q rising with wealth Tax rates on capital τK and labor τL going down Saving rates rising with wealth ⇓ In what follows, estimates of saving and rates of returns by wealth group
  40. We construct new estimates of saving rates and returns by wealth group Returns: Yields and price effects by asset class from national accounts Combined with wealth composition of different groups For pre-tax r: needs incidence assumptions Saving rates: Compute synthetic saving rates by wealth group Using changes in the market value of wealth and capital gains/losses by wealth group: Wt+1 = (Qt+1/Qt) · (Wt + St) ⇓ We have income, wealth, saving & returns by wealth group
  41. The role of saving and returns differentials has changed over time 1913-1929: Saving rates and returns r + q both sharply rising with wealth → explosive inequality dynamics 1929-1986: Major shocks on asset prices q affecting the rich disproportionately and highly progressive capital taxes → compression 1986-2013: 0 saving at the bottom and high S at the top → rising wealth concentration Higher pre-tax returns for rich today, but differential lower than 1 century ago bc. democratization of equities through pensions ⇓ Three distinct periods
  42. Real growth rate of wealth Savings- induced wealth growth rate Real rate of capital gains Growth rate of number of families Real growth rate of wealth per family Private saving rate (personal + retained earnings) Total pre-tax rate of return gw gws = S/W q=(1+gw) / (1+gws) -1 n gwf s = S/Y r + q All 3.8% 2.7% 1.0% 2.0% 1.8% 10% 9.2% Bottom 90% 1.3% 0.1% 1.2% -0.6% 0% 8.2% Top 10% 4.4% 3.5% 0.9% 2.4% 24% 9.4% Top 1% 5.1% 4.1% 1.0% 3.1% 35% 10.1% All 3.0% 3.4% -0.4% 1.4% 1.5% 11% 6.7% Bottom 90% 4.3% 3.1% 1.2% 2.8% 4% 7.4% Top 10% 2.5% 3.6% -1.0% 1.1% 23% 6.5% Top 1% 2.0% 3.5% -1.5% 0.5% 29% 6.5% All 3.4% 1.9% 1.5% 1.4% 1.9% 7% 7.8% Bottom 90% 2.1% 0.4% 1.8% 0.7% 1% 7.7% Top 10% 3.9% 2.6% 1.3% 2.5% 16% 8.0% Top 1% 4.9% 3.5% 1.4% 3.4% 26% 8.3% 1917-1929 1929-1986 1986-2012 Decomposition of wealth growth rate Rates of saving & return
  43. The bottom 90% massively dis-saved in the decade preceding the crisis -10% -5% 0% 5% 10% 15% 1975 1980 1985 1990 1995 2000 2005 2010 %ofbottom90%primaryincome Saving rate of the bottom 90%
  44. Saving rates rise with wealth except in the 1930s -10% 0% 10% 20% 30% 40% 50% 1913-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-12 %ofeachgroup'stotalprimaryincome The rich save more as a fraction of their income, except in the 1930s when there was large dis- saving through corporations. NB: The average private saving rate has been 9.8% over 1913-2013. Saving rates by wealth class (decennial averages) Top 10 to 1% Top 1% Bottom 90%
  45. Pre-tax rates of returns rise with wealth 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% Bottom 90% Top 10% Top 1% Top 0.1% Top 0.01% Pre-tax return on wealth by wealth group 1986-2012 average Real price effects Pure yield
  46. Post-tax rates of returns are the same across wealth groups today 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Top 10% Top 1% Top 0.5% Top 0.1% Top 0.01% Note: the average post-tax total return on wealth has been 5.5% over 1990-2012 Post-tax return on wealth by wealth group 1990-2012 average
  47. Post-tax rates of returns used to decline with wealth 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Top 10% Top 1% Top 0.5% Top 0.1% Top 0.01% Note: the average post-tax total return on wealth has been 3.5% over 1960-1980 Post-tax return on wealth by wealth group 1960-1980 average
  48. Rates of returns rise with wealth: the case of foundations 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 100k-1m 1m-10m 10m-100m 100m-1bn 1bn+ Net foundation wealth Return on foundation wealth, 1985-2010 average Return includes realized + net unrealized capital gains
  49. V- Conclusion
  50. A first step toward DINA We are constructing new, consistent series on the distribution of wealth W and capital income YK YK is about 1/3 of national income Y Next step: distribution of YL so as to obtain the full distribution of national income Y = YK + YL Will make it possible to break GDP growth by fractile, before and after-tax, based on a representative microfile with individual-level income and wealth consistent with macro aggregates = distributional national accounts (DINA), reconciling macro and inequality studies OTA
