Bequests,taxation and the distribution of wealth in a general equilibrium model

This paper examines the role of bequests and of taxation on bequests for the distribution of wealth. We investigate a model with overlapping generations and heterogenous households where parents derive utility directly from their bequests. We obtain all results analytically. Using the coefficient of variation as the measure of inequality, bequests per se diminish the inequality of wealth since they raise private savings and hence average wealth holdings more than the variance of wealth. From a policy perspective, taxing bequests and redistributing government revenue lump-sum among the young generation further decreases wealth inequality.     

Thomas Piketty's Historical Macroeconomics: A Critical Analysis

There has been a great deal of interest in the data on income and wealth inequality collected by Thomas Piketty. This paper does not question that data; rather, it questions the framework of Piketty's analysis, both theoretically and empirically—namely the alleged upward tendency of the ratio of wealth to national income and the rise of wealth inequality. First, in the mechanism put forward, wealth can only grow as a result of savings, thus ruling out any form of price effect (as in urban land). Second, Piketty’s second law defines an asymptotical trajectory, in which variables grow in parallel, something incompatible with the rise of the ratio between two variables. In addition, Piketty’s model does not match data for the USA. The historical profile of the ratio of wealth/national income is actually the inverted image of the productivity of capital (the ratio of output/firms’ fixed capital). Doubts are also expressed concerning the dramatic fall of the ratio of wealth/national income in Europe around World War I.     

THE EFFECT ON POVERTY STATUS IN ISRAEL OF CONSIDERING WEALTH AND VARIABILITY OF INCOME

This paper assesses the effects of including wealth and the variability of income on the incidence of poverty and the degree of income inequality in Israel. A special survey, which includes data on the wealth and income of a national sample of Israeli families in 1963–64 and 1964–65, allows us to go beyond measures based on current income alone.
The first section reviews earlier studies of poverty in Israel. The next section looks at poverty and inequality in terms of current income, current wealth, and a combined measure of income and wealth. The combined measure is the Hansen-Weisbrod measure (HW), which equals income plus the annuity value of wealth, assuming all wealth is just consumed at the time of death. It is interesting that, in spite of the much higher wealth inequality than income inequality, the HW measure was slightly more equally distributed than income. This result occurred because the annuity component made up a low share of the total HW measure and the correlation between income and wealth was well under 1. Although overall inequality and poverty were similar for income and HW measures, the incidence of poverty by subgroup depended on the measure used.
The final section presents a dynamic view of poverty and inequality. Year-to-year changes in poverty were substantial. Because of the use of a relative poverty concept and the rise in real incomes, the real income poverty line rose by 15 percent between 1963 and 1964. Still, of those in income poverty in 1963, 37 percent managed to escape poverty in 1964. The paper shows how the degree to which poverty was stable or transitory varied substantially by age and country of origin.     

Increasing returns to savings and wealth inequality

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns on savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index and all but the top 1 percentile of the US distribution of wealth.     

Do family resources matter? Educational attainment during transition in Poland*

We analyse the relationship between family background and children's educational attainment in the 1990s in Poland. If parental poverty affects children's educational prospects, the increase in social inequalities observed in the Polish transition process will be transmitted between generations. We apply an ordered probit model of educational attainment on longitudinal data from the Polish Labour Force Survey. Surprisingly, parents’ income and their labour market status have only a weak impact on children's education. Parents’ schooling, however, is strongly related to children's, and so are household structure, city size, and region of residence. We conclude that, if transmission of inequality takes place between generations, this seems to be primarily caused by the inheritance of human capital rather than by pure wealth effects.     

Income inequality, consumption, and social-status seeking

Using the Chinese Urban Household Survey data between 1997 and 2006, we find that income inequality has a negative (positive) effect on household consumption net of education expenditures (savings) even after we control for household income. We argue that people save to improve their social status when social status is associated with pecuniary and non-pecuniary benefits. Rising income inequality can strengthen the incentives of status-seeking savings by increasing the benefit of improving status, and by enlarging the wealth level required for status upgrading. We also find that the negative effect of income inequality on consumption is stronger for poorer and younger people and that income inequality stimulates more education investment, which are consistent with the status-seeking hypothesis.     

