Income and Wealth Inequality: Evidence and Policy Implications Emmanuel Saez, UC Berkeley Neubauer Collegium Lecture University of Chicago October 2014 1
MEASURING INEQUALITY Inequality matters because the public cares about it Need to provide transparent inequality measures Goals: Understand drivers of inequality trends and the effects of public policy on inequality Two key economic concepts: Income and Wealth Income is a flow = Labor income + Capital income Capital income is the return on Wealth Wealth is a stock accumulated from savings and inheritances 2
BASIC ECONOMIC FACTS In aggregate, labor income is about 70-75% of total income Capital income is about 25-30% of total income Total wealth is about 400% of total annual income Annual rate of return on wealth = 6-7% Wealth inequality is always much higher than income inequality (bottom 50% families own about zero wealth) Government taxes 1/3 of market incomes to fund transfers and public goods: disposable income inequality lower than market income inequality 3
TOP INCOME SHARES Simple way to measure inequality: what share of total pre-tax market income goes to the top 10% families, top 1%, etc. Individual income tax statistics are the only source (a) covering long-time periods (b) capturing well top incomes 25 countries have been analyzed in the on-going World Top Incomes Database Caveats: Income concept used is narrower than National Income and focus is solely on pre-tax, pre-transfer income 4
Top 10% Pre- tax Income Share in the, 1917-2012 50% Top 10% Income Share 45% 40% 35% 30% 25% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Source: Piketty and Saez, 2003 updated to 2012. Series based on pre-tax cash market income including realized capital gains and excluding government transfers. 2012 data based on preliminary statistics
25% Decomposing Top 10% into 3 Groups, 1913-2012 Share of total income for each group 20% 15% 10% 5% 0% Top 1% (incomes above $394,000 in 2012) Top 5-1% (incomes between $161,000 and $394,000) Top 10-5% (incomes between $114,000 and $161,000) 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Source: Piketty and Saez, 2003 updated to 2012. Series based on pre-tax cash market income including realized capital gains and excluding government transfers. 2012 data based on preliminary statistics.
Top 0.1% Pre-Tax Income Share, 1913-2012 Top 0.1% Income Share 12% 10% 8% 6% 4% 2% Top 0.1% income share (incomes above $1.91m in 2012) 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Source: Piketty and Saez, 2003 updated to 2012. Series based on pre-tax cash market income including or excluding realized capital gains, and always excluding government transfers.
Top 0.1% Pre- Tax Income Share and Composi:on 12% 10% 8% Capital Gains Capital Income Business Income Salaries 6% 4% 2% 0% 1916 1921 1926 1931 1936 1941 1946 1951 1956 Source: Piketty and Saez, 2003 updated to 2012. Series based on pre-tax cash market income including or excluding realized capital gains, and always excluding government transfers. 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Table 1. Real Income Growth by Groups Average Income Real Growth Top 1% Incomes Real Growth Bottom 99% Incomes Real Growth Fraction of total growth (or loss) captured by top 1% (1) (2) (3) (4) Full period 1993-2012 17.9% 86.1% 6.6% 68% Clinton Expansion 1993-2000 31.5% 98.7% 20.3% 45% 2001 Recession 2000-2002 -11.7% -30.8% -6.5% 57% Bush Expansion 2002-2007 16.1% 61.8% 6.8% 65% Great Recession 2007-2009 -17.4% -36.3% -11.6% 49% Recovery 2009-2012 6.0% 31.4% 0.4% 95% Computations based on family market income including realized capital gains (before individual taxes). Incomes exclude government transfers (such as unemployment insurance and social security) and non-taxable fringe benefits. Incomes are deflated using the Consumer Price Index. Column (4) reports the fraction of total real family income growth (or loss) captured by the top 1%. For example, from 2002 to 2007, average real family incomes grew by 16.1% but 65% of that growth accrued to the top 1% while only 35% of that growth accrued to the bottom 99% of families. Source: Piketty and Saez (2003), series updated to 2012 in August 2013 using IRS preliminary tax statistics for 2012.
