Two recent papers on top-earner taxation have made an important contribution to the policy debate on the topic, but it seems to me that we still have some way to go before we have an understanding of the phenomenon that is robust enough to use as a basis for policy.
The meeting of the federal and provincial/territorial health ministers in Halifax on Thursday will be preoccupied with the sustainability of health expenditures and the coming negotiations over the renewal of the health care accord. Naturally, the provinces want to ensure that federal transfers continue to rise to meet their needs while the federal government will be focused on the rate of increase of its health transfers as well as the need to ensure value for money from those transfers.
The rise in provincial government health spending and the tendency for its growth rate to outstrip revenue growth has been well chronicled. However, another dimension to health spending is its distribution.
The debate about income inequality seems to be happening at two levels, which I'm going to label "first-order" and "top-end" inequality.
A few weeks ago, Mike Moffatt wrote an op-ed that ran in the Ottawa Citizen and several other PostMedia papers to the effect that there simply isn't the will on the part of 99% of the population to do much about inequality: if there were, there'd be more popular support for the sort of tax-and-redistribution measures that would actually be effective in reducing inequality. Instead, we get stuff like this:
Assume ten identical young men. One of them is needed to do a dangerous job which creates disutility for the person doing it. Assume they have diminishing marginal utility of consumption. Assume (though a weaker assumption can get the same results) that the utility function is separable in consumption and the type of job.
There are two ways to allocate resources:
1. Volunteer Army. The nine compensate the one at exactly the right level so that all are indifferent between doing and not doing the dangerous job.
2. Conscript Lottery. The ten hold a lottery, and the one who draws the shortest straw does the job.
The incomes earned by elite athletes are often cited as examples in arguments to the effect that high incomes aren't a problem that need solving. If large numbers of people are willing - eager, even - to give small sums of money to watch Wilt Chamberlain play basketball, then on what grounds would anyone begrudge Chamberlain's salary or the system that generated it?
I was thinking about this while watching Bull Durham for the umpteenth time. Especially this part:
Much of the public debate on income inequality focuses on what is happening with market incomes. But most people generally accept that a certain level of inequality in market incomes is inevitable, and indeed necessary in order to provide the sort of incentives that generate economic growth. What really matters is inequality of income net of taxes and transfers. If increasing inequalities in market income are compensated by stronger redistribution, then there's less to worry about.
Unfortunately, that doesn't appear to be happening. A few weeks ago, I noted that Canada's tax-and-transfer system had become less effective in reducing inequality, as measured by the Gini coefficient. In this post, I'm going to look at how taxes and transfers have evolved for the various income quintiles. It reaches the same conclusion, but it also suggests a reason why the system has become less progressive.
Stephen Gordon recently posted an excellent analysis of trends in income inequality in Canada and elsewhere. Stephen, like almost all of the other authors cited in his post and the subsequent discussion, measured inequality using the Gini coefficient.
Talk about deja vu all over again. Various limitations of the Gini inequality index have been known for years. Tony Atkinson described some and proposed an alternative to back in 1970; other indices for measuring inequality are the Theil index, and the Hoover index. Greselin and co-authors set out new arguments, and make a convincing case for replacing the Gini. But I don't expect to see the Zenga index in wide use any time soon.
We keep on using the Gini because that's the way people have always done it. But why did people even start using the Gini in the first place?
The increasing concentration of incomes among a small number of high earners has been documented at length here (, , ) and elsewhere. Any sensible response to this development has to be based on at least a partial understanding of how and why this trend began - and we still don't have a theory that seems strong enough to use as a basis for policy.
Here is a story that makes sense to me. Then again, I may be putting one and one together and getting eleven.
Wealth and income inequality is a big issue and I thought some historical perspective on wealth inequality might be interesting given that my research to date has led me to conclude that little has changed for the bottom of the wealth distribution at least in terms of relative wealth shares. While there has been the growth of a middle wealth holding class over the last one hundred years in Canada, the wealth share of the bottom half of the wealth distribution is remarkably unchanged.
My brother thinks of himself as a farmer, which he is. But I think of him as an asset manager. He has chosen to hold his assets in land, tractors, ploughs; and that's him, driving his tractor, pulling his plough over his land, fixing the tractor, fixing the plough, managing his assets. He earns his income doing the 1001 things he needs to do to get the best return from his assets.
I'm a health and fitness nut, so I read a lot of health studies as well as using my own body as a guinea pig. I've discovered a lot of things - for instance, I don't know if using creatine monohydrate leads to more strength gains than using a placebo, but I do know it makes you pee every 15 minutes.
Reading health studies (or even worse, hearing reports of health studies) can be incredibly frustrating as they often appear to be contradictory. Caffeine is good for you. Caffeine is bad for you. Ephedrine and ECA stacks are dangerous. Ephedrine and ECA stacks are effective and safe to use, etc. What to believe?
We're all familiar with the concept, but for those who weren't aware that it had been formalised, given a title and a Wikipedia entry, the Politician's Syllogism goes like this:
And so it is with the minimum wage. Poverty and inequality are problems that demand some sort of policy response, and if you're not familiar with the file, then increasing the minimum wage sounds like a halfway-plausible response. At least it's something, right?
One part of Canada's tax-transfer system increases inequality of wealth. That's not an unfortunate side-effect of the policy; it is deliberately designed that way. It would be very easy to design it differently so that it did not increase inequality.
"The poor don't have enough income to save, and can't help going into debt to the rich. Debt is caused by inequality".
That statement is wrong on many levels. It's wrong theoretically. It's wrong empirically. But most of all, it's wrong because it might make inequality worse. It's the soft bigotry of low expectations. Providence is especially important to the poor. Saying that the poor can't help but be improvident is the last thing they need to hear.
(This post will piss some people off. "Nick's blaming the poor; of course they can't help either their poverty or their lack of saving!")
People give when they're asked.
Jim Andreoni and Justin Rao have proved it. They ran the following experiment: one person, the allocator, was given 100 'money units', worth $10 in real money. She was free to choose how much to keep for herself and how much to give to another person, the recipient. The recipient, however, had an opportunity to ask for a particular division of money - 50/50, say, or 30/70 or 60/40.
It turns out that people who ask for more get more - up to a point. When the recipient asks for, say, 70 percent of the money in the envelope, the allocator is quite likely to say "sorry" and give nothing. But a recipient who asks for a 50/50 split on average receives more than the recipient who asks for nothing.
I used to blog fairly regularly about the Basic Income (aka Citizen's Income, aka Guaranteed Annual Income), but the passage of a decent interval of time, Kevin Milligan's recent Economy Lab columns ( , ) and Erin Anderssen's long article in Saturday's Globe and Mail gives me an excuse to revisit the issue and perhaps repeat myself. I had almost finished writing this before I saw Kevin's most recent column, so there's some overlap that I can't be bothered to edit out at this point.