  51. There is a need for more data Using additional data would enable us to refine our estimates: E.g., matched property and individual income tax data Limited additional administrative data collection effort could have high value: 401k sending account balances (and not only IRAs) Mortgages outstanding Market value of portfolio securities on forms 1099 Purchases and sales of securities (→ saving) ⇓ All of this necessary to obtain fully accurate distributional national accounts
  52. Supplementary Slides
  53. 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
  54. What tax data miss 0% 5% 10% 15% 20% 25% 30% 35% 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 %offactor-pricenationalincome 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 & evasion Corporate income tax back
  55. Most trusts generate income taxable at the individual level 0% 2% 4% 6% 8% 10% 12% 1952 1962 1972 1982 1992 2002 2012 %nethouseholdwealth Wealth held in estates & trusts Total estate & trust wealth Estate & trust wealth that does not generate distributable income back
  56. Results robust to alternative treatment of pensions, capital gains, bond returns 5% 10% 15% 20% 25% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Top 0.1% wealth share, robustness checks 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 back
  57. Our top 10% wealth share is consistent with SCF 50%   55%   60%   65%   70%   75%   80%   85%   90%   1913   1918   1923   1928   1933   1938   1943   1948   1953   1958   1963   1968   1973   1978   1983   1988   1993   1998   2003   2008   Top  10%  Wealth  Shares:  Comparing  Es8mates   Capitalized  Incomes  (Saez-­‐Zucman)   SCF  (Kennickell)   back
  58. Estate tax returns fail to capture rising top wealth shares 0%   5%   10%   15%   20%   25%   30%   35%   40%   45%   50%  1913   1918   1923   1928   1933   1938   1943   1948   1953   1958   1963   1968   1973   1978   1983   1988   1993   1998   2003   2008   Top  1%  Wealth  Shares:  Comparing  Es7mates   Capitalized  Incomes  (Saez-­‐Zucman)   Estates  (Kopczuk-­‐Saez  and  IRS)   SCF  (Kennickell)   back
  59. Our estimate for top 0.01% is consistent with 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%  1983   1985   1987   1989   1991   1993   1995   1997   1999   2001   2003   2005   2007   2009   2011   2013   Top  .01%  wealth  sahre   Top  400  (.00025%)  wealth  share   Top  400  (top  .00025%)  and  Top  .01%  Wealth  Shares   Top  400   Top  .01%   back
  60. The concentration of declared capital income is rising fast 0% 10% 20% 30% 40% 50% 60% 70% 1960 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Top capital income shares including capital gains Top 1% Top 0.1% Top 0.5% Top 0.01%
  61. Improving Estimates with Internal Data Internal IRS data could be used to refine our estimates: Value of all IRAs available at individual micro level (30% of all pensions) Value of DB and 401(k) pensions could be estimated from employer and past contributions Value of homes could be estimated using geo-code and Zillow Value of businesses (partnerships and S-corps) could be estimated by matching with business returns balance sheets Date of birth data to compute wealth distributions by age Date of death data to compute mortality rates by wealth and improve estate multiplier estimates back
  62. Improving Estimates with Enhanced Information Tax Reporting 401k reporting of account balances (and not only IRAs) Market/assessed value of real estate on property tax bills Mortgages outstanding on form 1098 Market value of accounts and portfolio securities on forms 1099 Purchases and sales of securities (→ saving) ⇓ This would allow to obtain consistent income, wealth, and savings information at the micro-level Foundations or charitable organizations already report all this information back

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