Anthony Atkinson and Andrew Leigh have a working paper on the strikingly similar patterns in high-end income concentration in five English-speaking countries.
Anthony Atkinson and Andrew Leigh have a working paper on the strikingly similar patterns in high-end income concentration in five English-speaking countries.
Yesterday saw an odd coincidence:
Three years ago, I blogged about the results that Mike published with Berkeley's Emmanuel Saez on the evolution of top income shares in Canada up to 2000. The updated numbers are not directly comparable to the ones in the AER study, but they show the same trends over the periods in which the two data sets overlap. Even better, they show what has happened to the concentration of after-tax income.
I haven't seen Avatar. That's good. It means I can take a clearer look at the underlying policy problem.
The policy problem in Avatar is that some blue people own all of some valuable natural resource, and won't let anybody else have any.
Lloyd George, as UK Chancellor of the Exchequer, addressed the same policy problem in his 1909 "People's Budget". The British aristocracy owned the land, just as the blue people owned the valuable natural resource in Avatar. I don't know if the blue people in Avatar used it for hunting foxes; probably they had peculiar customs of their own.
The minimum wage in Ontario went up today, and Jim Stanford thinks that it's cause for celebration. I'm not sure why. I'm guessing that he - as does the editorial board of the Toronto Star - believes that a higher minimum wage will help reduce poverty.
Sadly, this belief is mistaken. As I noted earlier when discussing this study, recent research using data from Ontario finds that the intersection between those in poverty and those who earn low wages is remarkably small:
From that previous post:
Even under the assumption that there are no employment effects, "only 10.66 percent of total wage increases accrue to workers belonging to poor households." Given that 10.3% of households are in poverty, increasing the minimum wage is only slightly more effective as an anti-poverty measure as would be distributing money at random across households.
Not really cause for celebration, is it? I've said it before, and I'll say it again: if you want to help people in poverty, give them money.
Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses. Our results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor.
I understand that an internal study done for the Quebec government has found the same thing. I'll blog on it if and when it becomes public.
If you want an effective anti-poverty measure, give money to poor people. It really is that simple.
A few weeks ago, I wrote this on the effectiveness of introducing a tax surcharge on high income earners as a way to reduce income inequality:
[We] have to look at the incidence of the increased tax on high earners. The burden of the tax does not necessarily fall on the people who actually pay the tax.
We can be pretty sure that if there's one group of people who won't be paying the tax, it is the high-income earners themselves...
[T]he gross incomes of high-income earners will rise so that their after-tax incomes are the same. Extra revenues will be generated, but the burden of the tax increase will be borne by those below the top end of the income distribution...
The tax system is at best a clumsy instrument for redistributing income, and there are simply too many possibilities for generating unintended perverse outcomes.
Soon after, the UK government announced a tax of 50% on bank bonuses. And today, we have this (h/t MR):
Bankers escape bonus blow: City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.
Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.
The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.
So just who will end up paying that surtax?
One article struck me in particular: Yannick Vanderborght's "Why trade unions oppose basic income". Why would unions - who often take pride in their commitment to progressive goals - object to a basic income policy?
This is a bleg. I'm looking for someone who: understands optimal tax theory better than me (shouldn't be too hard); can explain it simply (may be harder).
Here's the question: can it ever be part of an optimal tax system to have 100% marginal tax rates on some part of the income distribution?
In this post on Ed Broadbent's suggestion for a 6 ppt increase in the income tax rates faced by people earning $250k or more, I mentioned that some serious econometric work had to be done before this could be treated as a meaningful proposal. It soon occurred to me that there very likely had been some work done on this topic, and that I should try to track down some of the literature. It turns out that prospects of using the tax system to counter the trend towards higher concentration of incomes at the top end of the income distribution are limited, and the chances of generating perverse outcomes are large.
Ed Broadbent had an op-ed in Tuesday's Globe on a plan to reduce child poverty, and he offers this proposal:
In the next budget, let's impose a six-point increase in income tax on those earning more than $250,000 a year (whose average taxable income is $600,000). While leaving them with very high incomes, this would provide $3.7-billion in additional revenue. All of this should be used to increase the National Child Benefit Supplement and thus help our poorest children. With this single act, we would significantly make up for two decades of neglect and make a major dent in child poverty.
I'm happy to endorse the $3.7b increase to the National Child Benefit Supplement - the costs are small (less than 2% of federal spending), and the gains are huge. But for reasons I'll explain shortly, the tax proposal is not particularly persuasive.
In his article, Broadbent asks
Why is it that Finland, Sweden and Denmark have almost wiped out child poverty, and we have not?
Below the fold, I'll try to provide a partial answer to that question. And I'll explain why the conventional Canadian Left's preoccupation with using the tax system as a way of dealing with inequality and poverty should be rethought.
