The Gini Coefficient

A recent issue of the Handelsblatt (the German Wall Street Journal equivalent) had a neat graphic comparison of the U.S. to 5 other major countries: France, Germany, Italy, Spain and the U.K., along the criteria of the Gini coefficients on pre-tax/transfer incomes, post-tax/transfer incomes, and household wealth. Our pre-Gini on incomes is slightly below that in Italy, a bit higher than in the other four countries.  The big difference is that our post-Gini is much higher than in all the other countries—0.38 compared to a range of 0.29 to 0.34.  We do much less redistribution through transfers and have flatter taxes.

It is thus not surprising that we win the Champions League of Gini wealth inequality:  Ours is 0.85, with a range of 0.65 to 0.78 in the other five countries. The tiny tax increase on the top 1 percent of households that took so much political energy last year will do almost nothing to strip us of our championship status.


PK

Professor Hamermesh,

Would you say that Ginis measured at the household level are the larger issue, or the decline in household formation (~27% households single in 2012 vs. ~10% in 1952)? When you look at our income Gini at an individual level (I haven't tried it for wealth) we're relatively flat over the last years. Perhaps the lower household formation at the lower end of the income/wealth scale is a symptom?

frankenduf

so much for the propaganda that our taxes are too high

James

That's like saying it's great that the loan shark's enforcer only broke my arm, 'cause all those other people had their kneecaps broken.

Enter your name...

Does that calculation properly account for tax expenditures (the difference between "here, take $100 off your tax bill because you're a low-income parent" and "here, have a $100 because you're a low-income parent")?

nobody.really

Links! Links! Links!

Chekhov remarked that if you begin a play/novel showing a loaded gun, then at some point before the ending someone has to fire it off. Similarly, if you begin a blog post with "Gee, there's this terrific graphic...," you HAVE to provide a link -- or at least say why you're not providing one.

Michael

My neighbor, an ophthalmologist, makes more than 4 times what I make. Clearly I've been wronged by this. Will someone please make the world a better place by taking half his income and giving it to me, so I can buy a nicer car?

Lowering Gini coefficients is a less worthy goal than improving median standard of living. Increased wealth redistribution makes our Gini look better, but society as a whole is worse off than it would be otherwise.

tmeier

You are talking a different language than the people who think the welfare state should be expanded. Essentially it comes down to your morality being individual and theirs collective. The idea of individual morality strikes them as absurd because we are all interconnected, the idea of collective morality strikes you as absurd because only an individual can make moral decisions and be a moral agent.

Andreas Moser

@tmeier: I am an individual and I make an individual moral decision, but that does not mean that I need to disregard others and society or my community. The reason for that is that i recognize that my personal position (as a healthy, smart and educated white guy from a middle-class family) is only due to luck and that if somebody else is sick, poor or not so smart, it's not his fault. Our positions in life are largely arbitrary, so we shouldn't be too proud of them.
(for more on this see John Rawls about the "veil of ignorance".)

Dave F.

I have said it before and I will say it again - it is simply silly to treat these direct comparisons of some countries to others when there are whole lists of confounding factors. I am far from an expert in this field, but there are quite a few things that could severely skew distributions, including family size, immigration differences, etc.

Besides, is the main goal income equality, or is the goal a wealthy society? We are more wealthy and more productive than all those EU countries in almost every way.

Why do I want America to be like France?

Andreas Moser

Have you been to France? Have you tasted the food, seen the girls and listened to the language. There are many reasons why I would like every place to be like France.

tmeier

I have lived in France (and the UK and spent a deal of time in the other Western European countries) and though I find many points in their favor their economic and political systems are not among them. France of course did not always have the political and economic orientation it has now and was always apparently a nice place in many ways. I think it's more the customs and culture, the gustatory approach to life which gives France it's positive character, this it has had for the last few hundred years at least.

As to the women, I found European women different on average from those in the U.S. in that they don't expect as much from a man. British on the whole I found most congenial if you want an easy, comfortable relationship and British men (who only seem to really want a girlfriend to drive them home from the pub when they've drunk too much) aren't much competition.

