Economic Inequality

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A presentation prepared for CCEE on Economic Inequality

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Economic Inequality

  1. 1. The Wealth DivideDale DeBoer, Ph.D.University of Colorado, Colorado Springs
  2. 2. Looking backward
  3. 3. International implications $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 Mean Median $20,000 $15,000 $10,000 $5,000 $0 France Germany Japan UK US OECD
  4. 4. International implications GAP Relative to OECD 4.0% 2.0% 0.0% France Germany Japan UK US -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0%
  5. 5. What is inequality?• Is it poverty?
  6. 6. Modalities of inequality• Wage inequality – Colorado minimum wage: $7.64/hour – Denver average 2011 CEO salary: $735,979 • $353.84/hour – Source: salary.com
  7. 7. Modalities of inequality• Wage inequality• Income inequality – How do they differ? • Government transfers – EITC • Interest earned • Dividends received • Rental payments • Capital gains
  8. 8. Modalities of inequality• Wage inequality• Income inequality – How do they differ? – Pre-tax or post-tax • Progressive income tax system • Top 20 percent pay 67 percent of federal taxes – Data for 2009 – Congressional Budget Office
  9. 9. Modalities of inequality• Wage inequality• Income inequality• Consumption inequality
  10. 10. Modalities of inequality• Wage inequality• Income inequality• Consumption inequality• Wealth inequality
  11. 11. A too simple example (part 1)• Bob Poor • Sally Rich – Wage, $20/hour – Wage, $20/hour
  12. 12. A too simple example (part 1)• No wage inequality
  13. 13. A too simple example (part 1)• Bob Poor • Sally Rich – Wage, $20/hour – Wage, $20/hour – Consumption, $800/w – Consumption, $600/w eek eek
  14. 14. A too simple example (part 1)• No wage inequality• Consumption inequality
  15. 15. A too simple example (part 1)• Bob Poor • Sally Rich – Wage, $20/hour – Wage, $20/hour – Consumption, $800/w – Consumption, $600/w eek eek – Wealth after 1 – Wealth after 1 year, $0 year, $10,400
  16. 16. A too simple example (part 1)• No wage inequality• Consumption inequality• Wealth inequality
  17. 17. A too simple example (part 1)• Bob Poor • Sally Rich – Wage, $20/hour – Wage, $20/hour – Consumption, $800/w – Consumption, $600/w eek eek – Wealth after 1 – Wealth after 1 year, $0 year, $10,400 – Monthly income (2nd – Monthly income (2nd year), $3,466 year), $3,510 • 5% rate of interest
  18. 18. A too simple example (part 1)• No wage inequality• Consumption inequality• Wealth inequality• Income inequality
  19. 19. Source of the inequality?• Personal choice
  20. 20. A too simple example (part 2)• Bob Poor • Sally Rich – Inherited wealth, $0 – Inherited wealth, $100,000
  21. 21. A too simple example (part 2)• Wealth inequality
  22. 22. A too simple example (part 2)• Bob Poor • Sally Rich – Inherited wealth, $0 – Inherited wealth, $100,000 – Wage, $20/hour – Wage, $40 hour
  23. 23. A too simple example (part 2)• Wealth inequality• Wage inequality – Why might this occur?
  24. 24. A too simple example (part 2)• Bob Poor • Sally Rich – Inherited wealth, $0 – Inherited wealth, $100,000 – Wage, $20/hour – Wage, $40 hour – Monthly income, $3,466 – Monthly income, $7,350
  25. 25. A too simple example (part 2)• Wealth inequality• Wage inequality• Income inequality
  26. 26. Source of the inequality?• Family history – Dumb luck?