Focusing effect and the poverty trap

I build a dynamic consumption-savings model in which agents׳ choices are distorted by the focusing effect: agents overweight the utility of goods in which their options differ more. I show that the consumption-savings choice depends both on the marginal return on savings and on the total return on savings, implying that the incentive to save may increase with the initial level of wealth. As a consequence, a salience-based poverty trap may exist when the marginal return on savings is sufficiently high and sufficiently flat. I also consider the case of a perfect credit market and show that a poverty trap may emerge when the salience of consumption is bounded above. I discuss policy implications. In particular, imposing upon an agent a punishment for decreasing savings below a threshold leads to a higher level of savings, even when the threshold triggering the punishment is not binding     

Wealth inequality and financial inclusion: Evidence from South African tax and survey records

Theoretical models show that financial inclusion reduces wealth inequality. Existing empirical models are restricted to estimates using income inequality because of a lack of cross country wealth inequality data. We used 2010-11 and 2014-5 waves of the National Income Dynamics Study combined with South African tax records to estimate wealth and income inequality. Using Re-centered Influence Function regressions on the micro-level records, we confirmed the negative cross-country relationship between financial inclusion and income inequality. Wealth inequality is different. Financial inclusion improved wealth shares of only the middle class. Because of predatory lending, expansion of credit reduced the wealth share of the poor. Improved savings by the middle class, providing better oversight over financial services targeted at the poor and removing impediments to the small business sector are pre-conditions for financial inclusion to reduce wealth inequality.     

Income and Wealth Inequality in Asia and the Pacific: Trends,Causes, and Policy Remedies

The Asia–Pacific region's rapid growth and poverty reduction in recent decades have been accompanied by rising income and wealth inequality. Technological progress, globalization, deregulation and market-oriented reform, and financialization have generated many new opportunities, but rewarded capital more than labor, benefited skilled workers more than the unskilled, widened spatial inequality, and produced a growing number of the superrich. For some countries, population aging has also contributed to rising inequality. The present paper provides an update on recent trends of income and wealth inequality in the Asia–Pacific region, examines causes behind rising inequality, and discusses policy actions needed to tackle inequality. It also assesses how the COVID-19 has likely worsened inequality in the region.     

收入差距与社会地位寻求:一个高储蓄率的原因

我们使用中国城镇住户调查数据证实:在控制家庭收入之后,收入差距仍然会显著减少家庭除教育以外的消费。我们还发现收入差距对低收入或年轻家庭的消费抑制更加明显,但能刺激教育投资的上升。这很可能来源于为提升社会地位而储蓄的动机。更高的社会地位可以带来各种物质或非物质上的收益。而社会不平等的增加意味着进入社会上层可以获得更高的收益,同时提升地位需要更多的财富。这些都可能加强人们为提高社会地位而储蓄的激励。     

Public policy,dynamic status preferences,and wealth inequality

This paper studies the effect of productive government spending (taxation) on aggregate savings behavior and its consequences for the dynamics of wealth inequality, taking into consideration key behavioral changes that occur during the process of economic development. Substantial empirical evidence suggests that during this process agents' preferences toward status (positional consumption) evolves according to the average wealth of the society. The sources of wealth include private capital and productive public capital, the latter financed by a distortionary income tax. This dynamic status effect impacts peoples' responses to tax policy in ways which contrast with those of the standard neoclassical model. Specifically, we find that in response to an increase in the income tax, in economies with a strong (weak) enough dynamic status effect, savings and inequality increase (decrease). Incorporating the behavioral changes to fiscal policy expands the set of mechanisms available to explain the observed variations of savings and wealth distribution dynamics that cannot be attributed to technological or other structural factors.     

Insurance of Household Risks and the Rebalancing of the Chinese Economy: Health Insurance,Health Expenses and Household Savings

This paper studies the effects of a public insurance system, the New Cooperative Medical Scheme (NCMS) on household savings in rural China. We develop a theoretical model in which we explain the impact of health insurance on savings through the impact of health insurance on out‐of‐pocket (OOP) health expense given the household level of wealth and seriousness of illness. We test the model empirically using data from the China Health and Nutrition Survey. We run endogenous and exogenous quantile regressions to evaluate the effects of NCMS participation on the distributions of household savings and OOP health expense. The impact of NCMS varies with the seriousness of illness. The NCMS induces an increase in OOP health expense for mild illness and, inversely, a decrease in health payments for more serious illnesses. The NCMS also leads to a higher incidence of catastrophic healthcare spending. The impact of the NCMS, given a certain state of illness, also varies with the household level of wealth. Poor households face health expense for both mild and serious illnesses. As the NCMS has opposite effects on the OOP expense for these two kinds of illness, we observe no effect on poor households’ precautionary savings. Because the decrease in OOP health expense for mild illness is larger for less poor households, the NCMS induces a decrease in their savings. For the most affluent households, the higher decrease in OOP spending on most moderate illness is dominated by a sharp increase in catastrophic expense, causing an increase in savings. To significantly reduce household savings and enhance household consumption, the NCMS has to offer better coverage against both serious and catastrophic health risks.     