40% Bottom 90% wealth share in the United States, 1917-2012 35% % of total household wealth 30% 25% 20% 15% 10% 5% 0% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Wealth shares estimated using capitalization method by Saez and Zucman (2014)
40% Composition of the bottom 90% wealth share 35% 30% % of total household wealth 25% 20% 15% 10% Business assets Equities & fixed claims (net of non-mortgage debt) 5% 0% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Pensions Housing (net of mortgages)
Top 1% wealth share in the United States, 1913-2012 50% 40% % of total household wealth 30% 20% 10% 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 This figure depicts the share of total household wealth held by the 1% richest families, as estimated by capitalizing income tax returns. Source: Saez and Zucman (2014). 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
30% Top 0.1% wealth share in the United States, 1913-2012 25% 20% 15% 10% 5% 0% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 % of total household wealth
Real average wealth of bottom 90% and top 1% families Top 1% real average welath 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 Top 1% (left y-axis) Bottom 90% (right y-axis) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 0 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Bottom 90% real average wealth Real values are obtained by using the GDP deflator, 2010 dollars. Source: Appendix Tables B3.
SUMMARY OF RESULTS 1) Dramatic reduction in income and wealth concentration during the first part of the 20th century 2) Much lower income and wealth inequality in decades following World War II 3) Sharp increase in income and wealth inequality since 1970s 4) now combines extremely high labor income inequality with very high wealth inequality Analyzing international evidence is useful to understand drivers of inequality 15
Top 1% share: English Speaking countries (U-shaped) Top 1% Income Share (in %) 20 15 10 5 United States United Kingdom 0 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Top 1% share: Continenal Europe and (L-shaped) Top 1% Income Share (in %) 20 15 10 5 0 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Result 1: Drop in Inequality in 1st Half of 20th Century All advanced countries had very high income concentration one century ago (explains pessimism of Piketty 2014) All countries experience sharp reduction in income concentration during the first part of the 20th century 1) This is primarily a capital income phenomenon 2) War and depression shocks hit top capital earners (drop follows each country specific history) 3) Government policy responses regulations and progressive income and inheritance taxation make this drop permanent 18
Result 2: Recent Surge in Inequality 1) Driven by surge in top labor incomes which then fuels wealth inequality 2) Difference across countries rules out technical change/globalization as the sole explanation 3) Policies play a key role in shaping inequality (tax and transfer policies, regulations, education) 4) Key debate: do gains of the top 1% reflect productivity or do they come at the expense of the 99%? Looking at the role of top tax rates helps shed light on this 19
Top 1% Income Share (pre tax) and Top Marginal Tax Rate Top 1% Income Shares (%) 0 5 10 15 20 25 Pre tax Top 1% share Top MTR 0 10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%) 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
Elasticity=.07 (.15) 4 6 8 10 12 14 16 18 Top 1% Income Share (%) 40 50 60 70 80 90 Top Marginal Tax Rate (%) A. Top 1% Share and Top Marginal Tax Rate in 1960 4 Top tax rates include central+local income taxes (Piketty-Saez-Stancheva 14)
Elasticity= 1.90 (.43) 4 6 8 10 12 14 16 18 Top 1% Income Share (%) 40 50 60 70 80 90 Top Marginal Tax Rate (%) B. Top 1% Share and Top Marginal Tax Rate in 2005 9 Top tax rates include central+local income taxes (Piketty-Saez-Stancheva 14)
Elasticity=.47 (.11) 0 2 4 6 8 10 Change in Top 1% Income Share (points) 40 30 20 10 0 10 Change in Top Marginal Tax Rate (points) Top tax rates include central+local income taxes (Piketty-Saez-Stancheva 14)
ECONOMIC EFFECTS OF TAXING THE TOP 1% Strong empirical evidence that pre-tax top incomes are affected by top tax rates 3 potential scenarios with very different policy consequences 1) Supply-Side: Top earners work less and earn less when top tax rate increases Top tax rates should not be too high 2) Tax Avoidance/Evasion: Top earners avoid/evade more when top tax rate increases a) Eliminate loopholes, b) Then increase top tax rates 3) Rent-seeking: Top earners extract more pay (at the expense of the 99%) when top tax rates are low High top tax rates are desirable 20
Top 1% Income Share (pre tax) and Top Marginal Tax Rate Top 1% Income Shares (%) 0 5 10 15 20 25 Pre tax Top 1% share Top MTR 0 10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%) 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
