Tag Archives: Wealth inequality

Me Poor? Then We Need Less Redistribution

In the AEJ: Economic Policy, Christopher Hoy and Franziska Mager report that people are less supportive of redistribution when they learn that they are poorer than they thought.

We test a key assumption underlying seminal theories about preferences for redistribution, which is that relatively poor people should be the most in favor of redistribution. … people who are told they are relatively poorer than they thought are less concerned about inequality and are not more supportive of redistribution. This finding is consistent with people using their own living standard as a “benchmark” for what they consider acceptable for others.

Wealth Inequality and Wealth Taxes

In a series of blog posts, John Cochrane criticizes the Saez-Zucman proposal for higher wealth taxes. In posts #1 to #4 he argues that economic arguments for wealth taxes are inconsistent or not convincing. In post #5 he concludes that Saez-Zucman truly are motivated by political objectives which are grounded in the view that wealth of the rich is ill-gotten or that the rich have a disproportionate, negative influence on politics.

Saez and Zucman want to confiscate billionaires’ wealth, because they think billionaires have too much political power, billionaires all got their money unjustly, and somehow though big government cronyism is the problem, bigger government is the answer.

Cochrane rejects this view.

Monetary Policy and the Wealth Distribution

In a Staff Working Paper, the Bank of England’s Philip Bunn, Alice Pugh, and Chris Yeates discuss how monetary policy easing following the financial crisis affected income and wealth of different age groups.

The authors analyze survey panel data (ONS Wealth and Assets Survey) on households’ characteristics and balance sheet positions. They argue that

the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small. Given the pre-existing disparities in income and wealth, we estimate that the impact on each household varied substantially across the income and wealth distributions in cash terms, but in percentage terms the effects were broadly similar. We estimate that households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young. Overall, our results illustrate the importance of taking a broad-based approach to studying the distributional impacts of monetary policy and of considering channels jointly rather than in isolation.

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Inequality in the United States

… meanwhile, inequality in the US remains more of an issue.

On Alphaville, Kadhim Shubber summarizes a DB Global Markets Research study on US inequality:

  • More than 30% of US households have zero or negative non-home wealth.
  • Wealth is increasingly concentrated among the old, and among the wealthy.

Observers paint the picture of an increasingly dysfunctional society.

And they point to the relevance of inequality for political polarization and accountability.

Inequality in Switzerland

In a paper, Reto Föllmi and Isabel Martínez document trends in income and wealth inequality in Switzerland over the last 100 years.

Daniel Hug reports in the NZZaS (figures below taken from NZZaS).

Data (World Wealth and Income Database, based on tax records).

Some findings:

  • Income inequality has been rather stable and is modest …
  • … although social mobility as reflected in educational attainment is low.
  • Income inequality at the very top has increased.
  • The top 1% of income recipients earn at least CHF 300 000 annually (net income before tax), the top 0.01% at least CHF 4 million.
  • Wealth is distributed much more unequally. The top 1% own roughly 40%, slightly more than in the United States and twice as much as in France and the UK.
  • The wealth distribution is more equal if retirement savings in the second and third pillar are accounted for. PAYG funded pensions (first pillar) also contribute towards reducing inequality after taxes and transfers, much more so than taxes.

Tax Evasion and Tax Rates

High rates of tax evasion are not necessarily a consequence of high tax rates. In an NBER working paper, Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman provide estimates of countries’ wealth holdings in “tax havens.” Based on BIS statistics the authors find that:

  • Wealth on the order of 10% of global GDP is held offshore.
  • In Scandinavia, the number is much smaller.
  • In continental Europe, it equals roughly 15%.
  • In some Gulf and Latin American countries, almost 60%.
  • In Russia, the richest citizens hold the majority of their wealth abroad.

Tax Evasion and Wealth Inequality

The Economist reports about a study by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman who matched leaked information from Swiss banks and Panamanian shell companies with Scandinavian wealth records. Their findings:

  • Tax evasion is progressive. The average / top 1% / top 0.01% Scandinavian household paid 3% / 10% / 30% fewer taxes than it should.
  • Accordingly, estimates of wealth inequality (based on tax data) likely underestimate the degree of inequality.

Owner-Occupied Housing and Wealth Inequality

On VoxEU, Gianni La Cava summarizes his research on the secular rise in the housing share of US income.

In the US national accounts, income accruing to the housing sector is measured as ‘net housing capital income’, or simply, net rental income (i.e. gross rents less housing costs, such as depreciation and property taxes). This measure includes rental income going to both owner-occupiers (imputed rent) and landlords (market rent). The very detailed nature of the Bureau of Economic Analysis’ regional economic accounts allows for similar estimates of housing capital income to be constructed for each US state spanning several decades. …

The owner-occupier share of aggregate income has risen from just under 2% in 1950 to close to 5% in 2014 … . The share of income going to landlords (i.e. market rent) has also doubled in the post-war era. But, in aggregate, the effect of imputed rent is larger … because there are nearly twice as many home owners as renters in the US economy. …

… the long-run rise in the housing capital income share is fully concentrated in states that face housing supply constraints.

