Divvied up
Would a significant increase in the top income tax rate substantially alter income inequality?
William Gale, Melissa Kearney & Peter Orszag
Brookings Institution Working Paper, September 2015
Abstract:
The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest. That such a sizable increase in top income tax rates leads to such a limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge. To be sure, our results do not speak to the general desirability of a more progressive tax-and-transfer schedule, just to the fact that even a significant tax increase on high-income households and corresponding transfer to low-income households has a small effect on overall inequality.
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How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility?
Richard Freeman et al.
NBER Working Paper, October 2015
Abstract:
This paper examines unionism's relationship to the size of the middle class and its relationship to intergenerational mobility. We use the PSID 1985 and 2011 files to examine the change in the share of workers in a middle-income group (defined by persons having incomes within 50% of the median) and use a shift-share decomposition to explore how the decline of unionism contributes to the shrinking middle class. We also use the files to investigate the correlation between parents' union status and the incomes of their children. Additionally, we use federal income tax data to examine the geographical correlation between union density and intergenerational mobility. We find: 1) union workers are disproportionately in the middle-income group or above, and some reach middle-income status due to the union wage premium; 2) the offspring of union parents have higher incomes than the offspring of otherwise comparable non-union parents, especially when the parents are low-skilled; 3) offspring from communities with higher union density have higher average incomes relative to their parents compared to offspring from communities with lower union density. These findings show a strong, though not necessarily causal, link between unions, the middle class, and intergenerational mobility.
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The Wealth Elasticity of Political Contributions by the Forbes 400
Adam Bonica & Howard Rosenthal
Stanford Working Paper, September 2015
Abstract:
Inequality in campaign contributions in the American plutocracy has grown hand in hand with the growth in economic inequality. We report on the campaign contributions of the Forbes 400 wealthiest individuals from 1983 to 2012. We find that the wealth elasticity of individual contributions is around 1.0 without statistical controls but remains around 0.6 even with fixed effects for individuals and election cycles. The results suggest that the inequality in campaign contributions is largely driven by the increase in economic inequality. The sensitivity of contributions to individual wealth mainly benefits Republicans. In contrast, turnover in membership in the 400 has favored the Democrats.
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Are CEOs Born Leaders? Lessons from Traits of a Million Individuals
Renee Adams, Matti Keloharju & Samuli Knüpfer
Harvard Working Paper, October 2015
Abstract:
What makes a CEO? We merge data on the traits of more than one million Swedish males, measured at age 18 in a mandatory military enlistment test, with data on their service as a CEO of any Swedish company decades later. CEOs have higher cognitive and non-cognitive ability scores and are taller than typical members of the population. The difference in traits is larger when CEOs run bigger companies; it is smaller when they run family firms, in particular in the capacity of an heir or in a less competitive industry. Although the traits of CEOs compare favorably with the population, they are hardly exceptional: for example, the median large-company CEO belongs to the top-17% of the population in cognitive ability, and to the top-5% in the combination of cognitive, non-cognitive ability, and height. There are more than one hundred times as many men in managerial roles in the corporate sector who have better trait combinations than the median large-company CEO and who do not become a large-company CEO during our 7-year sample period. Being born with a favorable mix of traits may be necessary but is far from a sufficient condition for making it to the executive suite.
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The Willingness to State an Opinion: Inequality, Don't Know Responses, and Political Participation
Daniel Laurison
Sociological Forum, forthcoming
Abstract:
Most explanations of inequality in political participation focus on costs or other barriers for those with fewer economic, educational, and "cognitive" resources. I argue, drawing on Pierre Bourdieu's work on "political competence," that social position in the form of income also structures political participation through differences in the sense that one is a legitimate producer of political opinions. I test whether income differences in participation persist net of costs by examining nonparticipation in a setting in which barriers to participation are low: answering political survey questions. Lower-income people are more likely than others to withhold political opinions by saying "don't know" net of differences in education, "cognitive ability," or engagement with the survey exercise. Further, political "don't know" rates predict voting rates, net of other predictors. Efforts to democratize participation in American politics must attend not only to the costs of involvement but also to class-based differences in individuals' relationship to political expression itself.
