Top wealth shares in the United States, 1916-2000: evidence from estate tax returns.

INTRODUCTION

The pattern of wealth and income inequality during the process of development of modern economies has attracted enormous attention since Kuznets (1955) formulated his famous inverted U-curve hypothesis. Wealth tends to be much more concentrated than income because of life cycle savings and because it can be transmitted from generation to generation. Liberals have blamed wealth concentration because of concerns for equity and in particular for tilting the political process in the favor of the wealthy. They have proposed progressive taxation as an appropriate counter-force against wealth concentration. (1) For conservatives, concentration of wealth is considered as a natural and necessary outcome of an environment that provides incentives for entrepreneurship and wealth accumulation, key elements of macro-economic success. Redistribution through progressive taxation might weaken those incentives and generate large efficiency costs. Therefore, it is of great importance to understand the forces driving wealth concentration over time and whether government interventions through taxation or other regulations are effective and/or harmful to curb wealth inequality. This task is greatly facilitated by the availability of long and homogeneous series of income or wealth concentration. Such series are in general difficult to construct because of lack of good data. In this paper, we use the extraordinary micro dataset of estate tax returns that has been recently compiled by the Statistics of Income Division of the Internal Revenue Service (IRS) in order to construct homogeneous series of wealth shares accruing to the upper groups of the wealth distribution since 1916, the beginning of the modern federal estate tax in the United States.

The IRS dataset includes detailed micro-information for all federal estate tax returns filed during the 1916-1945 period. (2) We supplement these data with both published tabulations and other IRS micro--data of estate tax returns from selected years of the second half of the century. We use the estate multiplier technique, which amounts to weighting each estate tax return by the inverse probability of death, to estimate the wealth distribution of the living adult population from estate data. First, we have constructed almost annual series of shares of total wealth accruing to various sub-groups within the two percent of the wealth distribution. (3) Although small in size, these top groups hold a substantial fraction of total net worth in the economy. Second, for each of these groups, we decompose wealth into various sources such as real estate, fixed claims assets (bonds, cash, mortgages, etc.), corporate stock, and debts. We also display the composition by gender, age, and marital characteristics. This exercise follows in the tradition of Lampman (1962), who produced top wealth share estimates for a few years between 1922 and 1956. Lampman, however, did not analyze groups smaller than the top .5 percent and this is an important difference because our analysis shows that, even within the top percentile, there is dramatic heterogeneity in the shares of wealth patterns. Most importantly, nobody has attempted to estimate, as we do here, homogeneous series covering the entire century. (4)

Our series show that there has been a sharp reduction in wealth concentration over the 20th century: the top 1 percent wealth share was close to 40 percent in the early decades of the century but has fluctuated between 20 and 25 percent over the last three decades. This dramatic decline took place at a very specific time period, from the onset of Great Depression to the end of World War II, and was concentrated in the very top groups within the top percentile, namely groups within the top 0.1 percent. Changes in the top percentile below the top 0.1 percent have been much more modest. It is fairly easy to understand why the shocks of the Great Depression, the New Deal policies which increased dramatically the burden of estate and income taxation for the wealthy, and World War II, could have had such a dramatic impact on wealth concentration. However, top wealth shares did not recover in the following decades, a period of rapid growth and great economic prosperity. In the early 1980s, top wealth shares have increased, and this increase has also been very concentrated. However, this increase is small relative to the losses from the first part of the twentieth century and the top wealth shares increased only to the levels prevailing prior to the recessions of the 1970s. Furthermore, this increase took place in the early 1980s and top shares were stable during the 1990s. This evidence is consistent with the dramatic decline in top capital incomes documented in Piketty and Saez (2003) using income tax return data. As they do, we tentatively suggest (but do not prove) that steep progressive income and estate taxation, by reducing the rate of wealth accumulation of the rich, may have been the most important factor preventing large fortunes to be reconstituted after the shocks of the 1929-1945 period.

Perhaps surprisingly, our top wealth shares series do not increase during the 1990s, a time of the Internet revolution and the creation of dot-com fortunes, extra-ordinary stock price growth, and of great increase in income concentration (Piketty and Saez, 2003). Our results are nevertheless consistent with findings from the Survey of Consumer Finances (Kennickell, 2003; Scholz, 2003), which also indicate hardly any growth in wealth concentration since 1995. This absence of growth in top wealth shares in the 1990s is not necessarily inconsistent with the income shares results from Piketty and Saez (2003) because the dramatic growth in top income shares since the 1980s has been primarily due to a surge in top labor incomes, with little growth of top capital incomes. This may suggest that the new high income earners have not had time yet to accumulate substantial fortunes, either because the pay surge at the top is too recent a phenomenon, or because their savings rates are very low. We show that, as a possible consequence of democratization of stock ownership in America, the top one percent individuals do not hold today a significantly larger fraction of their wealth in the form of stocks than the average person in the U.S. economy, explaining in part why the bull stock market of the late 1990s has not benefited disproportionately the rich. (5)

Although there is substantial circumstantial evidence that we find persuasive, we cannot prove that progressive taxation and stock market democratization had the decisive role we attribute to them. In our view, the primary contribution of this paper is to provide new and homogeneous series on wealth concentration using the very rich estate tax statistics. We are aware that the assumptions needed to obtain unbiased estimates using the estate multiplier method may not be met and, drawing on previous studies, we try to discuss as carefully as possible how potential sources of bias, such as estate tax evasion and tax avoidance, can affect our estimates. Much work is still needed to compare systematically the estate tax estimates with other sources such as capital income from income tax returns, the Survey of Consumer Finances, and the Forbes 400 list.

The paper is organized as follows. The second section describes our data sources and outlines our estimation methods. The third section presents our estimation results. We present and analyze the trends in top wealth shares and the evolution of the composition of these top wealth holdings. The fourth section proposes explanations to account for the facts and relates the evolution of top wealth shares to the evolution of top income shares. The fifth section discusses potential sources of bias, and compares our wealth share results with previous estimates and estimates from other sources such as the Survey of Consumer Finances and the Forbes richest 400 list. The final section offers a brief conclusion. All series and complete technical details about our methodology are gathered in appendices of the longer NBER working paper version of the paper (Kopczuk and Saez, 2004).

DATA, METHODOLOGY, AND MACRO-SERIES

In this section, we describe briefly the data we use and the broad steps of our estimation methodology. Readers interested in the complete details of our methods are referred to the extensive appendices at the end of the NBER working paper version of the paper. Our estimates are from estate tax return data compiled by the Internal Revenue Service (ILLS) since the beginning of the modern estate tax in the United States in 1916. In the 1980s, the Statistics of Income division of the IRS constructed electronic micro-files of all federal estate tax returns filed for individuals who died in the period 1916 to 1945. Stratified and large electronic micro-files are also available for 1965, 1969, 1972, 1976, and every year since 1982. (6) For a number of years between 1945 and 1965 (when no micro-files are available), the IRS published detailed tabulations of estate tax returns (U.S. Treasury Department, Internal Revenue Service, various years a). (7) This paper uses both the micro-files and the published tabulated data to construct top wealth shares and composition series for as many years as possible.