Inequality: Capital In The XXI Century

Question 1

Mechanism of wealth divergence explains evolution of wealth overtime: 3 facts to observe

Answer 1

There was hyperconcentration of wealth in EU during XIX century up to WW1. (Inequal)

Compression (fall) of wealth inequality following shocks of 1914-1945 (Great depression, WW, human/physical capital loss)

Concentration of wealth has not regained pre-1914 levels

Question 2

1st stage

Hyperconcentration of wealth in EU during 19th century to WW1.

Answer 2

Prior WW1 Up to 1913- Primary agrarian societies with low growth (g) . Rate of return of capital/wealth (r) > g

R>g THEORY!!!

If r (rate of wealth)>g(growth of income) then rich people with assets will get wealthier at a higher rate than poor people with no assets.

Question 3

2nd stage.
1.The compression of wealth inequality following shocks 1914-1945:

2.What happened to tax on capital wealth, before and after WW1?

Answer 3

The gap between R>G shrunk

2. Before WW1-tax on capital low,
   After WW1- tax high (reduce return on capital (R), so reduce wealth inequality!)

Question 4

3. Concentration of wealth has not regained pre-1914 levels

3 reasons why it has not regained.

Answer 4

K accumulation is a long term process-not enough time since 1945.

Emergence of a “patrimonial middle class”- decrease in upper deciles wealth, benefitted middle 40% of population

20th century- significant tax on capital income imposed on dividends, interest, rents, profits

Question 5

Capital in 21st century: 3 forces that can WORSEN/increase wealth inequality

Answer 5

Global tax competition to attract capital

Growth slowdown (R) and technical change

Unequal access to high financial returns

Question 6

1. Global tax competition to attract capital investment

And example of tax.

Answer 6

Capital taxes expected to fall as international competition intensifies, to attract investment.

For example inheritance tax has been falling. (Increase inequality as rich people keep their wealth R>G)

Question 7

2. Growth slowdown (R) and technical change

Answer 7

Low G rates, while Return to R (wealth) is to remain stable from 0-2100. widen gap between r and g.

Technological change-robotisation benefits owners of capital, while lower down workers can lose jobs!

Question 8

3rd force that can increase inequality of wealth:

1.Unequal access to high financial returns

2.Evidence to support?

Answer 8

1.Large financial portfolios have access to significantly higher returns than smaller ones. More money, more advice etc. (Inequality of opportunity)

2. The very richest top 1%’s wealth grows faster than average wealth (6.8% R rate compared to 2.1%)

Question 9

That was 3 forces for rising wealth inequality…

4 reasons for rising labour inequality in US

Answer 9

Access to skills/higher education (inequality of opportunity)
Skill-biased technological change
Exploding top managerial compensations (superstar effect)
Large cuts in top income tax rates

Question 10

Interaction between labour income inequality and capital income inequality

Answer 10

Labour inequality can fuel rising wealth concentration (e.g people who can’t access education, lower income than others, who can spend on wealth and increase gap further)

Then wealth inequality has the greater impact on income inequality overall. (The 3 causes of wealth inequality relating to R>G, increasing income inequality between rich and poor further)

Question 11

How to tackle rising inequality (4)

Answer 11

Progressive tax-combats income and wealth (lower rich incomes)

Progressive tax also a key component of redistribution (redistribute riches)

The case for a Global Financial Register (GFR)- records ownership of assets to tax more effectively. (Solve tax evasion from tax havens)

Tackling inequality at the bottom: more equal access education and good paying jobs (links to inequality of opportunity)

Question 12

Picketty sugggests an optimal inheritance tax rate (Part of redistribution)

Answer 12

50-60%

Question 13

Global financial register (GFR)

Answer 13

Address global tax evasion.

Tax havens make it hard to measure and tax wealth and capital income.

Wealth held in tax havens worth 10% of GDP

Question 14

4th way to tackle inequality

Tackling inequality from the bottom

2. What is the probability that a child born to parents in the bottom fifth of the income distribution reaches the top fifth in UK and US? (Concept of American dream-rags to riches)

Answer 14

Equal acccess to education to address the stagnant income growth for bottom half of population (get them earning more)

2. 9% UK
   7.5% US
   Shows the American dream is more likely to be done NOT IN THE US

Question 15

Summary: the main cause of income inequality is…

Answer 15

Increasing wealth inequality (3 forces linking to rising wealth inequality)

(global tax competition, growth slowdown and unequal access to high financial returns)

Question 16

So what is the main way to reduce inequality? (2)

Answer 16

Institutions and policy to regulate relationship between capital and labour (since wealth/capital inequality is the main problem!)

Question 17

3 causes of wealth inequality
4 causes of income inequality
4 solutions

Answer 17

3 wealth (global tax competition, G slowdown+tech change, unequal access to high financial returns)

4 income (inequal access to ed/skill, skill-biased tech change, exploding managerial compensations, falling top income rates)

4 solutions (progressive tax to reduce rich income, progressive tax for redistribution, GFR, improve opportunities (school/skills)