Income Inequality: Evidence and Implications with Emmanuel Saez

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that was fantastic. thanks.

👍︎︎ 1 👤︎︎ u/salvia_d 📅︎︎ Mar 12 2013 🗫︎ replies
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- [Narrator] This program is presented by University of California Television. Like what you learn? Visit our website or follow us on Facebook and Twitter to keep up with the latest UCTV programs. Also, make sure to check out and subscribe to our YouTube original channel UCTV Prime available only on YouTube. (light acoustic music) - I'm Margaret Chowning, Professor of Latin American History and Chair of the Moses Lectureship Committee. We're pleased, along with the graduate division, to have invited this year, Emmanuel Saez, this year's speaker in the Bernard Moses Memorial Lecture Series. As a condition of this bequest, we are are obligated, we're also delighted, but we're obligated to tell you how the endowments supporting the lectures came to UC Berkeley. In 1937, University of California President, Robert Gordon Sproul and the UC Board of Regents established the Bernard Moses Memorial Lectureship in the Social Sciences. The Lectureship honors the memory of the late Bernard Moses, a Professor of History and Political Science at the University of California from 1875 to 1911 and an Emeritus Professor from 1911 until his death in 1930. Professor Moses earned a worldwide reputation for his contributions to understanding the problems of the Latin American Republics and was a pioneer scholar of Latin American History. Professor Moses served as a member of the United States Philippine Commission from 1900 to 1904. Past lecturers have included Herma Hill Kay, Lloyd Ullman, Nicholas Riasanovsky, George Lakoff, Kenneth Stampp, Eugene Hammel, Ken Jowitt, and Carolyn Merchant. Now I'd like to say a few words about our lecturer today, Emmanuel Saez. Professor Saez is professor of economics and director of the Center for Equitable Growth at the University of California at Berkeley. His research focuses on tax policy and inequality, both from theoretical and empirical perspectives. Jointly with Thomas Piketty, he has constructed long-run historical series of income inequality in the United States that have been widely discussed in the public debate. His research has advanced our understanding of income inequality in relation to taxation, a critical and timely issue in the wake of the recent economic recession. His landmark article, Striking It Richer: The Evolution of Top Incomes in the United States revealed the vast and growing gap between the incomes of the nation's highest earners, the 1%, and the rest of Americans. Saez has not only pioneered useful methods for understanding long-term income patterns, but has also explored theoretical possibilities for equitable growth. He continues to probe the dynamics of income inequality and produce models for optimal taxation. Emmanuel Saez received a BA in mathematics at the École Normale Supérieure in 1994. He earned both an MD in economics from the department of laboratory of applied and theoretical economics and a PhD in economics from MIT in 1999. He served as an assistant professor of economics at Harvard University from 1999 to 2002, and joined the Berkeley faculty in 2002. He was awarded the John Bates Clark Medal of the American Economic Association in 2009, and a MacArthur Fellowship in 2010. Please join me in welcoming Professor Emmanuel Saez. (audience applause) - Thank you. Thank you, thank you very much for this introduction. Thank you all for coming tonight to this lecture. So tonight, I will talk about the research that I've been carrying out with many other researchers about income inequality evidence and implications. So let me introduce the topic. So as you all know free market economies generate substantial economic growth, but they also generate inequality and indeed, historically, this has been the main criticism of free market economies. And therefore this raises two set of issues for economists. The first one is a positive question about measuring and understanding inequality. What is the level of inequality? How does it change over time? What are the factors that drive inequality? And the second, this raises policy questions. That is, should the government try and reduce inequality using redistributive policies such as taxes, transfer programs, and an array of regulatory policies? So those are the questions that I would like to talk about tonight. So a simple way to measure inequality is to ask the question, a simple question, what share of total market income goes to various groups in the income distribution, such as the top 1%? So what fraction of total income does the top 1% earn? So it turns out that to answer that question, income tax statistics are probably the most valuable resource because they have been available for a very long time, almost a century in United States. Like, the federal individual income tax turns 100 next year. It started in 1913, and it's also available across a wide range of countries. So with Piketty, indeed we have used those data to analyze income concentration in the United States starting in 1913 when the data start, and since then, we've continued this research agenda, and many other researchers have joined in, so that a large number of countries, about 25, have now been analyzed and those studies have been summarized in various studies. And we've put online in what we have called The World