University of Chicago. October ... market income goes to the top 10% families, top 1%, etc. Individual ... Top 10% Pre-â
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 US 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 US, 1917-‐2012
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
Top 10% Income Share
50%
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
Decomposing Top 10% into 3 Groups, 1913-2012
20%
15%
10% Top 1% (incomes above $394,000 in 2012)
5%
Top 5-1% (incomes between $161,000 and $394,000)
2008
2003
1998
1993
1988
1983
1978
1973
1968
1963
1958
1953
1948
1943
1938
1933
1928
1923
0%
1918
Top 10-5% (incomes between $114,000 and $161,000)
1913
Share of total income for each group
25%
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% US Pre-Tax Income Share, 1913-2012
10%
Top 0.1% income share (incomes above $1.91m in 2012)
8% 6% 4% 2% 0%
1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Top 0.1% Income Share
12%
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.
US Top 0.1% Pre-‐Tax Income Share and Composi:on 12% Capital Gains
10%
Capital Income Business Income
8%
Salaries
6% 4%
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.
2011
2006
2001
1996
1991
1986
1981
1976
1971
1966
1961
1956
1951
1946
1941
1936
1931
1926
1921
0%
1916
2%
Table 1. Real Income Growth by Groups
Full period 1993-2012 Clinton Expansion 1993-2000 2001 Recession 2000-2002 Bush Expansion 2002-2007 Great Recession 20072009 Recovery 2009-2012
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)
17.9%
86.1%
6.6%
68%
31.5%
98.7%
20.3%
45%
-11.7%
-30.8%
-6.5%
57%
16.1%
61.8%
6.8%
65%
-17.4%
-36.3%
-11.6%
49%
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 US families. Source: Piketty and Saez (2003), series updated to 2012 in August 2013 using IRS preliminary tax statistics for 2012.
Bottom 90% wealth share in the United States, 1917-2012 40%
% of total household wealth
35% 30% 25% 20% 15% 10%
2012
2007
2002
1997
1992
1987
1982
1977
1972
1967
1962
1957
1952
1947
1942
1937
1932
1927
1922
0%
1917
5%
Wealth shares estimated using capitalization method by Saez and Zucman (2014)
Composition of the bottom 90% wealth share
40% 35%
25%
Pensions
20%
Equities & fixed claims (net of non-mortgage debt)
15%
Business assets
10% 5%
2012
2007
2002
1997
1992
1987
1982
1977
1972
1967
1962
1957
1952
1947
1942
1937
1932
1927
1922
0%
Housing (net of mortgages) 1917
% of total household wealth
30%
Top 1% wealth share in the United States, 1913-2012 50%
30%
20%
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).
2013
2008
2003
1998
1993
1988
1983
1978
1973
1968
1963
1958
1953
1948
1943
1938
1933
1928
1923
0%
1918
10%
1913
% of total household wealth
40%
0% 2013
2008
2003
1998
1993
1988
1983
1978
1973
1968
1963
1958
1953
1948
1943
1938
1933
1928
1923
1918
1913
% of total household wealth 30%
Top 0.1% wealth share in the United States, 1913-2012
25%
20%
15%
10%
5%
Real average wealth of bottom 90% and top 1% families 140,000
Top 1% (left y-axis)
120,000
Bottom 90% (right y-axis)
10,000,000
100,000
8,000,000
80,000
6,000,000
60,000
4,000,000
40,000
2,000,000
20,000
Real values are obtained by using the GDP deflator, 2010 dollars. Source: Appendix Tables B3.
