In­come vs. Wealth In­equal­ity By Em­manuel Saez

Rotman Management Magazine - - FACULTY FOCUS -

Ev­ery­where you look to­day, peo­ple are talk­ing about in­equal­ity in de­vel­oped coun­tries. One sim­ple way to mea­sure that is to es­ti­mate top-in­come shares: What share of to­tal, pre-tax in­come goes to cer­tain groups—such as the top 10% of fam­i­lies, the top 1% of fam­i­lies, or the top 0.1% of fam­i­lies?

Ad­vanced economies typ­i­cally started their pro­gres­sive in­come taxes a cen­tury ago. Thomas Piketty first stud­ied the case of France, and shortly there­after, to­gether we stud­ied the U.S. Since then, over 25 coun­tries have been stud­ied through a col­lec­tive ef­fort in­volv­ing many re­searchers. The data are posted on­line in the

World Wealth and In­come Data­base — a global project that in­cludes statis­tics cov­er­ing North Amer­ica, most of West­ern Europe and a num­ber of de­vel­op­ing coun­tries, such as China and In­dia.

As ev­i­denced by this data­base, the U.S. has gone through large vari­a­tions in in­come con­cen­tra­tion: In re­cent years, the top 10 per cent’s in­come share has grown from 33 to over 50 per cent, sur­pass­ing the peaks of pre-world War II. The tax data al­low us to dis­ag­gre­gate fur­ther within the top 10 per cent. A sim­ple way to do that is to de­com­pose it into three groups: The top 1%, the next 4%, and the next 5% (i.e., the bot­tom half of the top decile).

Us­ing these mea­sures, the top 10% gained 17 per­cent­age points since the late 1970s, go­ing from 33 to 50 per­cent­age points; and al­most all of those 17 per­cent­age points—be­tween 12 and 13—have gone to the top 1% (fam­i­lies with in­comes above $443,000 in 2015). Their share of to­tal pre-tax in­come rose from nine per­cent­age points to some­where be­tween 21 and 22 in re­cent years.

The next 4% are fam­i­lies mak­ing be­tween $180,500 and $443,000 in 2015, and this group has gained, but only three or four points. The last in­come share se­ries for the bot­tom half of the top 10 per cent (fam­i­lies with in­comes be­tween $125,000 and $180,000 in 2015) has not ex­peri-

enced much gain at all since the 1970s.

Even within the top 1%, the gains are un­equal and grow larger, the higher you go. The share of in­come of the top 0.1% (fam­i­lies with more than $2 mil­lion in in­come to­day) has gone up from 3% in the late 1970s to 11 per cent in 2015. Therefore, a big part of the in­creas­ing in­come con­cen­tra­tion can be traced to this very top in­come group.

In the U.S. to­day, wealth is so con­cen­trated that the share owned by the bot­tom 90 per cent of fam­i­lies is only slightly above 20 per cent, and hence about the same as the share for the top 0.1%. That means that the wealth of the top 0.1% of fam­i­lies is 900 times larger, on av­er­age, than the av­er­age wealth of the bot­tom 90 per cent of fam­i­lies.

On the hous­ing front, it is well known that the ex­plo­sion of mort­gage re­fi­nanc­ing has eaten into the eq­uity of the bot­tom 90 per cent. Com­bined with other forms of debt, in­clud­ing con­sumer credit cards and loans, this ex­plo­sion in debt means, ef­fec­tively, that over the last 30 years, the bot­tom 90 per cent of fam­i­lies saved zero, on av­er­age, while top wealth hold­ers have been able to save more and more.

The re­sult: A huge in­crease in wealth in­equal­ity that, un­for­tu­nately, is likely to per­sist — short of adopt­ing more dras­tic poli­cies aimed at curb­ing the wealth at the top and en­cour­ag­ing wealth ac­cu­mu­la­tion at the bot­tom.

Em­manuel Saez is a Pro­fes­sor of Eco­nom­ics and Di­rec­tor of the Cen­tre for Eq­ui­table Growth at the Univer­sity of Cal­i­for­nia, Berke­ley. For more, visit the World Wealth and In­come Data­base at

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