LIFETIME INEQUALITY AND TAX PROGRESSIVITY WITH ALTERNATIVE INCOME CONCEPTS

The increased availability of cohort data and use of dynamic microsimulation models means that more attention is now being paid to longer term income concepts. Results are usually reported for only one income concept and a limited number of summary measures, and it is not clear whether results are influenced by the income concept used. This paper uses simulation methods to compare different approaches. For this purpose a very simple lifecycle earnings model was used to generate profiles of pre-tax incomes. Many comparisons were made using a flexible tax structure and four alternative income concepts. It was found that there was a substantial amount of agreement among the alternative concepts in making pairwise comparisons, with tentative support for the use of present values.     

INTERTEMPORAL UTILITY SMOOTHING: THEORY AND APPLICATIONS

This paper reviews models of intertemporal choice designed to be consistent with a phenomenon called a preference for spread; that is, where a decision‐maker prefers to spread good and bad consumption evenly over time. We closely examine the notion of utility smoothing adopted in these models as a source of the preference for spread. The paper also reviews extensions of these models where a strong aversion to volatility involved in a utility sequence causes preferences to be nonmonotone. Furthermore, to gain a better understanding of the behaviour implied by these models, we apply them to the Diamond growth model.     

DEPRIVATION,INEQUALITY AND WELFARE*

Welfare ranking of income distributions involves a trade‐off between equity and efficiency. A person's feeling of deprivation about higher incomes may be of a relative or absolute type. We consider an intermediate notion of deprivation, a convex mix of relative and absolute deprivations. We then look at the problem of welfare ranking of income distributions when welfare increases under a globally equitable redistribution and under an income increase that keeps intermediate deprivation fixed. All deprivation indices can be regarded as inequality indices but the converse is not true. We also provide a numerical illustration of our results.     

RELATIVE INEQUALITY, ABSOLUTE INEQUALITY, AND WELFARE: LARGE SAMPLE TESTS FOR PARTIAL ORDERS

Two general welfare criteria, mean-relative Lorenz and mean-absolute Lorenz dominance, induce partial orders on income distributions. We propose asymptotically distribution-free inference procedures, based on the union-intersection principle, for these two welfare criteria. Unlike classical tests, our procedures allow one to distinguish among dominance, equality, and noncomparability. We show that union-intersection tests must be used to test for partial orders, and that the statistical ordering is acyclic. The tests are applied to compare the UK distribution of real family income to five other countries.     

A COMPARISON OF DISTRIBUTIONS OF ANNUAL AND LIFETIME INCOME: SWEDEN AROUND 1970.

The concern with income distribution has always mainly existed because of a concern with individuals' economic welfare. In recent years, the question has arisen whether the distribution of annual income—the distribution most often studied—is the best proxy for the distribution of economic welfare. Other measures, such as lifetime income, have been proposed instead.
The paper starts with a discussion of how to define and measure the distribution of lifetime income. By using a simulation model, which partly consists of estimated functions and partly of tax functions taken directly from tax laws, distributions of lifetime income, variously defined, are then constructed. These distributions are compared with each other, and with distributions of annual income. The simulations indicate that the distribution of lifetime income is considerably less unequal than the distribution of annual income. Whether inheritances are included or not seems to be of no importance for the inequality of lifetime income. If, on the other hand, we include the value of leisure time in lifetime income, inequality increases by about 10–15 percent. Distributions of income after tax have Gini coefficients which are approximately 25 percent less than the Ginis for the before-tax distributions. We thus find that the picture of inequality we get is very much dependent on which income concept we use.     

POVERTY AND INCOME INEQUALITY IN PUERTO RICO, 1969–89: TRENDS AND SOURCES

The paper examines Puerto Rican trends in income distribution during the 1970s and 1980s, then attempts to ascertain the source of the changes in income inequality through a decomposition of the Gini coefficient by factor income source. The study finds that poverty and inequality declined unambiguously during the twenty-year period. The source of the fall in income concentration was found to have been tied, not to changes in the distribution or share of earned income, but to that of unearned income, particularly transfers. These appear to have also accounted for the decline in poverty.     

