Tuesday, March 26, 2013

Emmanuel Saez On Taxes And Inequality

This is more a conversation than an interview, and all the more interesting for it (excerpt; emphasis added):

Taxing Away Inequality
A Conversation with Emmanuel Saez

…DG: I’m prompted by your last point to suggest that another underappreciated feature of your work is that it delivers rather provocative hints about the causes of the increase in inequality. That is, it not only lays out the descriptive trajectory of income inequality, but also suggests what’s driving that descriptive trajectory. We participated in a Boston Review debate on one account of the sources of the recent takeoff, namely the expansion of rent, where rent is understood as sweetheart deals, corruption, backdating stock option contracts—all sorts of pay-setting practices that permit those at the top to secure more than they would in a competitive market. On the basis of your research, do you think that rent is an important source of the recent growth in income inequality?

ES: If we define rent in terms of situations where pay doesn’t correspond to what economists call ‘marginal productivity’—that is, the economic contribution a person is providing—I would say yes, because the evolution of income concentration over time and across countries has a number of features that are inconsistent with the story where pay is everywhere equal to productivity. The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes…

It’s a fairly long interview/conversation but basically looks at the pros and cons of using tax policy to address income inequality, specifically highly progressive income taxes.

At one stage, the top marginal income tax rate in the United States stood at 91%, and was above 70% from the end of WWII to the beginning of the Reagan era, when tax rates began a downward trajectory. The current top marginal income tax rate is a less mind-boggling 39.6%. Not surprisingly, income inequality was negatively correlated with the marginal income tax rate over the same periods.

I don’t know if we ever want to be that punitive, but low income tax rates definitely do have an impact in increasing income inequality, and by extension wealth inequality.

But do have a read – the interviewer’s a sociologist not a journalist, and it shows in the thoughtfulness of the questions and makes for an insightful (and very accessible) look at the issue.

(H/T: Mark Thoma)


  1. You got it wrong dude as it amounts to nothing of that sort. Saenz does not categorically say it was due to tax. He even hedged it with deregulation and policy. The former is especially pertinent to what happened in the equities and derivatives till 2008. And of course, the latter is relevant when you consider the yanks had the new deal, the fair deal of Truman and Johnson's great society going. And the oil shock of the 70s sort of crimped everyone. Only a totality of deregulation, tax, policy accounts for the yank story, and I will throw globalization and the global supply chain into the mix. So it's not solely taxation. Even the data from PEW is revealing as to who is actually impacted with those at the bottom bearing the brunt irrespective of Friedman (Thatcherite) monetarism or Reagan supply side voodoonomics


    Plus this is ancillary:


    In fact, you made a generalization which does not echo Saez's. take.
    The very same mistake you made with that witch allusion in the ratings thread,mate. Look at your final take for something does not jive there. Spot if you can, it has to do with information asymmetry. My line of work takes me to the US regularly, why even this year! And the common gripe I hear is the disappearance of manufacturing jobs and the likelihood that some jobs may NEVER return.

    To demonise taxation is easy peasy for bleeding heart liberals but the fact of the matter is that taxation constitutes only a small portion of the problem for in actuality, a whole lot of factors both internal and external contribute to the eventual outcome.

    Warrior 231

    1. Cue: trumpets, dancing slave girls and delirious crowd...warrior is back!


      I'm not sure what you mean - for one thing, I fully agree with there being a multiplicity of causes for inequality. FWIW I just finished reading Greenspan's The Age of Turbulence, and he agrees with your assessment.

      However, there's nothing in what I wrote above that says that low taxes are the sole cause of inequality, only that they are contributory (you missed out education BTW). I'm also not generalising from Saez, I'm generalising from all that I've read and written about inequality over the past 4 years.

      More importantly from the perspective of policy levers, tax policy has a proven track record of regulating inequality, which is really what Saez is talking about and the reason why I did this post.