The most recent issue of Canadian Public Policy has this short note:
Minimum Wage Increases as an Anti-Poverty Policy in Ontario: In this article, we consider the possibility of alleviating poverty in Ontario through minimum wage increases. Using survey data from 2004 to profile low wage earners and poor households, we find two important results. First, over 80 percent of low wage earners are not members of poor households and, second, over 75 percent of poor households do not have a member who is a low wage earner. We also present simulation results which suggest that, even without any negative employment effects, planned increases in Ontario's minimum wage will lead to virtually no reduction in the level of poverty.
I've blogged on this before, but it's worth doing so again.
Here is what I would like some staffer to ask next time NDP strategists are kicking around ideas for goods to subsidise or services that governments to provide at a discount in order to advance their agenda of reducing poverty and inequality:
"Why don't we just give low-income households money and let them spend it on what they need most?"
Because one you start asking yourself this question regularly, you're less likely to come up with policy proposals that are inefficient, inegalitarian and regressive.
One of the themes being played up in the NDP's convention is its attempt to 're-brand' (up to, but not quite, including dropping the 'New' from its name), and part of this is apparently an attempt to develop a credible economic platform. The NDP has historically been pretty consistent in its refusal to take advice from professional economists, so on the off chance that the NDP is serious about this endeavour, I'm starting a series of posts on the economic analysis behind some of its core themes. Below the fold, I'll do a brief survey of what is probably the most important economic issue for the NDP: inequality.
Kevin Milligan of the University of British Columbia and Mark Stabile of the University of Toronto asked themselves "Can income transfers to poor families help children?" Here's a summary of the answer they got:
Since the 1990s, many countries have reformed their systems of transfers to low income families with an eye toward improving work incentives. This column shows, using Canadian data, that well-designed income transfers can not only help families make their way back to employment, but also improve the educational, mental health, and behavioural outcomes of the next generation.
This sort of scholarship makes me despair of the Canadian Left. Instead of focusing attention on targeted transfers, it wastes its time on arguing for higher minimum wages (a policy that is at best pointless), or on making the case for universal programs that favour the well-off. (, , )
When the Canadian Left does consider the idea of targeted income transfers, its response is invariably dismissive. A typical reaction to the Working Income Tax Benefit (our equivalent of the US Earned Income Tax Credit) is to describe it as a handout "so that employers can continue to pay poverty wages." Not all reactions on the left are so negative, of course. But if this piece is anything to go by, the Canadian Left's support for the idea of giving money to poor people can be at best characterised as 'tepid'.
It's getting harder and harder for me to come up with charitable explanations for the disconnect between the policies that the Canadian Left advocates and policies that serious scholarship says will actually help reduce poverty and inequality.
Whenever I make the points summarised in this post, someone invariably counters with the following median-voter argument:
This argument is not without merit, and it's pretty convincing in certain contexts. But it doesn't work in all contexts: there are several important cases in which the traditional progressive preference for universal programs leads to regressive outcomes.
A recession is here, the Bank of Canada is running out of bullets, and it's time for a fiscal stimulus. The problem is that the worst possible signal has been sent out to the usual gang of well-connected, media-savvy interest groups: "We're giving money away, and we really don't care who gets it!". This has resulted in a contest in which those with the sharpest elbows and the best PR campaigns win.
This is not a game in which the most marginalised elements of society do well, so I was glad to see this proposal to increase the Child Tax Credit and the GST rebate. (The only thing I'd add would be a proposal to increase the Working Income Tax Benefit.)
Sadly, no political party is interested. Not even the NDP.
The Liberals and the NDP have recycled their promises of a national daycare program:
Liberal Leader Stéphane Dion said if elected, his party would scale up spending on child care spaces to reach $1.25 billion in four years time, money that he said would fund 165,000 new spaces...
NDP Leader Jack Layton made a similar promise, vowing to create 150,000 spaces across the country within the first year of a mandate at a cost of $1.4-billion.
Both parties offer the same choice to parents. Call it the Rumpelstiltskin model: they are willing to provide money, but you must surrender your child in return. I realise that it is unfair to compare the Liberals and the NDP to a villain of a fairy tale. Unfair to Rumpelstiltskin, that is: he at least brought something - his ability to spin gold from straw - to the table. The Liberal-NDP position is based on reallocating gold spun by taxpayers.
This is not an exaggeration. Remember Scott Reid's "beer and popcorn" crack in 2006? It was a gaffe in its purest form - the inadvertent revelation of the truth. And when I listened to Olivia Chow insist on 'publicly-provided, not publicly-funded' daycare, I wondered if it had ever occurred to ask herself why.
