Do Piketty and Saez Understate U.S. Income Inequality?

From at least 1960-1986 the PikettySaez (P-S) data set understates the concentration of income among top income earners. Adjusting the P-S data series for income shifting in response to changes in income taxation for top earners shifts income shares upward for the years prior to the Tax Reform Act of 1986 (TRA86). We calculate that adjusted income share of the top one percent of earners are overstated by over two percentage points for many of the years that the P-S series reports historically low income inequality. Our adjustment reflects just one aspect of major tax regime change during the past century, namely the relationship between the top marginal personal income tax rate and the corporate income tax rate. It is likely that adjustments for other changes in income tax law would lead to even greater increases in income shares during the high-marginal rate era between World War II and the mid-1980s.