INCOME INEQUALITY IN AUSTRALIA AND NEW ZEALAND: INTERNATIONAL COMPARISONS AND RECENT TRENDS

In this paper we present results on the distribution of income in Australia and New Zealand that can be compared with those for a range of other advanced countries. The framework of analysis, concepts and definitions used have been developed as part of the Luxembourg Income Study (LIS). Using data for the early 1980s, the results indicate that the income distributions in Australia and New Zealand are not, as previous research has suggested, more equal than those in other countries. Neither country has an equivalent net family income inequality ranking in the top half of the eight countries studied. Further analysis indicates increasing inequality in Australia in the first half of the 1980s and, on the basis of some indicators, in New Zealand also. The paper does not investigate the causes of these increases in inequality, although the results indicate that the rise in property income has been a factor behind them.     

THE EARNINGS-RELATED STATE PENSION, INDEXATION AND LIFETIME REDISTRIBUTION IN THE U.K.

The redistributive impact of the U.K. state pension scheme is examined. Benefit-cost ratios are calculated using individual lifetime earnings profiles constructed for a cohort of men drawn from cross-section data. The scheme is investigated at maturity and revenue neutrality is imposed in order to isolate the intra-generationally redisiributive effects of the pension scheme.
The results suggest that differences in returns to the pension scheme are driven by differential mortality, which outweigh the redistributive effect of the two-tier benefit structure. Various reforms of the pension scheme are then simulated, and solved for revenue neutrality. The results suggest that a great deal of care is needed in formulating reforms if redistributive objectives are to be achieved.     

A COMPARISON BETWEEN ACTUAL DISTRIBUTIONS OF ANNUAL AND LIFETIME INCOME: SWEDEN 1951–89

This paper uses register data on tax assessed income from 1951 to 1989 for a representative sample of Swedish men in order to compare the distributions of annual income and "lifetime" income. It is found that the dispersion of lifetime income is around 35 to 40 percent lower than typical cross-sections of annual income. It is income up to around 30 years of age that mainly explains this discrepancy in the magnitude of dispersions. From the age of 30 until 65 years the correlations between annual and lifetime income are quite high and the dispersion of annual income is not very much higher than the dispersion of lifetime income. An analysis of the evolution of income mobility shows that there is a slight tendency to rising mobility over time. This finding implies that the common approach to study the development of income distribution by using only annual income can be misleading.     

MEASURING VARIATIONS IN LIFETIME WELFARE EX ANTE AND EX POST: SOME EXPLORATORY CALCULATIONS

Whereas longevity‐adjusted consumption measures have become increasingly used as indicators of lifetime standards of living, it remained unnoticed that those measures, by relying on period – rather than cohort – life tables, constitute indicators of expected – rather than actual – lifetime standards of living. In order to estimate the actual gap between ex ante and ex post measures of lifetime welfare, this paper computes, for 19th‐century European economies, longevity‐adjusted consumption measures based on period and cohort life tables. It is shown that the gap between ex ante and ex post measures is statistically significant, and that attempts to reduce it are likely to be unsuccessful, because standards of living tend to exhibit, over temporal horizons as long as a human life, structural breaks, which make the ex ante measurement of lifetime welfare highly speculative.     

SEN'S CAPABILITY APPROACH AND GENDER INEQUALITY: SELECTING RELEVANT CAPABILITIES

This paper investigates how Amartya Sen's capability approach can be applied to conceptualize and assess gender inequality in Western societies. I first argue against the endorsement of a definitive list of capabilities and instead defend a procedural approach to the selection of capabilities by proposing five criteria. This procedural account is then used to generate a list of capabilities for conceptualizing gender inequality in Western societies. A survey of empirical studies shows that women are worse off than men on some dimensions, better off on a few others, and similarly placed on yet others, while for some dimensions the evaluation is unclear. I then outline why, for group inequalities, inequalities in achieved functionings can be taken to reflect inequalities in capabilities, and how an overall evaluation could be arrived at by weighting the different capabilities.     