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Income Inequality and Education
Richard Breen & Inkwan Chung
Sociological Science, August 2015
Abstract:
Many commentators have seen the growing gap in earnings and income between those with a college education and those without as a major cause of increasing inequality in the United States and elsewhere. In this article we investigate the extent to which increasing the educational attainment of the US population might ameliorate inequality. We use data from NLSY79 and carry out a three-level decomposition of total inequality into within-person, between-person and between-education parts. We find that the between-education contribution to inequality is small, even when we consider only adjusted inequality that omits the within-person component. We carry out a number of simulations to gauge the likely impact on inequality of changes in the distribution of education and of a narrowing of the differences in average incomes between those with different levels of education. We find that any feasible educational policy is likely to have only a minor impact on income inequality.
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Does Expansion of Higher Education Lead to Trickle-Down Growth?
Sebastian Böhm, Volker Grossmann & Thomas Steger
Journal of Public Economics, forthcoming
Abstract:
The paper revisits the debate on trickle-down growth in view of the widely discussed changes in the distribution of earnings and income that followed a massive expansion of higher education. We propose a dynamic general equilibrium model to dynamically evaluate whether economic growth triggered by an increase in public education expenditure on behalf of those with high learning ability eventually trickles down to low-ability workers and serves them better than redistribution through labor income taxation or education policies targeted to the low-skilled. Our results suggest that promoting higher education implies that low-skilled workers first lose in terms of consumption and income but eventually gain. Policies that aim at expanding the skills of low-ability workers make them better off only moderately because of adverse general equilibrium effects. Low-ability workers typically benefit most from redistribution.
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Does Compulsory Voting Increase Support for Leftist Policy?
Michael Bechtel, Dominik Hangartner & Lukas Schmid
American Journal of Political Science, forthcoming
Abstract:
Citizens unequally participate in referendums, and this may systematically bias policy in favor of those who vote. Some view compulsory voting as an important tool to alleviate this problem, whereas others worry about its detrimental effects on the legitimacy and quality of democratic decision making. So far, however, we lack systematic knowledge about the causal effect of compulsory voting on public policy. We argue that sanctioned compulsory voting mobilizes citizens at the bottom of the income distribution and that this translates into an increase in support for leftist policies. We empirically explore the effects of a sanctioned compulsory voting law on direct-democratic decision making in Switzerland. We find that compulsory voting significantly increases electoral support for leftist policy positions in referendums by up to 20 percentage points. We discuss the implications of these results for our understanding of the policy consequences of electoral institutions.
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Why does Income Relate to Depressive Symptoms? Testing the Income Rank Hypothesis Longitudinally
Hilda Osafo Hounkpatin et al.
Social Indicators Research, November 2015, Pages 637-655
Abstract:
This paper reports a test of the relative income rank hypothesis of depression, according to which it is the rank position of an individual's income amongst a comparison group, rather than the individual's absolute income, that will be associated with depressive symptoms. A new methodology is developed to test between psychosocial and material explanations of why income relates to well-being. This method was used to test the income rank hypothesis as applied to depressive symptoms. We used data from a cohort of 10,317 individuals living in Wisconsin who completed surveys in 1992 and 2003. The utility assumed to arise from income was represented with a constant relative risk aversion function to overcome limitations of previous work in which inadequate specification of the relationship between absolute income and well-being may have inappropriately favoured relative income specifications. We compared models in which current and future depressive symptoms were predicted from: (a) income utility alone, (b) income rank alone, (c) the transformed difference between the individual's income and the mean income of a comparison group and (d) income utility, income rank and distance from the mean jointly. Model comparison overcomes problems involving multi-collinearity amongst the predictors. A rank-only model was consistently supported. Similar results were obtained for the association between depressive symptoms and wealth and rank of wealth in a cohort of 32,900 British individuals who completed surveys in 2002 and 2008. We conclude that it is the rank of a person's income or wealth within a social comparison group, rather than income or wealth themselves or their deviations from the mean within a reference group, that is more strongly associated with depressive symptoms.
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Matt McGue, Aldo Rustichini & William Iacono
Journal of Personality, forthcoming
Objective: There is considerable evidence that college attainment is associated with family background and cognitive and non-cognitive skills. Behavioral genetic methods are used to determine whether the family background effect is mediated through cognitive and non-cognitive skill development.
Method: We analyze data from two longitudinal behavioral genetic studies, the Minnesota Twin Family Study, consisting of 1382 pairs of like-sex twins and their parents, and the Sibling Interaction and Behavior Study, consisting of 409 adoptive and 208 non-adoptive families with two offspring and their rearing parents.
