Stay classy
A theory of top income taxation and social insurance
Francisco Gonzalez & Jean-François Wen
Economic Journal, forthcoming
Abstract:
The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply during the 1930s and 1940s, but then gradually decreased, even as social transfers continued rising. We propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.
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Voting for Income-Immiserizing Redistribution in the Meltzer–Richard Model
Richard Barnett, Joydeep Bhattacharya & Helle Bunzel
Economic Inquiry, April 2014, Pages 682–695
Abstract:
This paper argues that income received via redistributive transfers, unlike labor income, requires no direct sacrifice of leisure; this makes it attractive to many voters even if it leaves them poorer. This point is made within the classic Meltzer and Richard (1981) model wherein heterogeneous voters evaluate an income-redistribution program that finances a lump-sum transfer to all via a distorting income tax. The political-equilibrium policy under majority rule is the tax most preferred, utility-wise, by the median voter. Ironically, this voter, and many poorer voters, may support a redistribution policy that leaves them poorer in income terms but with higher utility.
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Peter Enns et al.
Journal of Politics, April 2014, Pages 289-303
Abstract:
This article develops and tests a model of conditional status quo bias and American inequality. We find that institutional features that bias policy outcomes toward the status quo have played a central role in the path of inequality. Using time-series analysis of top income shares during the post-Depression period, we identify the Senate as a key actor in the politics of income inequality. Our findings suggest that the supermajoritarian nature of the Senate and policy stagnation, when coupled with economic and social factors that produce rising inequality, create a situation in which inequality becomes difficult to reverse.
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Evelyne Huber & John Stephens
Socio-Economic Review, April 2014, Pages 245-267
Abstract:
This article analyses the determinants of market income distribution and governmental redistribution. The dependent variables are Luxembourg Income Study data on market income inequality (measured by the Gini index) for households with a head aged 25–59 years and the per cent reduction in the Gini index by taxes and transfers. We test the generalizability of the Goldin–Katz hypothesis that inequality has increased in the USA because the country failed to invest sufficiently in education. The main determinants of market income inequality are (in order of size of the effect) family structure (single mother households), union density, deindustrialization, unemployment, employment levels and education spending. The main determinants of redistribution are (in order of magnitude) left government, family structure, welfare state generosity, unemployment and employment levels. Redistribution rises mainly because needs rise (that is, unemployment and single mother households increase), not because social policy becomes more redistributive.
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Nordic exceptionalism? Social democratic egalitarianism in world-historic perspective
Mattia Fochesato & Samuel Bowles
Journal of Public Economics, forthcoming
Abstract:
We ask: In what respect, if any, are the Nordic economies exceptionally egalitarian when viewed from a world historical perspective? We use archaeological, historical and ethnographic as well as contemporary evidence to estimate the degree of wealth inequality over the past three thousand years. Our data set includes measures of inequality of wealth from economies based on foraging, sedentary hunting and gathering, horticulture, herding, and agriculture, and under institutions ranging from communal property, ancient slavery, feudalism, pre-modern centralized authoritarian systems, pre-modern urban economies, as well as contemporary capitalist economies governed by democratic polities. The countries exemplifying the Nordic model are not exceptionally equal in the ownership of material wealth. Moreover, the advent of social democracy in the Nordic nations did not result in a more equal distribution of years of schooling. But intergenerational economic and social mobility appears to be exceptional in the Nordic nations, and by most measures, inequalities in living standards in the Nordic economies are less than in other advanced economies. The closest Nordic analogy in our data set is the egalitarian distribution of well-being found in some horticultural and (especially) forager economies, in which neither human nor material wealth is strongly transmitted across generations, and one’s ownership of material wealth is not very important as a source of an individual’s livelihood, because one’s livelihood depends more on non-material forms of wealth including group membership, independently of material wealth.
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Cheryl Boudreau & Scott MacKenzie
University of California Working Paper, February 2014
Abstract:
Income inequality has risen dramatically in the United States, with potentially negative social, economic, and political consequences. Governments can use redistributive tax policies to combat inequality, but doing so requires public support. When will voters support redistributive tax policies? We address this question by conducting survey experiments where citizens express opinions about tax policies in a real-world context. We manipulate whether they receive party cues, information about rising income inequality, both, or neither type of information. We find that when citizens are given information about income inequality, they connect it to their views on redistributive tax policies. We also find that inequality information can induce Republicans to support a tax increase that their party opposes. These results challenge the prominent view of citizens as too ignorant to connect information about inequality to specific taxes. They also suggest that efforts to inform the electorate about inequality can influence tax policy opinions.