Top Incomes Database, which is a website that you can easily go to and you can see, you know, in read the countries here that have been studied, so most of Europe, North America, a few developing countries, and in blue, the countries that are currently being studied. So, let me show you some evidence from this collective research, first starting with the United States. So, this simple chart here shows you the share of total pre-tax income, so before government taxes and before the government redistributes those taxes in part in the form of transfers, that go to the top 10% from 1917 to 2010. And so what you can see in this graph, is that the shape of this curve, as the forms a U, with very high levels of income concentration with the top 10% capturing almost half of total income in the first part of the 20th century, then a precipitous drop during World War II, that brings the share down to the low 30s, and you can see that for three decades, that top 10% income share stayed relatively low, then of course, the striking thing is what has happened in the last 30 years, where you see that share has grown up pretty much back where it was at the beginning of the century, reaching a peak of almost 50% in 2007. Note that it has dropped somewhat during the Great Recession, but you can se that already in 2010, it's started back up, showing that the Great Recession is certainly not an event that per se is going to dramatically change the picture. Now, notice that the increase here from 33 to 50% in 2007 is 17 points of total income have gone toward the top 10%. What is striking is to see how concentrated this phenomenon has actually been, and you can see that in the next chart, where we decompose the top 10% into three groups. So the famous top 1% from the press are in black, and the next groups, the next 4% in blue, and the next 5% in red. So the combination of those three groups is what constitutes the top 10%. And so the striking thing that I want you to notice, is that most of the variations actually come in the top 1% group, and in particular, the very large increase since the late, since the 1970s has really been concentrated in the top 1%. That goes from 9% to a maximum of 23%. So it's 14 points out of those 17 points I was mentioning before really is top 1% phenomenon. You can see that those upper middle class groups below increase slightly, but not nearly as much. And so actually the higher you go in the distribution, the more extreme it is. So here we take the top point one percent this time, and you see that the increase, they captured only 2.5% in the late 70s, and they reached a peak of about 12% in 2007. Okay, so given this evidence, you may ask me, why do we care about top income shares? Don't we care more about how the middle class or the poor are doing? So at the onset, I should say, you know, the emphasize the first point, inequality matters because people evaluate their economic well-being relative to others and not in absolute terms. That is, if people were really behaving as most economic models assume, that is, you value how well you are doing only in absolute term, I probably wouldn't be here tonight with such a big group of people listening to me. Inequality is interesting because the public cares about it, and the public cares about it because we don't function, or we don't think, in absolute terms. We think in relative terms. Now, the second point I want to make for why top income shares matter. They matter because those changes that I've pointed out to you have been actually so large that they really dramatically affect the way you value economic performance, country-wide. So to put it simply, the surge of the top 1% income share has been so large that income growth of the bottom 99% is only about half the growth of the average income in the economy. That is taking away the top 1% and you divide by two the growth rate, real growth rate per family in the economy over the last decades. Okay, and then of course, I can make points three and four, that is, the surge in top incomes naturally gives top earners more ability to influence the political process. So a variety of pathway, you know, think tanks, lobbying, campaign funding, etc., even though we know, that of course it's not the sole determinant of electoral outcomes, but certainly they play a role and they play a growing role as their incomes increase. And finally, these indeed matters because it can undermine confidence of the public in the economic and political system. And when this confidence is undermined, of course, the public will want changes, and we hope that in a democracy, of course, those changes will take place through a democratic reform and there are many historical examples, and I'll come back to them. So just to show you numbers, recent numbers that illustrate what I just said. So here in this table, I show you average income growth per family, you know, before taxes. So those are pre-tax market income over the last 17 years, starting in '93 to 2010, average incomes have grown 14%, which is not a very large number. It's about slightly less than 1% per year. Top 1% incomes have grown much faster, almost 60% income growth, and the striking thing is that when you remove the top 1% that has done so well and you look at the bottom 99%, the growth is divided by about two. You know it goes from about 14% to 6.5%, so that effectively the top 1% captures about half of total economic growth. So here I've broken the period in a number sub-periods, you