INCOME INEQUALITY AND POLITICAL POLARIZATION AND FRACTURALIZATION:AN EMPIRICAL INVESTIGATION OF SOME EUROPEAN COUNTRIES

This paper investigates the relationship between economic inequality and the distribution of votes among political parties, namely political polarization and fracturalization. Economic inequality is captured by the Gini index, whereas new measures of political polarization and fracturalization are offered. This is the first paper to calculate political polarization and fracturalization indices by a methodology previously used for ethnic, religious and linguistic polarization and fracturalization. Empirical analysis uses data for 17 European countries and for three decades, 1980s, 1990s and 2000s. It is shown that increased income inequality increases political party polarization and reduces fracturalization and that political party polarization decreases with increased GDP per capita.     

INCOME REDISTRIBUTION THROUGH THE TAX SYSTEM: A SIMULATION ANALYSIS OF TAX REFORM

In this paper, we consider reforming the tax system to a comprehensive income tax model in order to amend the differential treatment of income sources. Our simulation analysis shows that the tax reform improves the effectiveness of the tax system on the redistribution of all sources of income including earned income, financial wealth income, and imputed rent. The analysis of incidence of the tax reform suggests that the tax burden for young renters decreases the most and that for young loan-free land owners increases the most through this tax reform.     

CORPORATE SOCIAL RESPONSIBILITY INVESTMENT AND SOCIAL OBJECTIVES: AN EXAMINATION ON SOCIAL WELFARE INVESTMENT OF CHINESE STATE OWNED ENTERPRISES

We apply the theory of corporate social responsibility to analyse social welfare investment undertaken by Chinese State Owned Enterprises (SOEs). We present a simple theoretical model to illustrate how the presence of social objectives in the firm's objective function changes its investment behaviour. Our theoretical model accommodates special features of Chinese SOEs, whose social welfare investment is driven by both social objectives and profit concerns. The model is then tested using a panel of Chinese enterprises during the period 1995–1999. The empirical analysis indicates that despite of the corporatization reform social welfare investment undertaken by Chinese SOEs is still inefficient due to the lack of profit concerns, suggesting that social objectives still dominate profit concerns in motivating the SOEs' social welfare investment. However, we do obtain clear-cut evidence showing that social objectives become less important as time progresses.     

FALLING LABOR INCOME INEQUALITY IN KOREA'S ECONOMIC GROWTH: PATTERNS AND UNDERLYING CAUSES

Over the last twenty-five years, the economy of the Republic of Korea achieved a remarkable growth rate of 7 percent per year in real per capita income, causing it to be labeled, justifiably, as a miracle economy. This exceptional economic growth has beenpp accompanied by an even more exceptional fall m labor income inequality. Using a newly-developed methodology, we use data from Korea's Occupational Wage Surveys to quantify the importance of various factors that have contributed to the fall in labor income inequality in Korea. We find the most important factors explaining the level of income inequality are job tenure, gender, years of education, and occupation, while those that are most important in explaining the change in income inequality are years of education, industry, occupation, and potential experience.     

THE EFFICIENCY OF THE STATE‐OWNED FIRM AND SOCIAL WELFARE: A NOTE

We consider a mixed market where a state‐owned firm competes with private firms. If the number of firms is exogenous, then a deterioration of the efficiency of the state‐owned firm might improve social welfare. This situation occurs when the state‐owned firm is inefficient and private firms are efficient. However, if the number of firms is endogenous, then a deterioration of the efficiency of the state‐owned firm must reduce social welfare.     

A META‐ANALYSIS ON THE RELATIONSHIP BETWEEN INCOME INEQUALITY AND ECONOMIC GROWTH

In recent years there is a growing interest in determining the impact of inequality on economic growth. Theoretical papers as well as empirical applications have, however, produced controversial results. Although there is a considerable part of the literature that considers inequality detrimental to growth, more recent studies have challenged this result and found a positive effect of inequality on growth. In this paper, we provide a contribution to the empirical puzzle by using meta‐analysis to systematically describe, identify and analyse the variation in outcomes of empirical studies. We find that estimation methods, data quality and sample coverage systematically affect the results. The results point out that it will be particularly useful to increasingly focus research on determining the impact of income inequality on economic growth using single‐country data at the regional level, or a relatively homogeneous set of countries with adequate controls for country‐wide differences in economic, social and institutional characteristics.