Inequality, Taxation and Intergenerational Transmission: Volume 26

It is well known that taxes on the transfer of wealth typically raise very little revenue. However, this does not mean that they are ineffective as tools for redistribution. In this chapter, we show how important such taxes can be in the long-run distribution of wealth, reducing equilibrium inequality (the “predistribution” effect) by a much larger amount than what is apparent in terms of the immediate impact of the tax (the “redistribution” effect).

We investigate the relationship between the notion of progressive taxation and inequality reduction under a general version of the concept of inequality equivalence. We consider a two-parameter formalization of the concept of inequality equivalence that both includes, as special cases, the intermediate inequality equivalence and the path-independent/unit-consistent inequality equivalence. Both criteria could range from relative to absolute inequality views as the parameters in the formulation change. For the path-independent/unit-consistent inequality equivalence the condition of nondecreasing average tax rate is necessary and sufficient to guarantee the inequality-reducing effect of taxation for all the inequality views in between the relative and the absolute.

The publication of Capital in the Twenty-First Century by Piketty (2014) propelled the debate about the prospects of the evolution of income and wealth inequalities in this century. One of the main controversies is about the effects on the income and wealth inequalities of a decrease in the growth rate g. In Piketty (2014), it is claimed that a decrease in g will cause an increase in the wealth inequality, through an increase in the difference r−g, where r is the rate of return on capital. This claim was criticized by many authors. In this chapter, the author presents a neoclassical growth model with heterogeneous agents and uses it to shed more light on this issue. The author’s model generalizes and improves previous models introduced in Piketty and Zucman (2015) and in Aoki and Nirei (2016). The author also presents a result, relating income, wealth, and wage inequalities.

This chapter shows that the algorithm recently proposed to decompose the Foster and Wolfson bipolarization index by income sources (see Bárcena-Martin, Deutsch, & Silber, forthcoming) may be extended to break down wage bipolarization by its determinants. The chapter gives an empirical illustration comparing the determinants of wage bipolarization and inequality in various European countries in 2011, with a special focus on Portugal. In Portugal higher levels of education are the main source of bipolarization and inequality. Gender and working in the public sector are important determinants of bipolarization while age and having a temporary job are important determinants of inequality.

Using data on food insecurity in Israel, this chapter suggests borrowing techniques from the literature on multidimensional poverty to measure food insecurity, a distinction being made between “nominal” and “real” food insecurity. Various counting techniques are then implemented, including the well-known approach of Alkire and Foster. The chapter ends with a section where, following recent work by Dhongde, Li, Pattanaik, and Xu (2016), a distinction is also made between “basic” and “non-basic” dimensions of food insecurity.

This chapter examines the impact of education on income inequality in 18 Latin American countries between 2000 and 2010. This period has raised interest in the academic community because inequality has fallen across the region, after several years of consistent high levels. Employing the novel technique proposed by Firpo, Fortin, and Lemieux (2007), the author’s research provides a detailed decomposition of inequality. Three main findings emerge from the author’s results: First, the expansion of education increases inequality in six countries but reduces inequality in four countries. Second, the changes in returns to education are the driving component of the effects of education on inequality. Those countries where education contributes to a fall in inequality are those where the returns to education fell at the top of the income distribution. Third, the rise in the average years of education, considered alone, had an inequality-increasing effect in most of the countries under analysis.

The aim of this chapter is to shed some light on the behavior of Income Inequality and Inequality of Opportunity over time for 26 European countries. The analysis is carried out using microdata collected by the European Union Statistics on Income and Living Conditions (EU-SILC), which incorporates a wide variety of personal harmonized variables, allowing comparability between countries. The availability of this database for years 2004 and 2010 is particularly relevant to assess changes over time in the main inequality indices and the contribution of circumstances to inequality of opportunity. Furthermore, a bootstrap estimation is performed with the aim of testing whether the differences between both years are statistically significant.

Adults raised in poor households tend to be more prone to live in poverty than the rest, ceteris paribus. This holds true even in the presence of observed income transmission channels such as education attainment. We identify this differential poverty risk as intergenerational transmission of economic disadvantage (ITED). This chapter contributes to the literature on cross-country differences in the intensity of ITED in the EU by explicitly testing how macro-economic/institutional features shape the phenomenon. Working on a sample of 30- to 39-year-old interviewees from the EU-SILC 2011 module on Intergenerational transmission of disadvantages, the authors find that, first, past income inequality is positively correlated with current ITED intensity; second, past efforts on inequality reduction via social protection for families with children and unemployment benefits are negatively correlated with later ITED levels; finally, educational expansion correlates with lower ITED, pointing to the relevance of public investments in education as a way to fight inequality of opportunity.

There are conflicting views of the primary role of income inequality in economic development. Many expect that higher income shares at the top reflect substantial economic contributions while others think that these increases in top shares have not translated into higher economic growth. Recently, this debate has been reinvigorated by a new proposal: higher income inequality could hurt economic performance by decreasing future intergenerational mobility. We contribute to this debate by examining the relationship between intergenerational perceived job status mobility and past income inequality. We find a robust negative association of lagged income inequality with upward intergenerational job status mobility and a robust positive association of lagged income inequality with downward intergenerational job status mobility. In addition, we find that the quality of political institutions and religious fractionalization both contribute positively to job status mobility. Higher levels of past Gross Domestic Product (GDP) result in less upward job status mobility and more downward job status mobility.

This chapter focuses on an important aspect of economic inequality – the question of how people perceive inequality and whether these perceptions deviate in any meaningful way from statistical measures of inequality. Using a novel approach, the author investigates whether individuals across different countries are able to correctly estimate the shape of income distribution of the country where they reside. The author further investigates whether individuals have the distribution of a particular reference group in mind when they answer questions on inequality. The author finds that perceptions of inequality are frequently shaped by reference groups such as those formed according to educational attainment, age, and gender.

This chapter argues that in countries with well-functioning democracies most individuals should be “content” with the underlying income distribution. The authors derive this result from James Buchanan’s notion of a “fiscal constitution.” The authors test this hypothesis using data from the World Values Survey where respondents are asked whether “incomes should be more equal …, or do we need larger differences in income as incentives?” The authors’ empirical results indicate that the concentration of re-distributional preferences around the median response is positively related to the presence of a democratic voice.