know, putting in red the recessions, and in black the expansions. In all periods, in all expansions, during the Clinton administration, the Bush administrations, and the recent recovery, the top 1% does a lot better than the bottom 99%, but the difference was that in the Clinton administration, the bottom 99% was still growing at a pretty fast rate. So that inequality was not so much on the radar screen in the press, in the public, in the policy discussion. That changed, you know, the Bush expansion was different in the sense that there you really had an enormous difference with the bottom incomes growing only 7% in the five years of the Bush expansion relative to the more than 20% growth during Clinton administration. So of course, during the Great Recession, both groups lost quite a bit of ground. The top 1% fluctuations are always bigger in recessions, but what is really striking is that the bottom 99% lost about 10% in real term, in per family income, before government taxes and transfers. In reality, the net effect was lower thanks to a number of transfer programs, you know, food stamps and federal that kicked in and helped, unemployment insurance partly replace those income. But this fall for the bottom 99% is truly enormous. That is, we haven't seen anything like that since the Great Depression. And in the first year for which we have data, what is striking is that in the recovery, you know, 2.3% gain in 2010, almost all of that has gone to the top 1% with virtually no growth yet for the bottom 99%. So those numbers are striking, and they illustrate why inequality is so much discussed. So let me continue with U.S evidence, showing you something about the composition of top incomes, and that's very important for discussion that is going to follow. So here it's not super visible, but what this graph shows you, if you look at the top line here, it's the share of the top point one percent, what I showed you before. But what you see next is that for each year, the income of the top point one percent are decomposed into various groups, starting with salaries, business income, capital income, and capital gains. And so what I want to point out is that in the early part of the 20th century you see that the vast majority of top incomes was composed of capital income, which are returns on assets. So what happen is that here you have the Gilded Age, where a few big business monopolies developed, they were nicknamed the Robber Barons, so build enormous fortunes. That here, the Robber Barons here are old or they've passed the fortune to their heirs, so these people at the top of the distribution are really, if you will, rentiers. People who live off the very large fortunes that were accumulated through business in the decades before. And those fortunes come down dramatically, you know, during the Great Depression, the New Deal of Roosevelt, World War II, and they stay relatively low. And then what you see here is a phenomenon that is quite a bit different, and you see there is a lot less black here than there and there is a lot more salaries. That is a dramatic increase here in top incomes as being first the creation, if you will, of new fortunes. So you can think a`bout the new companies that have emerged, you know, Microsoft, Google, Facebook, etc., and also, new forms of jobs, like the hedge fund managers, etc., that have built fortunes. The point is that those are new fortunes that people initially make through their labor, okay? Most of the people now at the top have been self-made, or if you will, they are earning their income through their labor. They are not inheriting huge fortunes from prior decades, and that's very important because that affects a lot the way the public perceives whether the process, you know, inequality is fair or unfair. Naturally, most people tend to think that in a well-functioning market, earned income is fair. In contrast, you know, if you've received an enormous fortune from your parents, the public values that a lot less, you know, and could understand why you should be taxed, for example, through inheritance taxation, etc. So that certainly plays a role in the debate. So the next thing, so let me re-emphasize that in the short run, the top 1% has taken a hit in the Great Recession, because capital gains, stock options, business profits that constitute the bulk of top incomes are hit a lot harder. In contrast, wage earners that live below the top 1%, so in the top 10% but not in the top 1%, do well, so you see this is a striking thing. I haven't pointed out, but you see that during the Great Recession here, where top incomes fall, you see that the next two groups do actually gain, and the same was true during the Great Depression. So those are salaried people, you know, in the upper groups, so you can think about well-paid university professors would be an example of people living in those groups. We tend to keep our salaries, you know, even if there are budget cuts, etc. We tend to do pretty well in bad times. But the key thing from this graph is that you can see that during recessions, so for example, in the dot-com crash of 2000, top incomes aren't so lost a lot. And actually a lot of that was lost in California for new companies, etc., tech companies collapse. But you see that that fall doesn't last. The top incomes bounce back and we are already seeing it here at the end of the Great Recession. Top incomes are starting to bounce back. And contrast that with the Great Depression here, where