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Taekjin Shin
Social Forces, forthcoming
Abstract:
The widening pay gap between corporate executives and rank-and-file workers has attracted much attention in the United States, but the sources of the pay gap have not been systematically examined. In this paper, I use a relative bargaining power approach to explore the sources of pay disparity between executives and nonexecutive employees in the United States. I argue that the bargaining power of labor affects executive compensation, nonexecutive compensation, and the executive-worker pay gap and that this effect is moderated by the characteristics of the chief executive officers (CEOs) who implement organizational policies. An analysis of 185 US firms provides evidence that labor's bargaining power reduces the pay gap between executives and nonexecutive employees. This effect is mainly through the unions' impact on executive compensation. The results also suggest that labor's effect of narrowing the gap becomes weaker when the CEO has a finance background or when the CEO was recruited from outside the company rather than being promoted from within. These findings shed new light on our understanding of the linkage between firm-level dynamics and the rise in income inequality.
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The impact of redistributive policies on inequality in OECD countries
Philipp Doerrenberg & Andreas Peichl
Applied Economics, Spring 2014, Pages 2066-2086
Abstract:
Due to behavioural effects triggered by redistributional interventions, it is still an open question whether government policies are able to effectively reduce income inequality. We contribute to this research question by using different country-level data sources to study inequality trends in OECD countries since 1980. We first investigate the development of inequality over time before analysing the question of whether governments can effectively reduce inequality. Different identification strategies, using fixed effects and instrumental variables models, provide some evidence that governments are capable of reducing income inequality despite countervailing behavioural responses. The effect is stronger for social expenditure policies than for progressive taxation.
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Do assortative mating patterns for IQ block upward social mobility?
W. Johnson, M. McGue & W.G. Iacono
Personality and Individual Differences, April 2014, Pages S12–S13
Abstract:
In the Minnesota Twin Family Study, assortative mating for IQ was greater than .3 in both the 11- and 17-year-old cohorts. Recognizing this, genetic variance in IQ independent of SES was greater with higher parental SES in the 11-year-old cohort. This was not true, however, in the 17-year-old cohort. In both cohorts, people of higher IQ were more likely to have ‘married down’ for IQ than people of lower IQ were to have ‘married up’. This assortative mating pattern would create greater genetic diversity for IQ in people of higher IQ than in people of lower IQ. As IQ is associated with SES, the pattern could be one reason for the observation of greater genetic variance in IQ independent of SES with greater parental SES in several samples. If so, it could block upward social mobility among those already in lower-SES groups. I discuss possible involved mechanisms and social implications.
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A Note on Income Inequality in East and Central Europe
Frederic Pryor
Comparative Economic Studies, March 2014, Pages 42–51
Abstract:
This paper examines the proposition that the transition process to a capitalist economic system in Eastern and Central European nations has introduced greater income inequality than in long-time capitalist nations at similar stages of development. In the empirical analysis, I use comparable inequality data from the Luxembourg Income Study, hold constant a number of general causal determinants of inequality, and show that such inequality in Eastern and Central Europe is significantly less than in nations where capitalism has long held sway.
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Equilibrium Tax Rates and Income Redistribution: A Laboratory Study
Marina Agranov & Thomas Palfrey
NBER Working Paper, February 2014
Abstract:
This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate social preferences in the form of altruism and inequality aversion. The experiment varies the amount of inequality and the collective choice procedure to determine tax rates. We report four main findings. First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude. Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of the median wage worker. Third, we do not observe any significant differences in labor supply or average implemented tax rates between a direct democracy institution and a representative democracy system where tax rates are determined by candidate competition. Fourth, we observe negligible deviations from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion.
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Visibility, Values, and Voters: The Informational Role of the Welfare State
Jane Gingrich
Journal of Politics, April 2014, Pages 565-580
Abstract:
How do citizens’ preferences over social policy shape their vote choice? In this article, I argue that the relationship between individuals’ values and voting behavior is powerfully conditioned by the informational structure of the welfare state. More visible welfare states provide citizens with greater information on social policy, allowing them to more easily connect these preferences to the political process. Where visibility is low, voters place less importance on social-policy issues in voting. I test this claim against data from 55 elections from the Comparative Study of Electoral Systems and the 1996 and 2006 International Social Survey Program. I find compelling evidence that where welfare-state visibility is high, voters attach more weight to spatial distance from parties in voting, are more likely to see welfare related issues as important, are better able to place parties on a left-right spectrum, and have more consistent policy preferences.
