1 Income Inequality in Rich Countries A B Atkinson, Nuffield College, Oxford ECINEQ Conference Mallorca July 2005

2 1.Introduction 2.Income inequality in OECD countries today 3.What happens to inequality as we grow richer? 4.At the bottom: absolute poverty and relative exclusion? 5.At the top: changing case for progressive taxation? 6.Conclusions

3 Different parts of the distribution Long-run perspective Impact of policy choices THEMES

4 Earnings of Person 1 + Earnings of Person 2 + Income from Capital + Private transfers + State transfers - Direct taxes = Disposable income / Number of equivalent adults = Equivalent Disposable Income 2. Income inequality among households in OECD countries today

5

6

7

8 Substantial diversity across countries Makes a significant difference to how view economic performance Broadly similar pattern for Gini and relative poverty, but important differences Hard to separate history/policy stance

9 1.Introduction 2.Income inequality in OECD countries today 3.What happens to inequality as we grow richer? 4.At the bottom: absolute poverty and relative exclusion? 5.At the top: changing case for progressive taxation? 6.Conclusions

10 “By the early 1980s, inequality in the US had reached 1948 levels.. The figures suggest that the 1950s and 1960s.. were periods of unmatched equality” (Gottschalk and Smeeding) “the Golden Age … witnessed declines in income inequality in a number of countries. This trend was reversed over the last two decades as country after country has experienced an upsurge in inequality” (Cornia and Court) “the correlation between the Gini coefficient and the time variable is almost zero [and there is only] a weak U-shaped relationship” (Gustaffson and Johansson) The US income distribution “is a facet of economic life which changes slowly when it changes at all” (Solow, 1960)

11 Solow Kuznets Recent Literature

12 ? or

13

14 Kuznets effect expired as he wrote in US; later in other countries Limited evidence of U-turn, more episodic Policy impact

15 1.Introduction 2.Income inequality in OECD countries today 3.What happens to inequality as we grow richer? 4.At the bottom: absolute poverty and relative exclusion? 5.At the top: changing case for progressive taxation? 6.Conclusions

16

17

18

19

20 Relative = absolute in another space (capabilities) Relative = different concept (minimum rights)

21 1.Introduction 2.Income inequality in OECD countries today 3.What happens to inequality as we grow richer? 4.At the bottom: absolute poverty and relative exclusion? 5.At the top: changing case for progressive taxation? 6.Conclusions

22

23

24

25 Three elements relevant to choice of top tax rates: Elasticity of labour supply Distribution of earnings differences Social marginal valuation of income More elastic at top? Upper tail more extended Changing values?

26 At low income: Priority to those in absolute poverty, Uniformly low valuation of income above poverty line (zero in Rawlsian case) Tax middle and top at same marginal rate At high income: Concern with those in relative poverty, Concerned with distribution of income among those above poverty line, Tax middle and top at different marginal rates

27 ISSUES RAISED Empirical evidence: across countries/over time Conceptual issues in the definition of poverty and inequality: as we grow richer Policy: benefit uprating and top tax rates