you don't, you see them bouncing back a little bit, but not for long, and then they continue dropping during the New Deal and World War II. So this contrast is very important because it shows you, and that's something you can see as well in other countries, is that first top incomes are hit by a shock, so it can be here, a Great Depression. In other countries it can be a war. But if there isn't a significant change in government policies, top incomes will typically bounce back. And in the historical case where they don't, it's because the government has really changed the rule of the game through a number of regulatory and tax policies that drives down the income concentration. So here in the current policy debate, certainly we are not contemplating policy changes that are nearly as large as what was done in the New Deal. So my best bet is that, no matter what the outcome is of the negotiation about the fiscal cliff between what President Obama has proposed and what the Republicans would like, those parameters, are probably not radical enough to dramatically affect the picture of income concentration in the United States. Okay, so now let me go back to the World Top Income Database and give you some international perspectives. So let me start here with English-speaking countries. So in this chart, besides the United States in black, I have put the United Kingdom in red, and Canada in blue. And so what is striking in this chart is that all three countries follow pretty similar trends. All three curves are U-shaped. They all start with high levels of income concentration, that's the top 1% share. It falls a lot, it falls even the most in the United Kingdom, and then it goes back up, perhaps not as much as in the U.S., but still significantly so. So you might ask, maybe this is a universal phenomenon, this U-shape, this is actually not the case. 'Cause if we now look at continental Europe and Japan, so I've picked two European countries, France in black, Sweden in blue, and then Japan in red. You see that the first part of the picture looks quite similar to what we've seen for the English-speaking countries. A dramatic drop that is very important. In the beginning of the 20th century, those European countries, Sweden, you know, who is now known as the most egalitarian country had actually enormously high income concentration actually. Off the chart, as you can see here for Sweden. You know, I've put the same scale as the U.S. And all three countries here do experience a large drop in income concentration that follows the historical pattern or the historical events in each country. You see that for Japan, the dramatic event is World War II, and you know and then the U.S. occupation and economic policies, you know, actually decided by the U.S. France, you know you have first a shock in the 20s, then the war. Sweden has big shocks in the inter-war period. Not so much in World War II, because they weren't part of the conflict. Bottom line, through different historical processes, all three countries have dropped down their income concentration dramatically, like the English-speaking countries. And so what is different is that, in recent years, the increase in income concentration in those countries is not nearly as large as what has been experienced in the English-speaking countries. It has gone up some, but you see if you compare the charts that are on the same scale, you see it's really quantitatively very, very different. So this point is important because it shows you that the very large increase in income concentration for the United States is not a universal phenomenon, which means that it cannot be explained solely by, say, changes in technology and globalization, because all those economies are advanced economies that go through pretty much the same technological and globalization forces. What those graphs show you is that there is more than just technology, obviously, the way institutions and government policies react to technological changes play a major role in the shaping of income concentration. So in terms of those policies, I'm going to focus next on the role of top tax rates, which is indeed, I will hopefully convince you of that fact, that this is a major component explaining the changes in pre-tax, even before tax, income concentration. So you've, all of you, I'm sure have heard about the debate on how much we should tax the rich. Indeed it is at the core of the negotiations on the fiscal cliff, but so, here is briefly summarized, the situation. So pre-tax, top U.S. incomes have surged in recent decades, with the top 1% income share increasing from nine to about 20% today. Okay, so that means, that if you, there is a lot more money now at the top, so potentially, a lot more income to tax. So there is perhaps fiscal reserve has built up definitely at the top of the distribution. So in 2010, top 1% income earners pay an average federal individual tax rate of 22%. And so that represents in taxes 2.6% of GDP. And so if you do a very naive computation and say, let's increase their tax from 22% on average to 33% on average, you would raise 1.3 GDP point, which is 200 billion per year, which is, you know, according to the ten-year projection that is used for formal budgeting, that would be 2.6 trillion. Obama has proposed raising taxes by about 1.6 trillion on this group, and that is about 1% of GDP, basically bringing back the taxes on top incomes to what it was in the early part of the Clinton administration. So it doesn't