Results: Cognitive ability, non-cognitive skills, and family background are all associated with offspring college attainment. Biometric analysis show that the intergenerational transmission of college attainment owes to both genetic and shared environmental factors. The shared environmental influence was not due to highly educated parents fostering non-cognitive skill development in their children and there was limited evidence that they foster cognitive skill development.
Conclusions: The environmental transmission of educational attainment does not appear to be a consequence of highly-educated parents fostering cognitive and non-cognitive skill development. Alternative mechanisms are needed to explain the strong shared environmental influence on college attainment. Possibilities include academic expectations, social network effects, and the economic benefits of having wealthy parents.
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Native Amazonian children forego egalitarianism in merit-based tasks when they learn to count
Julian Jara-Ettinger et al.
Developmental Science, forthcoming
Abstract:
Cooperation often results in a final material resource that must be shared, but deciding how to distribute that resource is not straightforward. A distribution could count as fair if all members receive an equal reward (egalitarian distributions), or if each member's reward is proportional to their merit (merit-based distributions). Here, we propose that the acquisition of numerical concepts influences how we reason about fairness. We explore this possibility in the Tsimane', a farming-foraging group who live in the Bolivian rainforest. The Tsimane' learn to count in the same way children from industrialized countries do, but at a delayed and more variable timeline, allowing us to de-confound number knowledge from age and years in school. We find that Tsimane' children who can count produce merit-based distributions, while children who cannot count produce both merit-based and egalitarian distributions. Our findings establish that the ability to count - a non-universal, language-dependent, cultural invention - can influence social cognition.
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The evolution of wealth inequality over half a century: The role of taxes, transfers and technology
Barış Kaymak & Markus Poschke
Journal of Monetary Economics, forthcoming
Abstract:
Over the last 50 years the US tax system went through a striking transformation that reduced the effective tax rates for top income groups and raised transfers to seniors. This paper investigates the macroeconomic repercussions of this change in policy, particularly for the distributions of income, wealth and consumption. Changes in taxes and transfers account for nearly half of the rise in wealth concentration. Nonetheless, their impact on the distributions of income and consumption has been minor due to changes in equilibrium prices and the offsetting effects of tax cuts and transfers on the dispersion of consumption. Results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality.
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Top Incomes, Rising Inequality, and Welfare
Kevin Lansing & Agnieszka Markiewicz
Federal Reserve Working Paper, September 2015
Abstract:
We introduce permanently-shifting income shares into a standard growth model with two types of agents. Capital owners represent the top quintile of U.S. households while workers represent the remainder. Our tractable model allows us to exactly replicate the observed U.S. time paths of the top quintile income share, capital's share of income, and key macroeconomic variables over the period 1970 to 2013. For the baseline simulation, the welfare gain for capital owners is 3.7% of per-period consumption while workers suffer a welfare loss of 1.4%. Using counterfactual simulations, we find that both groups could have achieved gains if redistributive government transfers had increased to around 18% of total output by the year 2013 - somewhat higher than the actual value of around 15% observed in the data.
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Chess players' fame versus their merit
M.V. Simkin & V.P. Roychowdhury
Applied Economics Letters, Fall 2015, Pages 1499-1504
Abstract:
We investigate a pool of international chess title holders born between 1901 and 1943. Using Elo ratings, we compute for every player his expected score in a game with a randomly selected player from the pool. We use this figure as the player's merit. We measure players' fame as the number of Google hits. The correlation between fame and merit is 0.38. At the same time, the correlation between the logarithm of fame and merit is 0.61. This suggests that fame grows exponentially with merit.
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Subjective relative deprivation is associated with poorer physical and mental health
Sandeep Mishra & Nicholas Carleton
Social Science & Medicine, forthcoming
Abstract:
Substantial epidemiological evidence has shown that income inequality and objective measures of relative deprivation are associated with poorer health outcomes. However, surprisingly little research has examined whether subjective feelings of relative deprivation are similarly linked with poorer health outcomes. The relative deprivation hypothesis suggests that inequality affects health at the individual level through negative consequences of social comparison. We directly examined the relationship between subjective feelings of personal relative deprivation and physical and mental health in a diverse community sample (n = 328). Results demonstrated that subjective feelings of personal relative deprivation are associated with significantly poorer physical and mental health. These relationships held even when accounting for covariates that have been previously associated with both relative deprivation and health. These results further support the link between relative deprivation and health outcomes and suggest that addressing root causes of relative deprivation may lead to greater individual health.