  27. 27. What does the evidence show?• Types of measures – Summary • Gini coefficient
  28. 28. What does the evidence show?• Types of measures – Summary – Range data • Quintile, decile averages
  29. 29. US Wage Inequality Data $60,000 $50,000 $23.42/hour $40,000 $30,000 All Households $20,000 $10,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  30. 30. US Wage Inequality Data $60,000 $50,000 $40,000 $30,000 Bottom Quintile All Households $20,000 $10,000 $2.15/hour $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  31. 31. US Wage Inequality Data $25,000 $20,000 $15,000 2nd Quintile Lowest Quintile $10,000 $5,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  32. 32. US Wage Inequality Data $45,000 $40,000 $35,000 $30,000 $25,000 3rd Quintile 2nd Quintile $20,000 Lowest Quintile $15,000 $10,000 $5,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  33. 33. US Wage Inequality Data $70,000 $60,000 $50,000 $40,000 4th Quintile 3rd Quintile $30,000 2nd Quintile Lowest Quintile $20,000 $10,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  34. 34. US Wage Inequality Data $160,000 $140,000 $120,000 $100,000 Highest Quintile 4th Quintile $80,000 3rd Quintile 2nd Quintile $60,000 Lowest Quintile $40,000 $20,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  35. 35. US Wage Inequality Data $600,000 $500,000 $400,000 Top 1% Highest Quintile $300,000 4th Quintile 3rd Quintile 2nd Quintile $200,000 Lowest Quintile $100,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  36. 36. Why this pattern?• Likely not a direct outgrowth of government policy – Pre- not post-tax issue
  37. 37. Why this pattern?• Likely causes – Demographic changes
  38. 38. Children at age 44 (maternal) 3 2.5 2 1.5 1 0.5 0
  39. 39. Why this pattern?• Likely causes – Demographic changes – Educational changes
  40. 40. Educational attainment
  41. 41. Why this pattern?• Likely causes – Demographic changes – Educational changes – Decline in labor unions
  42. 42. Union membership 13.6 13.4 13.2 13.0 12.8 12.6 12.4 12.2 12.0 11.8 11.6 1998 2000 2002 2004 2006 2008 2010 2012
  43. 43. Union membership
  44. 44. Why this pattern?• Likely causes – Demographic changes – Educational changes – Decline in labor unions – Globalization
  45. 45. Trade balance
  46. 46. Why this pattern?• Likely causes – Demographic changes – Educational changes – Decline in labor unions – Globalization – Technological changes • “Winner takes all” economics
  47. 47. US Income Inequality Data $70,000 $60,000 $50,000 $40,000 Lowest Quintile 2nd Quintile $30,000 3rd Quintile $20,000 $10,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  48. 48. US Income Inequality Data $250,000 $200,000 $150,000 Lowest Quintile 2nd Quintile 3rd Quintile $100,000 4th Quintile Highest Quintile $50,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  49. 49. US Income Inequality Data $1,600,000 $1,400,000 $1,200,000 $1,000,000 Lowest Quintile 2nd Quintile $800,000 3rd Quintile 4th Quintile $600,000 Highest Quintile Top 1% $400,000 $200,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  50. 50. What did the government do?• Taxes and transfers $25,000 $20,000 $15,000 Lowest Quintile $10,000 $5,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  51. 51. What did the government do? $25,000 $20,000 $15,000 Lowest Quintile 2nd Quintile $10,000 $5,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  52. 52. What did the government do? $25,000 $20,000 $15,000 $10,000 Lowest Quintile 2nd Quintile $5,000 3rd Quintile $0 1975 1980 1985 1990 1995 2000 2005 2010 2015 ($5,000) ($10,000)
  53. 53. What did the government do? $25,000 $20,000 $15,000 $10,000 Lowest Quintile $5,000 2nd Quintile 3rd Quintile $0 4th Quintile 1975 1980 1985 1990 1995 2000 2005 2010 2015 ($5,000) ($10,000) ($15,000) ($20,000)
  54. 54. What did the government do? $30,000 $20,000 $10,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015 Lowest Quintile ($10,000) 2nd Quintile ($20,000) 3rd Quintile 4th Quintile ($30,000) Highest Quintile ($40,000) ($50,000) ($60,000) ($70,000)
  55. 55. What did the government do? $100,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015 ($100,000) Lowest Quintile ($200,000) 2nd Quintile 3rd Quintile 4th Quintile ($300,000) Highest Quintile Top 1% ($400,000) ($500,000) ($600,000)
  56. 56. US Income Inequality Data: Gini 0.700 0.600 0.500 0.400 Market Income Before-Tax Income 0.300 After-Tax Income 0.200 0.100 0.000 1975 1980 1985 1990 1995 2000 2005 2010 2015