go from 22 to 33, but it would go from 22 to perhaps 28%. So obviously you can see with those numbers that indeed the top 1% has a large potential tax capacity, but higher taxes on the top 1% might discourage economic activity, encourage tax avoidance, so that those naive calculations might not give you the right numbers to really understand what would happen if we were to increase significantly taxes on top earners. So, let me discuss briefly economic effects of taxing the top 1%. I will show you that indeed there is strong empirical evidence that pre-tax top incomes react to top tax rates, that is the naive calculation is wrong in the sense that there is a response to the tax system at the top. However, just knowing that there is a response is not enough to decide whether it's a good or bad thing to tax top incomes. You have to understand what is the mechanism through which top incomes respond. And here in this slide I've laid out three scenarios. So the first one is a classical supply-side scenario, that's the conservative argument. You tax top earners more, and they are going to work less and earn less, and in that scenario, obviously top tax rates should not be too high, because it's self-defeating above some point. Second scenario is about tax avoidance, tax evasion. Top earners are going to avoid or evade more when top tax rate increases. So that increasing tax rates in the current system is also going to be self-defeating. The very big difference, though, with this scenario is that if you're in scenario two, there is a smarter solution, which consists in first fixing the tax system so that you eliminate avoidance opportunities. And there is a very large literature that's showing, indeed, that the rich are savvy about exploiting tax avoidance opportunities when they arise, but also that the government policies play a major role in shaping how many of those tax avoidance opportunities are present. So in that sense, I agree with both parties, Republicans and Obama, that broadening the base at the top of the income distribution is very important, and it is indeed a first basic step that you need to make if you want to effectively be able to raise revenue from the top. But then the second thing is that once you've brought in the base at the top, that's when precisely you are in shape and you're able to raise top tax rates. Now, a third scenario that I want to point out is rent-seeking, and so is the Occupy Wall Street movement. That's a scenario that has been discussed much more widely in the press. The idea there is that the very large gains that we've seen in those early charts, perhaps, are not due to more economic activity created by the top 1%, but by the ability of the top 1% to extract, at the expense of the bottom 99%, a larger share of the economic pie. And it's possible that the top 1% is more able to extract a larger share of the pie when top tax rates are low, because it gives them more incentives, if you want, to go more aggressively after higher levels of compensation. Which means that top incomes are going to react to top tax rate, but the policy implication is radically different. In that case, you want high top tax rates precisely to prevent top earners from aggressively extracting a large share of income. Okay, now so I've laid out the three theoretical scenarios, so which situation are we in? The first graph I want to point out here is going back to the top 1% in the U.S. in black, but now I've put also on that graph with this scale here in red, the top marginal tax rates for the federal individual tax rate, and so what you can see very clearly is that the top individual tax rate was very high starting with the end of the Great Depression, World War II, post-World War II, and then came down dramatically starting in the 70s. So that you can see that the red curve is the inverse image of the black curve. And remember, the black curve is pre-tax income. The share of total pre-tax income going to the top 1%, and so that, in principle, there is no mechanical relationship between the two curves, so when you see this evidence, and it's also borne out by the analysis of other countries. You have to conclude that indeed there is a strong relationship, that is if the U.S. were to go back to very high tax rate, like 70%, 80%, 90%, it's very unlikely that top incomes, pre-tax, would stay at the very high level that they are at now. So you see, just to put that in perspective, the debate today is between Clinton versus Bush tax rates, so you see it's 39.6 versus 35. This is a minuscule change relative to the enormous changes in top tax rate that the U.S. has experienced. That's why I was saying early on that probably going back to Clinton is not going to dramatically affect top incomes. But certainly if we were going back to what it was under Carter, you know, or Eisenhower, etc., it would make a big difference. So, now of course, this chart here showing you the relationship between pre-tax incomes and top tax rates doesn't tell us in which of the three scenarios we are in, and it's critical to know where we are in. So the first one I want to dispel is the notion that tax avoidance explains everything. So that's a criticism that we've received now more from conservative circles saying, look, this is a nice chart, but perhaps it's a chart just showing you that the rich are savvy about avoiding taxes and doesn't tell us anything about how really the rich, how rich they are relative to the average, because you are only