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The Economists’ Voice

Ed. by Belke, Ansgar / Schnabl, Gunther

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CiteScore 2017: 0.15

SCImago Journal Rank (SJR) 2017: 0.104
Source Normalized Impact per Paper (SNIP) 2017: 0.105

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1553-3832
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Volume 12, Issue 1

Issues

Growing Apart: The Evolution of Income vs. Wealth Inequality

Michael Cragg / Rand Ghayad
Published Online: 2015-07-25 | DOI: https://doi.org/10.1515/ev-2015-0006

Abstract

The gap between the richest Americans and the rest of the nation has changed dramatically over the past three decades – becoming one of the most challenging political and economic trends for the nation. For decades prior to that, the distribution of wealth and income had been relatively stable, so much that a central problem posed in the economics literature was to explain this stability. But beginning in the early 1980s, inequality began to grow rapidly and has recently been attracting substantial attention from policymakers and researchers reflecting a widespread concern that reflecting a widespread concern that growing labor incomes of senior executives, finance professionals, and successful entrepreneurs is entailing large economic costs to society. The dominant paradigm in the media and Washington is that inequality is purely a matter of divergence in earned (labor) income inequality which can be ameliorated by making earned income taxes more progressive and shifting spending to help the poorer. However, this is not the story: wealth inequality, as it turns out, is much worse. This warrants emphasis for a variety of reasons: (1) a growing body of research that suggests that in the head-on comparison it is wealth inequality, rather than income inequality or poverty that has a negative, statistically significant effect on economic growth.1 (2) Historically societies have failed when wealth has become overly concentrated; and (3) the wedge between earned and unearned income tax rates reduces progressivity as capital income rises. We offer a number of solutions which should generate debate amongst economists as they test conventional wisdom.

Keywords: income inequality; unearned income tax; wealth inequality

References

  • Bagchi, Sutirtha, and Jan Svejnar. 2013. Does Wealth Inequality Matter for Growth? The Effect of Billionaire Wealth, Income Distribution, and Poverty. IZA Discussion Paper No. 7733.Web of ScienceGoogle Scholar

  • Piketty, Thomas, and Emmanuel Saez. 2013. Optimal Labor Income Taxation, Hand-book of Public Economics, Vol. 5. Amsterdam: North Holland.Google Scholar

  • Saez, E. 2009. Striking It Richer: The Evolution of Top Incomes in the United States. Retrieved May 2, 2015. http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf.

  • Toder, Eric, and Daniel Baneman. 2012. Distributional Effects of Individual Income Tax Expenditures: An Update. Washington, DC: Urban-Brookings Tax Policy Center.Google Scholar

About the article

Corresponding author: Michael Cragg, 44 Brattle St., Cambridge, MA 02138, USA, e-mail:

aMichael Cragg and Rand Ghayad are employed by The Brattle Group.


Published Online: 2015-07-25

Published in Print: 2015-08-01


Citation Information: The Economists' Voice, Volume 12, Issue 1, Pages 1–12, ISSN (Online) 1553-3832, ISSN (Print) 2194-6167, DOI: https://doi.org/10.1515/ev-2015-0006.

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