0.4 Income distribution  (Page 14/18)

And as long ago as the 18th century Scots and English rich elites willingly paid higher taxes than was the case in the 17th century. Why? Because they perceived that they received substantial government services for the pounds they paid in taxes. Arthur Herman (2001), How the Scots Invented the Modern World , New York, NY: Three Rivers Press, p.58-59.

Appendix chapter 4

Piketty and income inequality: a closer look

There are at least three reasons that reduce the credibility of Piketty’s results. First, the results pertain to the evolution of pre-tax income over time. That is, the author does not take into account the effects of existing taxes, direct transfers from government to individuals (welfare payments, social security payments). The use of pre-tax income as the measure of inequality is difficult to understand in a book intended to be policy relevant, particularly since the data on post-tax, post-transfer income (at least in the U.S.) is readily available. This is a significant issue given the degree of progressivity of effective rates in the U.S. federal tax and the pro-poor effects of government transfer payments.

First consider federal taxes. Table 4-1 shows that average tax rates paid by the top decile of the income distribution are nearly 12 times that of the lowest quintile. The share of total taxes paid by the top 1% is___ times that of the lowest decile.

In an era of high, and probably growing, pre-tax inequality of income, it should not be surprising that the share of the one percent most highly paid Americans has grown sharply: in 1979 the top 1% paid 18% of total income tax. By 2013, the share of the top 1% had grown to 46%, while 40% of households paid no income tax at all ( Economist, September 20, 2014, p.13). These figures suggest that, at the very least, the tax system has had some moderating effects in reducing post-tax income inequality.

A comprehensive report from the Congressional Budget Office in 2014 presents an exhaustive account of the effects of taxes and transfers in the United States from 1980 to 2010, closely corresponding to the period 1970-2010, a period of increasing income inequality reported by Piketty.

This study concludes that, when taxes and transfers are taken into account, income inequality has increased, but not as sharply as one would conclude from the Piketty results According to the CBO study, the Gini Coefficient in the U.S. increased from 0.48 to 0.59 from 1980-2010, if taxes and transfers are omitted in the definition of income.

Taking into account taxes and transfers, the Gini also increased over the same period, but from 0.37 to 0.44, an increase of 19%, compared to an increase of 23% when taxes and transfers are not included in income. This study helps confirm that income inequality in the U.S. has increased since 1980, but not by as much as would be indicated in studies utilizing before-tax income, including that of Piketty.