picking up tax avoidance. Namely, now top earners do report their full income and that's why they look so high. Back then, with tax rates so high, they were hiding their income and that's why you didn't see them on the tax statistics. So the reason why I think this is not right is for the following reason. To get this right in principle here in black, you would want the full economic income of the top 1%, that is their income that is taxed according to the regular tax schedule, plus the extra income that avoids the very high tax rates by showing up in other forms that are tax favored. And it turns out that this black curve is the sum of the ordinary income taxed at the high rates, plus the tax-favored capital gains. That is if use in this graph, if I add in this chart, ordinary income, that's the white curve here, it is slightly lower, but you can see that overall, it follows the black pretty closely, in the sense that the gap between the two are capital gains that are taxed at the very preferential rate over the full period. So if the conservative critic was right, this gap should be enormous. In the 1960s, when the gap in the two tax rates was so large, and it should be smaller, you know, in the period where that gap closes down. So sometimes that's perhaps the simplest way I can try to convey to a broad audience why, I think, studying those things carefully, that tax avoidance cannot explain those trends. So now, if it's not tax avoidance, it really becomes a stark debate between the supply-siders, you know, the top 1% are our job creators, and by taxing them a lot, you are going to kill jobs, versus the rent-seeking scenario, the top 1%, you have to tax them or otherwise they are going to extract a lot more, and steal, if you want, from the rest of the economy, namely the bottom 99%. So how do we tear apart those two strikingly different scenarios? So first let me say that I don't have a definitive proof. What I'm going to show you are a few suggestive charts. That's a very big question. I wish, you know, economics was advanced enough that I could give you a true answer, but at least the goal of economists is precisely to try and understand those things. So if we're in the rent-seeking scenario, the growth of top 1% income should come at the expense of the bottom 99%. And conversely, and indeed, what is striking in the U.S. is that, in the historical record, the growth of the top 1% income versus the bottom 99% income looks that way. That is, it is not a tide lifts all boats together. It really looks like, when the bottom 99% is doing well, the top 1% is doing poorly, and conversely, when the bottom 99% is doing poorly, the top 1% is doing well. So this chart shows you that. So here I've shown in white the evolution of bottom 99% income, and in black, top 1% incomes starting from a base 100 in 1913. And so what you can see is that, first part, you know, all groups do poorly because of the Great Depression, but starting with the end of the Great Depression, the New Deal, you see that the bottom 99% jumps up and grows actually very fast. Up to the early 70s, while the top 1% grows very modestly. In contrast, starting in the late 1970s, the top 1% start increasing very fast, while growth for the bottom 99% slows down dramatically. So you see that indeed you know that you hear a lot perhaps more among economics that in the end growth trumps everything, and that's true if you look perhaps at two or three centuries, but if you look at just a few decades, it doesn't look like that. That is one group can experience a very different growth situation than another group and that shows up here. So of course this evidence is not enough to conclude so you would want to see, you know, to bring more data. And that's what the World Top Income Database can help you with, to see whether the patterns that we've seen for the U.S. are borne out in other countries. So the first thing that is very easy for which we have very good evidence and that I can be confident about, is the first thing, that is, that the fact that there is a strong link between top tax rates and how much the top 1% gets is indeed true. So the best way to see this is to look at the evolution over time. So this is the world in the early 1960s, where I've put the top marginal tax rate here, so a measure of the tax burden on very top incomes, against the top 1% income share. So that's, and that time in the 1960s, top income shares are not very high. Most countries are below 10% and there is a distribution of tax rates, but you can see that a very large number of those rich countries are adopting top tax rates that are very high, very high from today's perspective. And what is striking here is that actually the U.S. and the U.K. were the most extreme countries in terms of how high they were setting their top tax rates. You know, countries like France and Sweden were not as extreme as the U.S. and the U.K. Now, turn to the world as it is today and you can see that the dots all shifted to the left. That is today, there is no country that tax top earners at more than 60%. And at the same time the dots move to the left, they also moved back up in that direction. So as top tax rates went down, the top 1% pre-tax started to do better, of course, with the U.S. being the most extreme case, so that if you really plot the change against the change that is by how much the country cuts its top marginal tax rates from the 60s to the present and how well the top does, that is by how much the