Chris

Given that 47% of Americans pay no taxes and 35% of Americans pay a negative tax rate (their refundable credits exceed taxes owed) it's not surprising pre-tax and post-tax ratios would be so similar. You have a relatively small percentage of the population paying most of the tax leading to a largely flat distribution that ramps sharply at incomes above $150,000.
I'd have to read the original article, but a relatively flat taxation system where the majority of the population pays little or no income tax is far preferable to the high tax rates paid by all in that select group of countries.

Scott2526

Your your definition of being more fair is taking a higher percentage of someones earned income, Gini is a wondefully informative figure. However, if your have high(er) levels of individual freedom to make choices partnered with with basic protections from exploitation, then all Gini measures is the amount someone takes from you in the states definition of fairness. If we have freedoms and basic protections (which fundamentally) all the countries listed do, I would argue the lower the Gini the more economic freedom a county offers.

ND

It's not just "we do much less redistribution through transfers and have flatter taxes", we actually transfer to the wealthy through the federal income tax and benefits system.

The US subsidizes capital-property-based earners. Their income tax rates range from 15%-20% while the top wage earner rate is 39.5% and capital-property-earners make no contribution to the progressive benefits in Social Security, so high wage earners (and younger generations of high wage earners) carry all the burden of progressivity.

A related issue is the federal scheme of transferring wealth from 2-earner/2-parent families to patriarchal families (sole breadwinner, nonearning parent, whether married or not); some of this goes up the income chain as well.

Because there are marriage penalties on 2-earner families with joint income above $130K, women tend to get driven from the workplace as they move up in their careers. This is one reason that 43% of college-educated Gen-X women do not have children.

Read more...

Caleb B

Capital taxes exist because the capital invested has already been taxed as income...again, made with post-tax dollars...additionally, short-term investments of less that 365 days are taxed as income. Capital is at a higher risk of loss and is not indexed for inflation, so an investment that has "grown" 5% in the decade is taxed on the entire 5%, even though this is a negative return in real terms due to inflation. To me, the distinction makes a lot of sense.

The marriage penalty makes zero sense.

Pshrnk

The company paying my salary has already paid a corporate income tax on their money. Please explain the difference.

Emil

Seems as if (at least) Italy, France and Spain are showing that this amount of redistribution is not really sustainable.

Does seem like a strange moment in time to advocate becoming more like basket-case economies.

Also, has that comparison adjusted for the "worstall fallacy"? (see e.g. http://www.forbes.com/sites/timworstall/2013/03/09/the-problem-with-the-wealth-inequality-in-america-video-it-commits-worstalls-fallacy/)

Andreas Moser

The redistribution in Germany is massive and quite sustainable.

Tarrou

Inequality in and of itself is not a problem. I know a lot of people take it for granted that it is, but there's just not much data to support that assumption.

http://www.brookings.edu/~/media/Research/Files/Articles/2013/03/overstating%20inequality%20costs%20winship/overstating%20inequality%20costs%20winship.pdf

Another major point is that the higher the baseline living standard is, the more difficult it is to reduce inequality. The poor in America have houses, cars, TVs, appliances, etc. One could reduce the inequality in Africa by getting electricity and water to all homes. When people already have an extremely high standard of living, raising the low end is far harder to do. How much money would the average poor person have to make to offset the monstrous incomes at the top?

Which, of course, is the point, the inequality doomsayers want to make the rich poorer. They know they can't make the poor substantially richer.

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tmeier

I don't know if I'd say inequality is not a problem, rather it's a problem which can only be solved by measures which are arguably worse. I agree with the rest, the higher the baseline, the richer the society the more disparity there will tend to be in a market economy.

The underlying 'problem' is technology, the more advanced and complex the tech the fewer who can master it and the greater the rewards of mastery, hence the greater the disparity between those who master the technology and those who don't or can't.

James

Mastering complex technology is not the only way to make a decent living. Take for instance plumbers, or my neighbors' kid, who is making close to $100K/year as an electric lineman.

SKS

I have been looking for the Handelsblatt article - would you mind posting it?
Thank you very much!

alan

Who decided that the gini coefficient matters, other than as a convenient political tool to bash the United States with?

What's the correlation between growth in a nation's GDP and the gini coefficient, or growth in total wealth and gini coefficient?