INTERNATIONAL ECONOMICS

Inequality

Section A, Team 8
Eda Ihlamur, Yuri Kono, Colin Withers, Jose Javier Lombardi, Rui Araujo, Felipe Grana

Wednesday, 29th of November 2017

 Agenda
1. What’s wrong with inequality
2. Why inequality is a drag on economies
3. Taxing the top 1%
4. Basic income experiments
5. Basic income as a policy option

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 1. What’s wrong with inequality

“Inequality for All”

Robert Reich
• American Economist,
political commentator
• Secretary of Labor under
the president Bill Clinton
(1993-1995)
Documentary
• “Inequality for All”
(2015)
“We’re in the biggest
Bibliography economic slump since the
• “Saving Capitalism : Great Depression, and we
For the Many, Not the can’t seem to get out of it.
Few” (2015) Why? Because, exactly as
• “Beyond Outrage : in the 1920s, so much of
What Has Gone with the nation’s income and
Our Economy and wealth are going to the
Our Democracy and top, that the vast middle
How to Fix it” (2013) class doesn’t have the
• “Aftershock : The purchasing power to keep
Next Economy and the economy going.”
America’s Future”
(2010)

http://inequalityforall.com/about-the-film/ 29/11/2017 | 3
1. What’s wrong with inequality

Inequality in US

After the stagnation, the

share of total income going to
the top 1% has soared to
levels not seen for 100 years

Shouldn’t we
complain about
this?

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 1. What’s wrong with inequality

Political System is at Risk

• Joseph Stiglitz, an author of “the Price of

Inequality”(2012), an economist and a professor
at Columbia university, mentioned that
plutocracy gradually replaces democracy.

• Plutocracy means a state and a government governed by

the wealthy
• Instead of making products or innovating structures, “rent-
seekers” can be rich in another way by lobbying, re-
writing rules, and being rewarded in their business or
governments.
• They do not create values but waste of everyone’s
resources.
http://www.nytimes.com/2012/08/05/books/review/the-price-of-inequality-by- 29/11/2017 | 5
joseph-e-stiglitz.html
 1. What’s wrong with inequality

Rent-Seekers : Bankers

• Bankers have lobbied to change the law of

bankruptcy, or at least give new room for
interpretation of the law.
• They have tried to make those who had
inappropriate loans not escape bankruptcy.
• The breaking bankruptcy priority is a right
which is basically protected by the corporate
law in US.
• Bankers’ salaries and bonuses will be
untouched even when the situation collapses
and escape clauses for mortgage holders are
opposed by bankers.

https://dash.harvard.edu/bitstream/handle/1/16251727/RoeTung_Proof.pdf?se 29/11/2017 | 6
quence=1
1. What’s wrong with inequality

The Vicious Cycle

The more
The richer
successful Successful rate-seeking can
their clients
rate-seekers
become
become reinforce itself to keep going
and generate the vicious cycle
for rate-seekers to be richer.

The more money is

generated for
lobbying

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 2. Why inequality is a drag on economies

America’s Wealth Distribution

Percentage of Total US Wages in 2013

30.50%

52.70%

16.80%

Top 3% of Population Top 4-10% of Population Bottom 90% of Population

Wolf, 2014 29/11/2017 | 8

 2. Why inequality is a drag on economies

Supply-Side vs. Demand-Side Economics

• Decades-long debate
between two economic
schools of thought:

Supply-Side = Wealth trickles

down through investment

Demand-Side = Wealth moves

up through consumer spending

Vernengo, 2014 29/11/2017 | 9

 2. Why inequality is a drag on economies

Rising Inequality Slowing Recovery

Recovery from the 2008 session has been

sluggish.

Why?

One explanation: Inequality means the

poor suffered more, recovered less, and
are now getting poorer.

Wolf, 2014 29/11/2017 | 10

 2. Why inequality is a drag on economies

Two consequences of inequality in U.S.

1. Weak Demand
• Stagnant wages and the inability to borrow
more leads to weak consumer demand
2. Lagging Education
• The U.S.’s public education funding is
inadequate and Post-Secondary education
is expensive
Wolf, 2014 29/11/2017 | 11
2. Why inequality is a drag on economies

The Debt Well Runs Dry

Prior to 2008, wage stagnation was

offset by rising debt and housing prices.

After the crash, Americans were

saddled with debt and lending rules
became tighter.

This means: no more debt-fuelled

spending.

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2. Why inequality is a drag on economies

American Education Lags

The U.S. is the only developed country whose

25-34 year old age group isn’t more educated
than their 55-64 year old age group.

The barrier to entry for college is money,

meaning the children of the wealthy tend to stay
wealthy and the children of the poor tend to stay
poor.

This will hurt the U.S. economy in the long-run

as their workforce ages and competitor
countries have a more educated workforce.

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 3. Taxing TOP 1%

Can we increase tax rates?

 It is argued that low taxes on the rich raise productivity and economic
growth. However, it might be possible that the optimal top tax rate could be
over 80% and only the mega rich would lose out.

 In the 1950s and 1960s, when the USA economy was booming, the
wealthiest Americans paid a top income tax rate of 91%.

 Today, the top rate is 43.4%.