  57. 57. Breaking Down the Data: Top 20% 20.0 18.0 16.0 14.0 12.0 Capital Income 10.0 Capital Gains 8.0 Business Income 6.0 4.0 2.0 0.0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  58. 58. Breaking Down the Data: Top 20% $40,000 $35,000 $30,000 $25,000 Capital Income $20,000 Capital Gains Business Income $15,000 $10,000 $5,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  59. 59. Breaking Down the Data: Top 20% Capital income relative to wages 80% 70% 60% 50% 40% 30% 20% 10% 0% 1975 1980 1985 1990 1995 2000 2005 2010 2015
  60. 60. Breaking Down the Data: Top 1% 60.0 50.0 40.0 Capital Income 30.0 Capital Gains Business Income 20.0 10.0 0.0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  61. 61. Breaking Down the Data: Top 1% $700,000 $600,000 $500,000 $400,000 Capital Income Capital Gains $300,000 Business Income $200,000 $100,000 $0 1975 1980 1985 1990 1995 2000 2005 2010 2015
  62. 62. Breaking Down the Data: Top 1% Capital income relative to wages 400% 350% 300% 250% 200% 150% 100% 50% 0% 1975 1980 1985 1990 1995 2000 2005 2010 2015
  63. 63. Role of the government? Maximum Capital Gains Tax Rate 45 40 35 30 25 20 15 10 5 0 1950 1960 1970 1980 1990 2000 2010 2020
  64. 64. Role of the government? Effective Average Capital Gains Tax Rate 30 25 20 15 10 5 0 1950 1960 1970 1980 1990 2000 2010 2020
  65. 65. Causation? 60.0 50.0 Capital Gains Income Share 40.0 30.0 20.0 R² = 0.338 10.0 0.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 Effective Capital Gains Tax Rate
  66. 66. Role of the government? Effective Corporate Tax Rate 40% 35% 30% 25% 20% 15% 10% 5% 0% 1976 1982 1987 1993 1998 2004 2009
  67. 67. US Consumption Inequality Data $120,000 $100,000 $80,000 Lowest 20 percent Second 20 percent $60,000 Third 20 percent Fourth 20 percent $40,000 Highest 20 percent $20,000 $0 1980 1985 1990 1995 2000 2005 2010 2015
  68. 68. US Consumption Inequality Data Greenspan, Consumption Gini Coefficients 0.35 0.3 0.25 0.2 0.15 1980 0.1 1995 0.05 0
  69. 69. US Consumption Inequality Data 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 -0.05
  70. 70. US Wealth Inequality Data $250 $200 $150 Thousands Lowest quintile 2nd quintile 3rd quintile $100 4th quintile $50 $0 1990 1995 2000 2005 2010 2015
  71. 71. US Wealth Inequality Data $1,400 $1,200 $1,000 Lowest quintile Thousands $800 2nd quintile 3rd quintile $600 4th quintile 80-90% Top Decile $400 $200 $0 1990 1995 2000 2005 2010 2015
  72. 72. What did the government do? Top Estate Tax Rate 60% 55% 50% 45% 40% 35% 30% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
  73. 73. What did the government do? Estate Tax Exemption $6,000 $5,000 $4,000 Thousands $3,000 $2,000 $1,000 $0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
  74. 74. What is needed to close the gaps?• The tyranny of math – Wage • Bottom: $4,479 • Top: $452,319 – 5% growth for top? • $22,616 – Needed for bottom?
  75. 75. What is needed to close the gaps?• The tyranny of math – Wage • Bottom: $4,479 • Top: $452,319 – 5% growth for top? • $22,616 – Needed for bottom? • 505%
  76. 76. What is needed to close the gaps?• The tyranny of math – Income • Bottom: $30,500 • Top: $872,300 – 5% growth for top? • $43,615 – Needed for bottom?
  77. 77. What is needed to close the gaps?• The tyranny of math – Income • Bottom: $30,500 • Top: $872,300 – 5% growth for top? • $43,615 – Needed for bottom? – 143%
  78. 78. What is needed to close the gaps?• The tyranny of math – Wealth • Bottom: $6,200 • Top: $1,194,300 – 5% growth for top? • $74,050 – Needed for bottom?
  79. 79. What is needed to close the gaps?• The tyranny of math – Wealth • Bottom: $6,200 • Top: $1,480,900 – 5% growth for top? • $74,050 – Needed for bottom? – 963%
  80. 80. How “bad” was the change? Mean Income Growth Rate, Top 1% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1979 to 1986 1987 to 2000 2001 to 2007
  81. 81. Does it really matter?• Is the concern inequality or poverty?
  82. 82. Does it really matter?• Inequality specific concerns – Distributional inefficiency
  83. 83. Does it really matter?• Inequality specific concerns – Distributional inefficiency – Growth effects • Incentives
  84. 84. Does it really matter?• Inequality specific concerns – Distributional inefficiency – Growth effects • Incentives • Government policies
  85. 85. Does it really matter?• Inequality specific concerns – Distributional inefficiency – Growth effects – Social cohesion
  86. 86. Does it really matter?• Inequality specific concerns – Distributional inefficiency – Growth effects – Social cohesion – Ethical concerns • “Veil of ignorance” arguments
  87. 87. A quick thank you• to DeEon Warner for his help compiling the data for this project
  88. 88. Sources• Bureau of Labor Statistics• Congressional Budget Office• Eurostat• Federal Reserve Economic Data• Federal Reserve, Board of Governors• Salary.com• Tax Policy Center• U.S. Census Bureau

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