Real changes vs. tax Avoidance? Test using charitable giving behavior of top income earners Because charitable is tax deductible, incentives to give are stronger when tax rates are higher Under the tax avoidance scenario, reported incomes and reported charitable giving should move in opposite directions Empirically, charitable giving of top income earners has grown in close tandem with top incomes Incomes at the top have grown for real 21
Mean charitable giving of top 1% incomes / mean income 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1962 1966 1970 Charitable Giving of Top 1% Incomes Mean charitable giving of top 1% divided by mean income [lea y- axis] 1974 1978 1982 1986 Source: Appendix Table XX. The figure depicts average charitable giving of top 1% inomes (normalized by average income per family) on the left y-axis. 1990 1994 1998 2002 2006 2010
Mean charitable giving of top 1% incomes / mean income 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1962 1966 Charitable Giving of Top 1% Incomes, 1962-2012 Mean charitable giving of top 1% divided by mean income [lea y- axis] Top 1% Income Share [right y- axis] 1970 1974 1978 1982 1986 Source: Appendix Table XX. The figure depicts average charitable giving of top 1% inomes (normalized by average income per family) on the left y-axis. For comparison, the figure reports the top 1% income share (on the right y-axis). 1990 1994 1998 2002 2006 2010 25% 20% 15% 10% 5% 0% Top 1% income share
Supply-Side or Rent-seeking Under rent-seeking scenario, growth in top 1% incomes should come at the expense of bottom 99% (and conversely) Evidence: Top 1% incomes grow slowly from 1933 to 1975 and fast afterwards. Bottom 99% incomes grow fast from 1933 to 1975 and slowly afterwards International evidence: cuts on economic growth Hard to find an effect of top rate Consistent with rent-seeking effects More research needed on this critical question 24
Real Income per adult (1913=100) 0 100 200 300 400 500 Top 1% and Bottom 99% Income Growth Top 1% Top MTR Bottom 99% 0 10 20 30 40 50 60 70 80 90 100 Marginal Tax Rate (%) 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
POLICY CONCLIONS 1) historical evidence and international evidence shows that tax policy plays a key role in the shaping inequality 2) High top tax rates reduce the pre-tax income gap without visible effect on economic growth 3) Public will favor more progressive taxation only if it is convinced that top income gains are detrimental to the 99% 4) In globalized world, progressive taxation will require international coordination to keep tax avoidance/evasion low 25
SUPPLEMENTARY SLIDES 26
Top 1% Income Share (pre tax) and Top Marginal Tax Rate Top 1% Income Shares (%) 0 5 10 15 20 25 Pre tax Top 1% share Top MTR 0 10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%) 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
Top 1% Income Shares (%) 0 5 10 15 20 25 Tax Avoidance: Top 1% Income Shares and Top MTR Top 1% Share Top 1% (excl. KG) Top MTR MTR K gains 0 10 20 30 40 50 60 70 80 90 100 Marginal Tax Rates (%) 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
A. Average CEO compensation CEO pay($ million, log scale) 1.0 1.5 2.0 2.5 3.0 3.5 United States United Kingdom Belgium.4.5.6.7.8 Top Income Marginal Tax Rate Link between top tax rate and CEO pay in 2006 across countries
B. Average CEO compensation with controls CEO pay($ million, log scale) with controls 1.0 1.5 2.0 2.5 3.0 3.5 United States United Kingdom Belgium.4.5.6.7.8 Top Income Marginal Tax Rate Controlling for firm profitability, governance, size, and industry
20 30 40 50 60 70 Mean Child Income Rank Mean Child Percentile Rank vs. Parent Percentile Rank Rank-Rank Slope (U.S) = 0.341 (0.0003) 0 10 20 30 40 50 60 70 80 90 100 Parent Income Rank
Mean Child Income Rank Intergenerational Mobility in the United States vs. 20 30 40 50 60 70 Rank-Rank Slope (U.S) = 0.341 Rank-Rank Slope () = 0.180 0 10 20 30 40 50 60 70 80 90 100 Parent Income Rank [Boserup, Kreiner, Kopczuk 2013] United States
REFERENCES Alvaredo, Facundo, Atkinson, Anthony, Thomas Piketty, and Emmanuel Saez, The World Top Incomes Database (web) Atkinson, Anthony, Thomas Piketty, and Emmanuel Saez Top Incomes in the Long Run of History, Journal of Economic Literature 49(1), 2011, 3-71. (web) Chetty, Raj, Nathan Hendren, Patrick Kline, and Emmanuel Saez, Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States, NBER Working Paper No. 19843, January 2014, forthcoming Quarterly Journal of Economics (web) Piketty, Thomas, Capital in the 21st Century, Cambridge: Harvard University Press, 2014, (web) Piketty, Thomas and Emmanuel Saez Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 118(1), 2003, 1-39. (web) Piketty, Thomas and Emmanuel Saez Inequality in the Long-Run, Science 344, 2014, 838-843 (web) Piketty, Thomas, Emmanuel Saez, and Stefanie Stantcheva Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities, American Economic Journal: Economic Policy 2014, 6(1), 2014, 230-271. (web) 28
Saez, Emmanuel and Gabriel Zucman, Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data, slides July 2014. (web)