top 1% income share increases. You can see that there is a very strong correlation here. You know, with the U.S. being the case study, the most extreme case study that I describe in detail. But you can see that more or less, the countries array themselves along a diagonal. Here the countries that don't cut their top tax rates, and there are a number of them, don't see much change in top income tax share. The countries that cut a lot tend to see very large increases. Now, of course that doesn't answer whether it's a good or a bad policy again, so what you want to know, the ultimate question actually where the debate really focuses on is that is cutting the top tax rate good for economic growth or not? And, again, you can use this area of countries, so if you just plot, again, the same countries by how much they cut their top marginal tax rate since the 1960s and how growth has been doing at the macroeconomic level, you know GDP per capita, real annual growth. I see a cloud that bears no relationship, apparently, with tax policy but the cloud is really dispersed, in the sense that countries that were very poor in 1960, like Portugal, Ireland, Japan, grew very fast, while countries that were a lot richer, like Switzerland and the U.S., of course, grew slower, so this is not very informative. So to tighten that cloud, you want to control for initial growth, which is what we do here. So this is growth per capital taking into account that some countries start richer than others in 1960, so naturally are not going to grow as fast. So you see that the cloud tightens, but it's hard to see a very strong link here. That is, if the conservatives were right, we should see a diagonal here. If the Occupy Wall Street were right, it should be totally flat, because changing the top tax rate changes the way income gets distributed, but doesn't affect growth. You know, perhaps it goes down slightly, but it's not significant statistically. If you look at the U.S. and the U.K., they have a growth experience that is no better than countries like Finland or Germany that have had dramatically different tax policies. So again, this is an analysis at the macro level. It doesn't prove the case, but it shows you that just by a comparison of countries, it's hard to detect strong growth effects of cutting taxes at the top, while it is very easy to detect a change in income distribution pre-tax by cutting taxes at the top. Okay, so conclude my presentation, the U.S. historical evidence and international evidence shows that tax policy plays a key role in the shaping of the pre-tax income gap. High top tax rates reduce the pre-tax income gap, perhaps, apparently, without hurting economic growth. So that you know, looking at the choices the U.S. faces, if it's a discussion between the Obama plan and the Republican plan, the changes here in tax rates are not so large that they are going to dramatically affect the pre-tax income gap. So, indeed you will get more revenue by taxing the richer more, but you are not going to fundamentally change the inequality dynamic. Now, when the public favor, we know that the public is in favor of slightly higher taxes on the rich, in the end, my reading of the historical evidence and the present evidence is that the public will favor more progressive taxation only if it is convinced that top income gains are detrimental the bottom 99%. So in the same way that during the, after the Great Depression and during the New Deal, those top incomes were accumulated fortunes that didn't really mean much for economic growth because they were coming from the past, so they were, the rich were criticized as rentiers and the public was willing to accept a dramatically different tax system. I think for the public to accept again very high tax rates, the psyche really has to change in this direction, and that's why the type of economic analysis, really understanding what happens and what drives those changes at the top are so important for tax policy. So let me stop here and I'm happy to take some questions. (audience applause) - [Margaret] Question number one, looking at the historical record, what is the likelihood that high-income inequality in the U.S. can be reversed without violence? For example, wars, either external or internal. - That's a good and difficult question. I would say that, again if we look at the historical record, a dramatic drop in income concentration almost always happens with a big shock first. A big shock that the government has not directly or purposely manufactured, so it can be a Great Depression in the United States, it can be World War II in a country like Japan. However, the shock is not enough, the shock really needs then to lead to dramatically different policy. So, the U.S. had its shock recently in the Great Recession. I think that would have been the time, really, to change dramatically policy-making regarding policies regarding the rich. It was done a little bit on the regulatory side with financial regulation that was increased but not increased nearly as much as it was increased during the Great Depression. On taxes, at the top, we didn't see anything, because we saw an extension of the Bush tax cuts. I think, I mean personally, I view that as a missed opportunity, because in 2009, you could explain to the public that this dramatic increase in income concentration, a lot of it coming from finance, did not bring good effects in the U.S. economy, and that was the moment, perhaps, to convince the public. So