    2. Oh BTW, I deleted your duplicate post, if you don't mind.

  2. Thanks for d grand, awe inspiring,jaw dropping welcome mate..hahaha As schucks, I am mighty touched! made my day in fact knowing I am welcome to vex you with missives like these. So you do enjoy them, don't you....hahaha (ROFLMAO) Anyway,Greenspan is a hindsight know it all jerk who dint have the foresight when he was in the driver's seat, period. Can't believe YOU of all folks reading garbage by an Ayn Randian fanatic! OMG, Wonders never cease!

    In any case, I disagree on taxation as a regulator of inequality. The data does not bear that out. In fact, if you look at the PEW link, you will notice the following, closing gaps when redistributive, poverty alleviation etc programs like the New Deal, Fair Deal plus Great Society were in swing as surely stuff like Medicare, Headstart, Appalachia will have impacts..... but when the effects begin wearing out, the gap widens. In fact,the Oil Shock decade of the 1970s when stagflation was prevalent, is the last period, the gaps dint widen by much. Once, Reaganomics and the Chicago school of Friedman gained traction and budget cuts on redistributive policies took effect, the gap accelerated , of course not helped by the tax cuts but NOT solely due to it. Throw in technology, global supply chain, globalisation etc to the 1990s heydays of deregulation (yes, even under Clinton) hastened the widening of the chasm (just look at the Business Insider link to get the pix) - a time when the mart, with its attendant greed, irresponsibility etc was given full rein as the ultimate arbiter. And add to the mix of the demise of well paying blue,white collar job and you have a series of whammies wupping incomes, left, right and centre and esp impacting the middle class

    Moral: redistributive policies narrow gaps, irresponsible free market frolics widens inequalities. Remember Gordon Gecko?

    That is why we need the NEP sans the deviations to keep the potentiality for social explosion under leash. And a wealth tax to accelerate the redist. We could of course as last resort adopt the Hitlerian approach of culling and expropriation but my Islamic sensibilities militates against that and my Shia imams are pretty clear on the obvious so i guess that notion is unpalatably haram.....But do bear in mind, Hitlerian reactions are what we are asking for if we jettison the NEP and leave the free market devil dictate terms. And this is no Perkasa threat, believe me, it is just any rational reading of historicities will yield. Not because Warrior 231 is racist but simply because as Santayana put it, " history is bound to repeat itself, if we don't take repasts from Mr Past!

    But that does not mean free market capitalism is invariably at odds with the NEP, there are ways to circumvent the problem, a wealth tax is one option. Another would be something along the lines of windfall tax ala Putin:


    Yet another option would be restrictions in certain emerging sectors I.e., halal food, Islamic finance,halal pharmaceuticals and cosmetics. After all there is a burgeoning "captive" mart out there with purchasing muscle to boot. But in exploring these and other options, I would be digressing wouldn't I?

    1. Warrior,

      I regard welfare transfer/redistributive policies part and parcel of tax policy - they go together, as the one finances the other. So no, I don't disagree with your assessment. In no wise am I thinking of doing away with redistributive policies such as the NEP in favour of tax alone, and I don't believe Saez (with his background) is either.

      Taken from that standpoint, the data does support tax policy as being effective e.g. pre- and post-tax and transfer Gini numbers in the OECD.

      As to why I'm reading Greenspan, look up Sun Tzu's Art of War, Chapter 3, Verse 18.

  3. Aw man, the net sucks big time in of all places, Timbuktu!. Nah, deleting half naked comments are no problems. Ok, time to hit the weed to smoke the net blues away!


  4. Ok dude, if we look at both as the same. Haven't seen the OECD data too conclude.

    I am more into Ali's (as) najhul balaghah . He trumps Sun Tzu anytime.

    Right I won't get into an argument on the above. Will be too geekish or nerdy to discuss policy, tax, sun Tzu etc on a wonderful Friday like this in Timbuktu. And I ain't a nerd or geek to forego slave gals, and reeds ...so there...off to the soaring catacombs of Timbuktu for W,W& W.......

    Warrior 231