The awfulness of the Liberal-NDP position is not restricted to its unapologetic paternalism. (Will I get through this post without using the expression "nanny state"? Apparently not.) It is also inegalitarian, regressive and inefficient.
From an editorial in the Toronto Star:
The Harper government has taken creative licence to an extreme in dubbing the $100-a-month cheques it sends to families with young children a "universal child-care benefit."
It may be universal for children under age 6 (although the fact it is taxable means some families keep very little of it). But with a single day of infant care in some licensed daycare centres costing $70 or more, it doesn't even begin to cover the staggering child-care costs that burden many families.
Let's do a little back-of-the-envelope arithmetic. According to this editorial, the total cost of sending $100 cheques each month is $2.4b/yr; that works out to 2m children. The NDP program calls for $1.45b to finance 150,000 daycare places, which works out to about $800 per month. That's certainly an improvement over the existing $100/month - but only if you happen to be one of the 7.5% of families who will benefit. The other 92.5% will see nothing. This project is profoundly inegalitarian: it will create a small class of insiders who have generous access to public funds, and it will do absolutely nothing for everyone else.
If those 7.5% were families at the very bottom of the income distribution, that could be sold as a progressive policy. But it's not; it's being sold as a step towards a universal daycare program. If the aim of the policy is to help out low-income parents, our experience with the Quebec model isn't very encouraging. As explained in great detail over here, the average subsidy to families in the highest income quartile is more than twice that received by families in the lowest quartile.
And then there are efficiency considerations. It is well known that cash transfers are a better way of redistributing income than providing in-kind goods and services.
A lesson for the Liberals and the NDP: if you want to help low-income families, give them money. It really is that simple.
There have been any number of MSM stories based on StatsCan's recent release on earnings and income. Median earnings from market income for individuals in 2005 are pretty much the same as they were back in 1980, and market income inequality has - by any measure - increased over the past 25 years.
This isn't really news - at least, not in the sense of 'revealing previously unknown facts'. Here are plots of average and median market income for unattached individuals and for for economic families of two or more people; the data are taken from Statistics Canada's Cansim Tables 202-0202 and 202-0203:
Although median market income in 2005 was the same as it was in 1980, it hasn't remained constant: the recessions of 1983 and especially 1991 reduced real median incomes considerably, and it's taken ten years to recover. And the widening gap between the average and the median indicates increasing inequality during this time; something we knew about already (see this post, and this one, among others).
Inequality in market income doesn't bother me much in itself; what really matters is inequality in income after taxes and transfers. If policy-makers are responding to rising inequality by improving its programs for redistributing income, then the effect on inequality of disposable income will be a wash.
Unfortunately, that's not what has been happening in Canada. Here is how net transfers have changed; the data are taken from Cansim Table 202-0704:
Net transfers to the highest quintile have decreased; income growth has been concentrated at the top end of the income distribution, so their tax payments have grown in proportion. But the main beneficiaries are not those with the lowest incomes; the increase in net transfers has been concentrated on the middle income groups.
Here are how the shares of (gross) government transfers have changed over the past generation:
The share of transfers to the lowest quintile has decreased since 1980, as has - albeit to a lesser extent - that of the second quintile. The winners in this reallocation are the middle and fourth income quintiles.
It's not hard to imagine an explanation for this; the median income group is likely to include the median voter. So every political party will be happy to sacrifice the lowest income group's interests (that group is either taken for granted or written off entirely) in order to gain popularity at the centre.
The idea of a basic income - it's generally referred to as a Guaranteed Annual Income in Canada - has been floated again. My initial reaction was that this is such a good idea that it's hard to figure out why we don't have it already.
For some reason, there doesn't seem to much in the way of a formal modeling exercises that work through the general equilibrium implications of a BI (I will be happy to be corrected on this point), so I decided to set up a blog-sized version. It turns out that although the BI is still a good idea, it's not quite the slam-dunk I thought it was.
The gory details are below the fold.
The national statistics agencies of Canada, Sweden and the United Kingdom have annual series for gini coefficients going back to 1980 or so. Although cross-country comparisons of the levels should be taken with a grain of salt, the trends in these three countries are remarkably similar:
It is a Well-Known FactTM that inequality has been increasing over the past couple of decades, but it would appear that the greatest part of this increase took place before 1995 or so. Over the past ten years, inequality in market income has remained fairly stable.
Update: My initial, off-the-top-of-my-head conclusion was that these inequality patterns were driven by technology (eg., the familiar skill-biased technical change story) rather than country-specific things such as trade patterns, labour market structure, etc. But since I didn't have anything stronger than an off-the-top-of-my-head impression to back it up, I didn't mention it. But this study offers some support to this notion:
[T]he causes of rising inequality are primarily structural and related to new technology rather than to trade or institutions.