Fiscal Incidence in Ghana

We use methods developed by the Commitment to Equity Institute to assess the effects of government taxation, social spending and indirect subsidies on poverty and inequality in Ghana. We also simulate several policy reforms to assess their distributional consequences. Results show that, although the country has some very progressive taxes and well‐targeted expenditures, the extent of fiscal redistribution is small, but about what one would expect given Ghana's income level and relatively low initial inequality. Results for poverty reduction are less encouraging: were it not for the in‐kind benefits from health and education spending, the overall effect of government spending and taxation would actually increase poverty in Ghana. Eliminating energy subsidies and at the same time reallocating part of the savings to well‐targeted transfer programs could lower the fiscal deficit while reducing inequality and protecting the poor.     

The Literature on Piketty

The extensive critical literature on Thomas Piketty’s Capital in the Twenty-First Century is surveyed under nine headings. The first deals with the conservative argument that inequality in the distribution of wealth does not matter, since a rising tide lifts all boats. Second, it is claimed that Piketty’s prediction of continuously increasing inequality and the return of ‘patrimonial capitalism’ is unjustified. Third, the quality of the empirical evidence that he cites is questioned, on a number of quite different grounds. Fourth, some critics object that Piketty’s explanation of long-run trends in the distribution of wealth is too general and too theoretical. Fifth is the argument that he has used the correct (neoclassical) theory incorrectly, exaggerating the elasticity of substitution of capital for labour. Against this, post-Keynesian critics claim, sixthly, that Piketty is using the wrong theory, and should have drawn on the Kaldor–Pasinetti model of distribution and growth, and not the discredited neoclassical analysis. Seventh, Piketty has been criticised for ignoring the distribution of wealth in developing countries. Eighth, there is a wide range of objections to his most striking policy proposal, for a progressive global wealth tax. Finally, several critics from outside economics complain that Piketty has neglected a number of non-economic dimensions of inequality. I conclude by welcoming both the book and the critical literature, and calling for the distribution of wealth to be placed back on the political agenda.     

The Gender Wealth Gap in Europe: Application of Machine Learning to Predict Individual-level Wealth

This article provides comparative estimates of the gender wealth gaps for 22 European countries, employing data from the Household Finance and Consumption Survey. The data on wealth are collected at the household level, while individual-level data are needed for the estimates of gender wealth gaps. We propose a novel approach using machine learning and model averaging methods to predict individual-level wealth data for multi-person households. Our results suggest that random forest performs best as the predicting tool for this exercise, outperforming elastic net and Bayesian model averaging. The estimated gender wealth gaps tend to be in favor of men, especially at the top of the wealth distribution. Men have 24 percent more wealth than women on average. We also find that a high home ownership rate is associated with a smaller country-level gender wealth gap. Our estimates suggest that the individual-level wealth inequality is on average 3 pp higher than the household-level wealth inequality in multi-member households.     

The Canadian tax-free savings account: a programme to help the rich get richer?

This article examines participation in the Canadian tax-free savings account (TFSA), implemented in 2009, and its potential impact on wealth inequality in Canada. Data from the 2012 Survey of Financial Security is used to estimate probit, tobit and Heckman probit selection models to test the hypothesis that high-income earners and wealth holders are the most likely recipients of the benefits associated with the TFSA. Empirical results highlight the significance of net worth as a key determinant of both participation in and contribution levels of the TFSA. The results are expected to be relevant to public policy-makers concerned with reducing inequality and those endeavouring to encourage savings for all socio-economic groups.     

From households to national statistics: Macroeconomic effects of Women's empowerment

How do shifts in intra-household gender dynamics affect the economy at large? This paper parametrizes intra-household gender-powered decision-making and endogenous distributions of income to allow for the aggregation of key macroeconomic variables. In equilibrium, we find that greater women's empowerment increases precautionary savings to offset low endowment realizations. The effect is stronger among poor households who hedge against hitting a subsistence bound. Given the boost in savings at the bottom of the distribution, more empowerment leads to less poverty and lower income inequality. Another equilibrium prediction of the model is an increase in the household's food intake regardless of income, reflecting women's greater preference for food compared to men. The model's predictions are mapped to Mexico's 2014 National Household Income and Expenditure Survey which identifies the gender of the head of the household. These predictions have policy implications in the areas of monetary policy, social policy, financial intermediation and banking.     

An exploration of the positive effect of inequality on common property forests

This paper analyzes the household level forces driving the positive impact of inequality on common property forest cover in Mexico. A game theoretic model demonstrates that when common property goods are complementary to private inputs in production, an increase in wealth inequality can lead to a decrease in exploitation of the commons. Data from 350 Mexican common properties show that as inequality increases, those on the lower end of the land distribution are less likely to use the commons. The data also show a negative correlation between inequality and poverty. Alternative hypotheses for these results are considered.