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Generational Inequalities and Welfare Regimes
Louis Chauvel & Martin Schröder
Social Forces, forthcoming
Abstract:
This paper uses a new age period cohort model to show that among cohorts born between 1935 and 1975, cohorts born around 1950 are significantly above the income trend in most countries. However, such inequalities between generations are much stronger in conservative, continental European welfare states, compared to social democratic and liberal welfare states. As we show, this is because conservative welfare states expose some cohorts to high youth unemployment and make lifetime earnings dependent on a favorable entry into the labor market. We thus demonstrate that conservative welfare states have put the burden of adjustment to the post-1975 economic slowdown on birth cohorts that could not get stable jobs before 1975, while similar cohort inequalities are much weaker in liberal and social democratic welfare states. In these latter two welfare regimes, the burden of adjustment to the post-1975 economic slowdown was not put on the shoulders of some cohorts relative to others. Our analysis is the first to show which welfare regimes are more conducive to such inequalities between cohorts and what mechanisms lead to these material cohort inequalities.
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Political Leaders’ Socioeconomic Background and Fiscal Performance in Germany
Bernd Hayo & Florian Neumeier
European Journal of Political Economy, June 2014, Pages 184–205
Abstract:
This paper investigates whether the socioeconomic status of the head of government helps explain fiscal performance. Applying sociological research that attributes differences in people’s ways of thinking and acting to their relative standing within society, we test whether the social status of German prime ministers can help explain differences in fiscal performance among the German Laender. Our empirical findings show that the tenures of prime ministers from a poorer socioeconomic background are associated with higher levels of public spending and debt financing. Social mobility has an asymmetric influence: social climbers adapt to their new class, whereas downwardly mobile prime ministers remain primarily influenced by their parents’ upper-class status.
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Skills and the Evolution of Wage Inequality
Elena Capatina
Labour Economics, forthcoming
Abstract:
This paper studies wage inequality in the United States between 1980 and 2010 in a framework that accounts for changes in the employment of physical and cognitive skills and their returns. I find that the secular rise in the employment of cognitive skills is largely accounted for by labour force composition changes in shares of gender-education groups rather than changes that occur within these groups. Average employed skills differ greatly across groups, but over time their average employed cognitive skills have remained approximately constant. Returns to cognitive skills increased very sharply for high skill levels, more gradually around mean levels, and decreased at low levels. Returns to physical skills generally declined. These trends account for approximately 63% of the increase in the college wage premium, with changes in returns to cognitive skills playing a dominant role.
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Austin Nichols & Philipp Rehm
Review of Income and Wealth, forthcoming
Abstract:
We present a measure of income risk that decomposes income dynamics into long-run inequality, volatility (inter-temporal variability around individual-specific growth rates), and mobility risk (variation in individual-specific growth rates). We measure these income risk components in panel data from 30 rich democracies. We use this comprehensive collection of panel data to analyze long-terms trends in income dynamics for four countries (Canada, Germany, Great Britain, and the United States), and cross-national patterns of income dynamics for an additional 26 countries. We find that tax and transfer systems lower income risk, but less so in the United States than in other comparable countries. We find that higher incomes tend to grow faster and to be more volatile than lower incomes. We find that the United States is exceptional in its level of, and increase in, each type of income risk. Various other measures of mobility are positively correlated with mobility risk.
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Garance Genicot & Debraj Ray
NBER Working Paper, March 2014
Abstract:
This paper develops a theory in which society-wide economic outcomes shape individual aspirations, which affect the investment incentives of individuals. Through its impact on investments, aspirations in turn affect ambient social outcomes. We explore this two-way link. A central feature is that aspirations that are moderately above an individual’s current standard of living tend to encourage investment, while still higher aspirations may lead to frustration and lower investment. When integrated with the feedback effect from investment, we are led to a theory in which aspirations and income evolve jointly, and the social determinants of preferences play an important role. We examine conditions under which growth is compatible with long-run equality in the distribution of income. More generally, we describe steady state income distributions, which are typically clustered around local poles. Finally, the theory has predictions for the growth rates along the cross-section of income. We use these predictions to calibrate the model so that it fits growth data by income percentile for 43 countries, and back out the implicit aspirations-formation process that underlies these observations.