Alan Reynold's New Book Examined

Dave Henderson over at TCS finishes his examination of economist Alan Reynold's new book, Income and Wealth. His third installment examines the Reynold's deconstruction of the myth of the "top 1%", most of which comes from a NEBR study by economists Emmanual Saez of the University of California, Berkeley and Thomas Piketty of École normale supérieure in Paris. Their study reportedly found that the top 1% of income earners share of total income increasing from the 8-9% range in the 1960's up to 16% in 1998.

Henderson refers first (as he did in the first installment) to Reynold's questioning of the use of "tax units", not families, in the data, which distorts the study, then to Reynold's note of the effects of the changes in tax laws, primarily noting the changes in the numbers of C (fewer) and S (more) type coporations, from the 1986 Tax Reform Bill. The effect of these changes is that people owning corporations had an incentive to change their companies to S types and benefit from the lower individual tax rate (28%) vs the corporate tax rate (34%). Formerly the coroporate rate was lower than the individual rate, so people had been filing their earnings under the C type, taxed as corporate income, not individual. Additional changes were also made in 1986, including the taxing of income earned from municipal bonds, which further distorts the study.

Reynolds then totally devastates the commonly repeated argument that CEO pay is 500 to 1000 times that of the average worker by simple arithmetic, using the same data shown in the Wall Street Journal article making that claim, showing it to be completely bogus. If average CEO pay is $2.16 million, it's not 500 times average worker income, which computes to around $4500. As I recall from the CIA World Factbook, GDP per capita is around $42,000, maybe someone forgot a zero in there.

Also pointed out is another error on the part of our favorite Princeton professor, Herr Doktor Paul Krugman, who included grants of stock options in his calculations of CEO pay for a 2002 article. He referred to a Fortune article on options granted in 1999, but he ignored the fact that the stock market tanked in 2000, and the Fortune magazine numbers appraised those options as 1999 value plus added an expected increase of one third. In reality, the pay of S & P 500 CEOs fell by 48% from 2000 to 2003, what you might expect when those executives have much of their total compensation tied to stock and the market falls flat on its face.