it didn't happen. We're out of this crisis to some extent, so I don't see a dramatic change in U.S. economic policy in the foreseeable future without seeing first some sort of dramatic event. - [Margaret] Okay, thank you. This is a sort of related question to the point you were just making, a question about timing. Why are you telling us this story now and not years ago when it might have counteracted the Tea Party? (audience laughter) - Okay, so on this one, I would say that we've been telling this story for a very long time actually. We did, that U.S. study first came out at the very beginning of 2001, so more than 10 years ago, but at that time, it was just the beginning of the dot-com crash, but it had been such a good growth experience in the United States in the 1990s, that really inequality was not at all on the radar screen. So the press wasn't necessarily that interested in this type of story. So it took years, you know, as the public and the press was experiencing some sort of disconnect between relatively good economic performance during the Bush administration, if you look at GDP growth measures, they didn't look bad. And yet, people were feeling that they were not getting ahead, and that's when our numbers started getting traction because they could explain why the bottom 99% wasn't feeling a large fraction of that growth. - [Margaret] Okay, a question related to the first question about violence. Do you think there is a danger of political turmoil worsening if economic inequality is not reined in? - Yes, so this, yes, so actually I should have said that in the first question, so I'm glad to have a chance to go back go it. I didn't show you that chart about developing countries because that shows income concentration in Argentina, South Africa, and the U.S. What I want to say is that the U.S. here, you can see has a level now of income concentration that is comparable to developing countries that are known to have extremely high levels of income concentration. And indeed, an issue for those countries, and that's, of course, very well-known in Latin America, that is the political turmoil in many Latin American countries comes from issues of inequality. There is a feeling that there is an unfair distribution of wealth and economic resources, enhanced incomes, that leads people to choose radical policy options, and then we encounter revolution, and you end up with right-wing dictatorships fighting left-wing guerrillas, etc. But political turmoil that is definitely very harmful to economic development, so that has been the situation in a number of Latin American countries. But the case of Europe and other countries shows you that you can have changes in policies that are not accompanied with economic turmoil. That is you can have situations where, you know, like the United States is actually a good example, where you can have really radical policies regarding top incomes, with tax rates that are just seem inconceivable today, above 70%, and that being accepted by the vast majority of the public. And actually both major political parties, so I would say there is a risk. We don't know how it is going to turn out. I hope, you know, it will be a repeat of the New Deal rather than a situation like Chile or Argentina. - [Margaret] Okay, and following on that question. Do you see any relationship between your research and the growing incidence of land grabs for agriculture and mining investment primarily in the global south by large corporate, equity, and even national investors? - On this one, I would say yes, the land grab and land reform is at the core in all the issue of redistribution in developing countries, because the way inequality manifests itself in a country like, not so much now, like Argentina was in it by very unequal land division, so one of the first things that you want to do to try to improve redistribution is what's called land reform. That is, sharing the land more equally and also theories that says that that's good for growth because that motivates the small land owners to work hard on their products, and that way, of course, this is not relevant for an economy like the U.S. today, but it was historically an important phenomenon. It's also interesting related, I mean it's peripheral to this question, but I think it is very interesting that probably if we had been able to go back further in the past here, in the 1800s, the U.S. probably had less inequality, if you exclude the slave problem, which is a very big one, but if you look only at whites, probably there was less inequality in a country like the U.S. than in Europe, in large part because land was more equally distributed in the U.S. and it was so abundant that a lot of people could get relatively large shares of land. While in a country like France, and my co-author Thomas Pikkety has studied the income, or the economic disparity in a country like France, you know, at the eve of the French Revolution was just astonishing. So it just shows you that with the same method you can go back in the past, using also tax records and look at those issues of land distribution. (soothing electronic music)
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Channel: University of California Television (UCTV)
Views: 10,430
Rating: 4.9148936 out of 5
Keywords: economy, economics, 99%, tax, income inequality
Id: _y7Xtwxd90I
Channel Id: undefined
Length: 59min 27sec (3567 seconds)
Published: Thu Mar 07 2013
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