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1950
0
1946
0
1954
Top 1% real average welath
12,000,000
Bottom 90% real average wealth
14,000,000
SUMMARY OF US 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) US now combines extremely high labor income inequality with very high wealth inequality Analyzing international evidence is useful to understand drivers of inequality 15
0 2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
5
1915
1910
Top 1% Income Share (in %)
Top 1% share: English Speaking countries (U-shaped)
20
15
10
United States
United Kingdom
Canada
0 2010
2005
2000
1995
1990
1985
1980
15
1975
20
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
Top 1% Income Share (in %)
Top 1% share: Continenal Europe and Japan (L-shaped) France Japan
Sweden
10
5
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
Pre−tax Top 1% share
Top MTR
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
0
0
Top 1% Income Shares (%) 5 10 15 20
25
10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%)
Top 1% Income Share (pre−tax) and Top Marginal Tax Rate
16
18
A. Top 1% Share and Top Marginal Tax Rate in 1960−4
Top 1% Income Share (%) 8 10 12 14
Elasticity= .07 (.15) Germany Switzerland
Netherlands Finland
France
Canada Japan
Spain
6
Australia Sweden NZ Ireland
US
UK
Italy Norway Portugal
4
Denmark
40
50
60 70 Top Marginal Tax Rate (%)
80
90
Top tax rates include central+local income taxes (Piketty-Saez-Stancheva ’14)
US
Elasticity= 1.90 (.43)
UK Canada Ireland Germany Norway Portugal Italy Spain Australia NZ France Japan Finland Switzerland Netherlands Sweden
6
Top 1% Income Share (%) 8 10 12 14
16
18
B. Top 1% Share and Top Marginal Tax Rate in 2005−9
4
Denmark
40
50
60 70 Top Marginal Tax Rate (%)
80
90
Top tax rates include central+local income taxes (Piketty-Saez-Stancheva ’14)
10 Change in Top 1% Income Share (points) 0 2 4 6 8
US
Elasticity= .47 (.11)
UK Ireland
Portugal
Norway Canada Italy
Australia Spain
NZ Japan
Sweden
Denmark
France Finland
Germany Switzerland
Netherlands
−40
−30 −20 −10 Change in Top Marginal Tax Rate (points)
0
10
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
Pre−tax Top 1% share
Top MTR
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
0
0
Top 1% Income Shares (%) 5 10 15 20
25
10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%)
Top 1% Income Share (pre−tax) and Top Marginal Tax Rate
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
90% 80% 70% 60% 50% 40% 30% 20%
Mean charitable giving of top 1% divided by mean income [leA y-‐axis]
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
0%
1966
10%
1962
Mean charitable giving of top 1% incomes / mean income
Charitable Giving of Top 1% Incomes
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.
90%
25%
80%
60% 15%
50% 40%
10%
30% Mean charitable giving of top 1% divided by mean income [leA y-‐axis]
20%
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
0%
1966
Top 1% Income Share [right y-‐axis]
10%
5%
0%
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).
Top 1% income share
20%
70%
1962
Mean charitable giving of top 1% incomes / mean income
Charitable Giving of Top 1% Incomes, 1962-‐2012
Supply-Side or Rent-seeking Under rent-seeking scenario, growth in top 1% incomes should come at the expense of bottom 99% (and conversely) US 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: Hard to find an effect of top rate cuts on economic growth ⇒ Consistent with rent-seeking effects More research needed on this critical question 24
0
Top MTR
Bottom 99%
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
10 20 30 40 50 60 70 80 90 100 Marginal Tax Rate (%)
Top 1%
0
Real Income per adult (1913=100) 100 200 300 400 500
Top 1% and Bottom 99% Income Growth
POLICY CONCLUSIONS 1) US 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
Pre−tax Top 1% share
Top MTR
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
0
0
Top 1% Income Shares (%) 5 10 15 20
25
10 20 30 40 50 60 70 80 90 100 Top Marginal Tax Rate (%)
Top 1% Income Share (pre−tax) and Top Marginal Tax Rate
Top MTR
Top 1% (excl. KG)
MTR K gains
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Year
10 20 30 40 50 60 70 80 90 100 Marginal Tax Rates (%)
Top 1% Share
0
0
Top 1% Income Shares (%) 5 10 15 20
25
Tax Avoidance: Top 1% Income Shares and Top MTR
2.5
United States
Italy
2.0
Switzerland Germany Canada
1.5
United Kingdom Ireland Australia Netherlands
1.0
CEO pay($ million, log−scale)
3.0 3.5
A. Average CEO compensation
Sweden
France Norway
Belgium
.4
.5
.6
.7
.8
Top Income Marginal Tax Rate
Link between top tax rate and CEO pay in 2006 across countries
3.0
United Kingdom Australia Ireland Canada
2.5
Italy
United States
2.0
Switzerland GermanyNetherlands
1.5
Norway
France Belgium Sweden
1.0
CEO pay($ million, log−scale) with controls
3.5
B. Average CEO compensation with controls
.4
.5
.6
.7
.8
Top Income Marginal Tax Rate
Controlling for firm profitability, governance, size, and industry
50 40 30
Rank-Rank Slope (U.S) = 0.341 (0.0003) 20
Mean Child Income Rank
60
70
Mean Child Percentile Rank vs. Parent Percentile Rank
0
10
20
30
40
50
60
Parent Income Rank
70
80
90
100
50 40 30
Rank-Rank Slope (U.S) = 0.341 Rank-Rank Slope (Denmark) = 0.180 20
Mean Child Income Rank
60
70
Intergenerational Mobility in the United States vs. Denmark
0
10
20
30
40
50
60
Parent Income Rank Denmark [Boserup, Kreiner, Kopczuk 2013]
70
80
90
100
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)