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Fearing the worst: The importance of uncertainty for inequality
Keith Blackburn & David Chivers
Economic Theory, October 2015, Pages 345-370
Abstract:
We present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital investment. This uncertainty implies the prospect that aspirations will not be fulfilled, the probability of which is greater the lower is the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any credit market imperfections, though they may appear as if they do.
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Job Authority and Support for Income Redistributive Policy
George Wilson & David Maume
American Behavioral Scientist, forthcoming
Abstract:
Building on substantive yet neglected foundations provided by classical sociological theorists - theorists who emphasized the experiential conditions of work in structuring ideology - we examine in this article the impact of job authority tasks on levels of support for policy to redistribute income. Such a focus contributes to a broader sociological understanding of the links between status, ideology, and political action. With data drawn from the 2010 and 2012 National Election Studies, we find that workplace experiences and tasks involving sanctioning/organizational responsibility as well as the hierarchical patterning of interactions on one's job help structure generalized views regarding inequality and policy orientations ultimately enacted outside of the workplace. In this regard, the number of authority tasks is inversely related to support for redistributive policy. Subsequent analyses, however, reveal this general pattern does not hold on the basis of race: less variation in policy support as well as greater levels of policy support is expressed by African Americans than Whites across all authority task levels. We conclude by discussing how our findings inform broader conceptions regarding the link between work, ideology, and politics, as well a deeper sociological sense of the attitudinal consequences of work and the underpinnings of tenets of American stratification ideology.
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Neighborhood Dynamics and the Distribution of Opportunity
Dionissi Aliprantis & Daniel Carroll
Federal Reserve Working Paper, October 2015
Abstract:
Wilson (1987) argued that policies ending racial discrimination would not equalize opportunity without addressing residential sorting and neighborhood externalities. This paper studies related counterfactual policies using an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality determined by the human capital in their neighborhood. We calibrate the model with two neighborhoods and neighborhood-specific production technologies to data from Chicago when mobility was restricted by race. We then conduct three numerical experiments by eliminating the restriction on neighborhood choice, equalizing production technologies, or both. We find that allowing residential mobility generates persistent income inequality, even when technologies are equalized across neighborhoods. Equalizing technologies only equalizes opportunity for residents in the originally segregated neighborhood when high-income households reside there. Our findings suggest that policies aimed at improving outcomes in impoverished areas should feature incentives for high-income households to stay or migrate into the neighborhood.
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Income Inequality and Asset Prices under Redistributive Taxation
Lubos Pastor & Pietro Veronesi
University of Chicago Working Paper, October 2015
Abstract:
We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions.
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Kwan Ok Lee & Masaki Mori
Real Estate Economics, forthcoming
Abstract:
This study is the first to examine the relationship between conspicuous demand and housing price dynamics. We hypothesize that conspicuous consumers would want high-end homes to signal their wealth and this housing consumption behavior would induce greater deviations from fundamental house prices. We test this by using a unique dataset that matches the consumers' appetite for nonhousing luxury goods from Google Insights for Search to housing premiums that they pay for high-end houses in U.S. Metropolitan Statistical Areas (MSAs) during 2004-2011. The estimation results demonstrate that controlling for a wide range of MSA demographic and economic characteristics, conspicuous demand has a significant, positive relationship with housing premiums. This relationship varies spatially and temporally. Conspicuous demand has a stronger relationship with a price increase in high-end homes in MSAs with a steady, higher housing premium than in MSAs with a volatile, lower premium during the boom period. In MSAs with a steady, higher housing premium, the relationship remains significant even during the bust period, potentially contributing to maintaining higher housing premiums.
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Changes in Inequality and Generalized Trust in Europe
Javier Olivera
Social Indicators Research, October 2015, Pages 21-41
Abstract:
This paper analyses the determinants of trust in a pool of 34 European countries over the period 2002-2012. We find that income inequality is negatively related with generalized trust when we analyze the pooled data of individuals with multilevel models, confirming a well-established result in the analysis of cross-country differences in trust. However, we are unable to find the same significant relationship when we estimate fixed effects models with a panel dataset composed by countries. It is plausible that unobserved effects may account for the significant and negative relationship between economic inequality and trust at the cross-sectional level. In contrast, in the fixed effects models, we find negative and significant effects of ethnic and linguistic fractionalization, discrimination (general or based on migrant status) and crime rates on trust.