Taxing the Rich

In Taxing the Rich: A History of Fiscal Fairness in the United States and Europe, Kenneth Scheme and David Stasavage

explore the intellectual and political debates surrounding the taxation of the wealthy while also providing the most detailed examination to date of when taxes have been levied against the rich and when they haven’t. Fairness in debates about taxing the rich has depended on different views of what it means to treat people as equals and whether taxing the rich advances or undermines this norm. Scheve and Stasavage argue that governments don’t tax the rich just because inequality is high or rising—they do it when people believe that such taxes compensate for the state unfairly privileging the wealthy. Progressive taxation saw its heyday in the twentieth century, when compensatory arguments for taxing the rich focused on unequal sacrifice in mass warfare. Today, as technology gives rise to wars of more limited mobilization, such arguments are no longer persuasive. [Text from the Publisher’s website.]

Summary by Bryan Caplan:

Democracies have no inherent tendency to “soak the rich.”

Instead, democracies adopt high, progressive taxation in the face of compelling “compensatory” arguments for redistribution.

Only major wars of mass mobilization make compensatory arguments compelling.

Modern military technology has made majors wars of mass mobilization obsolete.

Therefore, tax the rich policies are a thing of the past, at least for developed countries.  They won’t be coming back

Inequality and the Welfare State

A new book on inequality by Branko Milanovic adopts an international perspective. The Economist reviews the book:

Like Mr Piketty, he begins with piles of data assembled over years of research. He sets the trends of different individual countries in a global context. Over the past 30 years the incomes of workers in the middle of the global income distribution—factory workers in China, say—have soared, as has pay for the richest 1% (see chart). At the same time, incomes of the working class in advanced economies have stagnated. This dynamic helped create a global middle class. It also caused global economic inequality to plateau, and perhaps even decline, for the first time since industrialisation began. …

Mr Milanovic suggests that both [Kuznets and Piketty] are mistaken. Across history, he reckons, inequality has tended to flow in cycles: Kuznets waves.

In the FT, Martin Wolf argues that a significant part of the (British) welfare state is about insurance rather than redistribution:

Evidence for this comes from another IFS study  … This examined the effects of the tax and benefit systems on people born between 1945 and 1954 …

First, income is far less unequal over lifetimes than in any given year. This is because a big proportion of inequality is temporary … Second, largely as a result, more than half of the redistribution achieved by taxes and benefits is over lifetimes rather than among different people. Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year. Finally, in-work benefits are just as good as out-of-work benefits at helping people who remain poor throughout their lives but they do less damage to incentives to work. Higher rates of income tax, meanwhile, target the “lifetime rich” relatively well because mobility at the top is relatively modest.

Marcel Fratzscher also wrote a book on the topic, focusing on Germany. He argues that the “Verteilungskampf” (redistributive struggle) intensifies and that equality of opportunity is being lost. In the FAZ, Jan Hauser summarizes a critique of the book by another Berlin based professor, Klaus Schroeder, who argues that the text is very short on substance.

Spending Inequality

In a New Republic blog, Alan Auerbach and Larry Kotlikoff discuss lifetime spending inequality. Due to taxes and income variability over the life cycle, this is much smaller than wealth or income inequality.

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Auerbach and Kotlikoff write:

The top 1 percent of 40-49 year-olds face a net tax, on average, of 45 percent. … For the bottom 20 percent, the average net tax rate is negative 34.2 percent. …

Our standard means of judging whether a household is rich or poor is based on current income. But this classification can produce huge mistakes. … For example, only 68.2 percent of 40-49 year-olds who are actually in the third resource quintile using our data would be so classified based on current income.

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Wealth Inequality, Theory and Measurement

In an NBER working paper, David Weil argues that Thomas Piketty overestimates wealth inequality. In the abstract of the paper, Weil writes:

In Capital in the 21st Century, Thomas Piketty uses the market value of tradeable assets to measure both productive capital and wealth. As a measure of wealth this is problematic because it ignores the value of human capital and transfer wealth, which have grown enormously over the last 300 years. Thus the constancy of the wealth/income ratio as portrayed in his data is an illusion. Further, the types of wealth that he does not measure are more equally distributed than tradeable assets. The approach also incorrectly identifies capital gains due to reduced discount rates as increases in the capital stock.

 

Pareto and Piketty

In an NBER working paper, Charles Jones discusses Piketty’s famous r-g term in light of several simple and transparent macroeconomic models. Jones emphasises the role of the Pareto distribution and the difference between partial and general equilibrium reasoning. Importantly,

… exponential growth that occurs for an exponentially-distributed amount of time leads to a Pareto distribution.

Chinese Government Report on Options to Reduce Wealth Inequality

Markus Ackeret in the NZZ discusses a long-awaited Chinese government report on policy options to reduce wealth disparities. They include: Less manipulation of interest rates; more manipulation of wages; higher real estate taxes; higher dividend payments of government owned enterprises; changes in the legal status of workers moving from the countryside to the cities (hukou).