INCORPORATING DISTRIBUTIONAL INFORMATION INTO THE NATIONAL ACCOUNTS by Dale W. Jorgenson November 16, 2012 BEA Advisory Committee Comments on Edward Harris and Frank Sammartino, "Trends in the Distribution of Household Income between 1979 and 2007," Congressional Budget Office, October 2011.

DISTRIBUTION OF HOUSEHOLD INCOME Links Household Income Data from the Current Population Survey (CPS) and Statistics of Income (SOI) with Transfer Income from TRIM3 Household Income in Real Terms Has Been Growing at About the Same Rate as the GDP Inequality Is Increasing Since Much of the Growth of Household Income Is Concentrated on the Top Quintile and Even More on the Top One Percent

PROGRESSIVITY OF THE TAX AND TRANSFER SYSTEM The Federal Tax and Transfer System Is Progressive and the Resulting Redistribution of Household Income Reduces Inequality. Transfers Are Responsible for Most of the Redistribution of Income (60 Per Cent), While the Federal Tax System Accounts for the Rest (40 Per Cent) The Payroll Tax Is Mildly Regressive

DOES THE STUDY PROVIDE A MEASURE OF ECONOMIC WELL-BEING? Household Income and Its Distribution Do Not Provide a Measure of Economic Well-Being (Box 1 of the Paper). The Distribution of Consumption Provides the Best Measure of Current Well-Being. The Distribution of Wealth Provides the Best Measure of Lifetime Well-Being

SPECULATIONS ABOUT CHANGES IN THE TAX AND TRANSFER SYSTEM SINCE 2007 Changes in Progressivity of the Federal Income Tax Since 2007 Are Not Very Substantial The Payroll Tax Reduction Due for Expiration at the End of the Year Is Modestly Progressive The Expansion of Transfer Payments in Response to the Economic Downturn Is Also Progressive

A FEW LIMITATIONS OF THE STUDY State and Local Taxes Are Excluded from the Analysis of the Tax and Transfer System Capital Gains Should Be Measured on an Accrual Basis after Inflation Public and Private Pensions and Associated Transfers Should Be Measured on an Accrual Basis

OVERALL EVALUATION OF THE STUDY Integration of the CPS, SOI, and TRIM3 Data Sets Is a Very Important Contribution to the Analysis of the Distribution of Household Income. The Paper Breaks Significant New Ground in Analyzing the Progressivity of the U.S. Tax and Transfer System The Paper Does Not Address the Integration of Distributional Information into the National Accounts

New Architecture for an Expanded and Integrated Set of National Accounts for the United States 1. PRODUCTION Gross Domestic Product Equals Gross Domestic Factor Outlay 2. DOMESTIC RECEIPTS AND EXPENDITURES Domestic Receipts Equal Domestic Expenditure 3. FOREIGN TRANSACTION CURRENT ACCOUNT Receipts from Rest of World Equal Payments to Rest of World and Balance on Current Account 4. DOMESTIC CAPITAL ACCOUNT Gross Domestic Capital Formation Equals Gross Domestic Savings 5. FOREIGN TRANSACTION CAPITAL ACCOUNT Balance on Current Account Equals Payments to Rest of the World and Net Lending or Borrowing 6. DOMESTIC BALANCE SHEET Domestic Wealth Equals Domestic Tangible Assets and U.S. Net International Position 7. U.S. INTERNATIONAL POSITION U.S.-Owned Assets Abroad Equal Foreign-Owned Assets in U.S. and U.S. Net International Position

1. THE PRODUCTION ACCOUNT Output, Input, and Productivity

2. DOMESTIC RECEIPTS AND EXPENDITURES Income, Consumption, and Saving

Household standard of living and its cost

Social standard of living and its cost

3. MEASURES OF SOCIAL WELFARE Efficiency, Equity, and the Standard of Living Contributions to the Standard of Living

MEASURING SOCIAL WELFARE IN THE NATIONAL ACCOUNTS Growth in the Standard of Living Dropped Substantially After The Predominant Share of Growth in the Standard of Living Is Due to Efficiency. Growth in Equity Contributed Positively to Growth in the Standard of Living until 1973, but Negatively Through Equity Dropped Considerably from The Decline in Equity Was Relative Modest until 1995 and after 2000.

SHOULD SOCIAL WELFARE MEASURES BE INCLUDED IN THE NATIONAL ACCOUNTS? The Measurement of Social Welfare Combines Distributional Information about Consumer Expenditures with Normative Judgments. Social Welfare Measures Like Efficiency, Equity and the Standard of Living Would Fill an Important Gap in the National Accounts. Our Recommendation: Statistical Agencies Should Experiment with Satellite Systems Including Social Welfare Measures