New inequality research

Christopher Sheil

Following are brief notes and key charts about new data on: the share of Australian incomes accruing to the top 10% and top 1% (of individual adult income earners); the size and implications of tax evasion for inequality; and the distribution of income and wealth in China from 1978 to 2015.

Australian incomes

Income inequality continues to increase. WID.World (World Incomes and Wealth Database) published updated estimates for Australia in May 2017. Calculated by Roger Wilkins, the proportion of income distributed to the top 10% in 2014 was the highest since 1950, at 32.1 per cent (up from 31 per cent in 2012, and from 23 per cent in 1978). Almost a third of this (9.1 per cent) went to the top 1% (up from 8.5 per cent in 2012, and from a 4.4 per cent share in 1981), which means that the share of the top 1% is now almost equal to the 9.5 per cent peak reached before the GFC. The pictures are shown below.

 

 

 

 

 

 

 

 

 

 

 

 

Tax evasion and wealth inequality

Tax evasion rises sharply with wealth. In a paper based on Scandinavia (Norway, Sweden and Denmark) published on May 28, 2017, Annette Alstadaeter (Norwegian University of Life Sciences), Niels Johannesen (University of Copenhagen) and Gabriel Zucman (UC Berkeley and NBER), found that on average about 3 per cent of personal taxes are evaded, but this figure rises to 30 per cent in the top 0.01% of the wealth distribution (households with more than US$40 million in net wealth). Taking tax evasion into account markedly increases the rise in inequality seen in tax data since the 1970s.

The paper’s analysis combines population-wide administrative income and wealth records and the random audits conducted by tax authorities (hitherto, the main sources for estimates of tax evasion) with new micro-data from the two massive leaks from offshore financial institutions: the ‘Swiss leaks’ (from HSBC Switzerland) published in 2015 and the ‘Panama Papers’ (from Mossack Fonseca) published in 2016. They also analyse a large sample of Norwegian and Swedish households who voluntarily disclosed previously hidden wealth in the context of a tax amnesty.

All the data sets paint the same picture: the probability of hiding assets ‘rises very sharply with wealth’. The authors estimate that 50 per cent of offshore wealth is owned by the top 0.01%. When combined with estimates of the total stock of offshore wealth, this implies that the top 0.01% hides about 25 per cent of its true wealth.

The implications for inequality were examined for Norway, where high quality, long-run time series of top wealth shares exist (unlike in Australia). Because offshore wealth is highly concentrated, taking it into account lifts the top wealth shares significantly, increasing the top 0.1% wealth share from 8 per cent to 10 per cent of total wealth. For the top 0.01% (the wealthiest 330 Norwegian households), taking evasion into account raises their reported wealth by a third. The recent Evatt report The Wealth of the Nation, found that wealth inequality in Australia is roughly similar to Norway.

The paper highlights the need to move beyond tax records to capture the income and wealth of the very rich, even in countries where compliance is high. It also suggests that our current knowledge might significantly under-estimate the rise in wealth inequality over the past four decades. The authors observe that, because ‘most Latin American, and many Asian and European economies own much more wealth offshore than Norway, the Scandinavian results are likely to represent the lower bound for most of the world’s countries.

A slide presentation of the paper is available here.

 

 

 

 

 

 

 

 

 

 

Gabriel Zucman discusses tax evasion and inequality with Bloomberg's Joe Weisenthal

China and inequality: 1978-2015

The patterns of distribution of wealth and incomes in China is tending to replicate the United States, but with important differences. A paper by Thomas Piketty, Li Yang and Gabriel Zucman published in April 2017 provides the most comprehensive analysis of inequality in China to date, covering the period from 1978 to 2015. The big picture is staggering. Over these years, China’s share of world GDP increased from less than 3 per cent to about 20 per cent (as its share of the population meanwhile declined marginally, from 22 per cent to 19 per cent). Real per capita adult national income increased by more than eightfold, with an average growth rate of 6.2 per cent. The main findings are summarised in the DINA (Distributional National Accounts) formats for China in Tables 1 and 2 and 3 below, including comparisons with the United States and France.

Highlights are:

  • China’s aggregate private national wealth-income ratio is now close to Western levels: 450-500 percent in China in 2015 vs 500 per cent in the US and 550-600 per cent in Britain, France, and Australia. The major difference is that public wealth has become very small or negative in Western countries, while in China it has remained at about 30 per cent of national income (giving a national total wealth-income ratio of about 700 per cent, which is on the high-side by current international strandards).
  • Whereas most of China’s housing stock is effectively privately owned (95 per cent compared with 50 per cent in 1978), Chinese corporations are still predominantly publicly owned (60 per cent, compared with 30 per cent private and 10 per cent foreign).
  • China’s economy could not be described as communist in the state-owned property sense, but is not entirely capitalist: ‘it should rather be viewed as a “mixed economy” with a strong public component’ (that appears rather stable at the moment, and has in fact slightly increased since the GFC). The authors speculate on how this compares with the post-war mixed economies, and on leverage over inequality.
  • Using income tax data for the first time to correct official survey-based estimates, the top 10% receives about 40 per cent of total income, of which around 14 per cent goes to the top 1%, while the share received by the bottom 50% is about 15 per cent (down from 27% in 1978), and the middle 40% share has been pretty stable at around 45 per cent.
  • The gap between urban and rural incomes ruins the figures a bit, as the bottom 50% receives 20 per cent of rural China's income and 25 per cent of urban China's income, and its the gap that leads to the 15 per cent national figure.
  • This distribution is still significantly more egalitarian than the U. S., but is now less egalitarian than Europe and Australia, and appears to have stabilised in recent years (most change occurred between the mid-1980s and mid-2000s). Wealth inequality shows a similar pattern.
  • The key difference is that the magnitude of economic growth has obviously been extraordinary, with average per adult national income increasing by 811 per cent, compared with 59 per cent in the U.S. and 39 per cent in France (and 58 per cent in Australia).
  • In all three countries (there is no comparable data for Australia), the income growth accruing to the bottom 50% has been less than national growth rate, while the income going to the top 10% had been larger (and even more so if one looks at the top 1%, 0.5%, 0.1%, and so on).
  • But this brings us back to the key difference, which is that China’s bottom 50% benefited enormously at the absolute level even as inequality rose markedly, with income increasing by some 400 per cent. In contrast, the bottom 50% in the U.S. has had negative income growth. Thus, China does not describe an immiseration story in two senses: the inequality is not as severe as in the United States, or Europe (or Australia) when one takes the relativities of the regional and urban contexts into account, plus the level of absolute compensation has been extraordinary. The authors do not reflect on the development of class fractures, but it's difficult not to wonder about the consequences of a slowing growth rate, with which China must rendezvous at some point.
  • While this is the best study of China’s inequality levels to date, the data still leaves much to be desired and should be regarded as conservative.

A slide presentation is available here.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


See also:

Suggested citation
Sheil, Christopher, 'New inequality research', Evatt Journal, Vol. 16, No. 3, July 2017<http://evatt.org.au/news/new-inequality-research.html>