(Piketty, Saez, & Stantcheva, 2011, p. 1) 29/11/2017 | 14

(Americans for tax fairness, 2014).
 3. Taxing TOP 1%

Income Share vs Change in Marginal Tax

 There is a strong correlation between the reductions in top tax rates and the
increases in top 1% pre-tax income shares from 1975–79 to 2004–08 across 18
OECD countries

(Piketty, Saez, & Stantcheva, 2011, p. 1) 29/11/2017 | 15

 3. Taxing TOP 1%

Policy Implications
1. Supply-side effect

2. Increase tax avoidance.

3. Productivity vs Rent-seeking

(Piketty, Saez, & Stantcheva, 2011, p. 2) 29/11/2017 | 16

 3. Taxing TOP 1%

1. Supply-side effect

 Higher top tax rates may discourage work effort and business creation among the
most talented – the so called supply-side effect.
 In this scenario, lower top tax rates would lead to more economic activity by the rich and hence
more economic growth.

 In figure 1, the revenue-maximizing top tax rate would be 57%. This would still imply
that the United States still has some leeway to increase taxes on the rich, but that the
upper limit has already been reached in many European countries.

(Piketty, Saez, & Stantcheva, 2011, p. 2) 29/11/2017 | 17

 3. Taxing TOP 1%

2. Increase Tax Avoidance

 Higher top tax rates can increase tax avoidance.

 In that scenario, increasing top rates in a tax system riddled with loopholes and tax avoidance
opportunities is not productive.

 A better policy would be to first close loopholes so as to eliminate most tax avoidance
opportunities and only then increase top tax rates.

 With a broad tax base offering no significant avoidance opportunities, only real supply-
side responses would limit how high top tax rate can be set before becoming
counterproductive.

(Piketty, Saez, & Stantcheva, 2011, p. 2) 29/11/2017 | 18

 3. Taxing TOP 1%

3. Productivity vs Compensation

 In the end, the future of top tax rates depends on the public's beliefs of weather:
 top pay fairly reflects productivity
 top pay arises from rent-seeking.

 With higher income concentration, top earners have more economic resources to
influence social beliefs (through think tanks and media) and policies (through
lobbying), thereby creating some reverse causality between income inequality,
perceptions, and policies.

(Piketty, Saez, & Stantcheva, 2011, p. 2) 29/11/2017 | 19

 3. Taxing TOP 1%

Economic Growth vs High Taxes

 There is no correlation between cuts in top tax rates and average annual real
GDP-per-capita growth since the 1970s

 Countries like the US

and the UK had similar
or lower growth than
Germany or Spain with
a much higher change in
the Top Marginal tax rate

(Piketty, Saez, & Stantcheva, 2011, p. 2) 29/11/2017 | 20

 3. Taxing TOP 1%

Warren Buffet view

 Tax income from investments like income from work. It could potentially raise
$1.3 trillion over 10 years.

 The Buffett rule, would require millionaires to pay a minimum tax rate of 30%.
This will guarantee that the wealthy will not pay a smaller share of their income
in taxes than a middle-class family pays. It could potentially raise $72 billion
over 10 years.

“So let’s forget about the rich and ultrarich going on

strike and stuffing their ample funds under their
mattresses if — gasp — capital gains rates and
ordinary income rates are increased.”

(Buffet, 2012) 29/11/2017 | 21

(Americans for tax fairness, 2014).
4. Basic income experiments

Basic Income for everyone, Crazy

social experiment?
• In the following slides we would talk about 8 different income
experiments in different parts of the world.

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4. Basic income experiments

Kenya´s 12 year Income plan

In Oct 2016, Kenya´s government
approved the largest basic Pilot ever launched.

• People from 40 villages received a

weekly $5.50 with the purpose that
they can have money to eat and
obtain the basic resources for living.

• If you see it as a western country

person you will think that is not
enough, but in the context that the
cost of leaving there is far less
expensive and before this plan the
people where living with NO income.
Just based on trade or in what they
could collect, or grow.

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4. Basic income experiments

Finland: 2 year experiment

• An experiment for 2,000 unemployed finish receiving $600 per month
to fulfill basic needs.

• The program was launched as pilot to understand if basic income

could provide a new structure for social needs and to measure how
productivity levels change with this automatic income.

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4. Basic income experiments

Oakland, California

• In 2016, Y combinator, one of Silicon´s valleys biggest accelerator

programs started paying monthly between $1,000 and $2,000 to 100
families in Oakland. While other 2,000 families will receive $50 for
comparison.

• According to experts the Pilot was a success and a 5-year trial will
follow.

• (Video from Mark Zukerberk talking about basic income)

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4. Basic income experiments

Utrecht, Netherlands

• Another totally different case. At the beginning of the year, 250 dutch
citizens started receiving $1,100 per month in an assisted plan by the
government.

• They did need to perform 6 types of different work performances to

be included in the plan. So there was a tradeoff.

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4. Basic income experiments

Ontario, Canada

• $19 Million dollars to replicate 1970´s income experiment in Manitoba.

• To apply for this plan you will need to prove that you are Ontario citizen and
that you can not cover your basic living costs.

• The amount of money you may receive from Ontario Works will depend on
your:
• family size
• income
• assets, and
• housing costs.

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4. Basic income experiments

India´s government follow-up

• In 2010, India launched a two experiment basic income plan for more
than 6,000 people in the state of Madhya Pradesh. All this people
received monthly salaries for 18 months.

• In October 2016, country´s highest ranked economist announced that

basic income will play a major role in the next economic survey.

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4. Basic income experiments

Filipo´s Nogarin Small Pilot in Livorno

• The mayor of the Italian city of Livorno started a small income pilot by
giving 100 people from the city the sum of $537 per month.

• Although the pilot was small, the mayor of the city stated that: “The
system helps people get back on their feet with out the state
presuming to know what´s best for people.

• Other cities like Regusa or Naples are considering now pilots of their
own.

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4. Basic income experiments

Uganda´s $8.60 plan

• Uganda´s non profit organization Eight, started handling a weekly
basic income of $8.60 to 50 households in the region of Fort Portal.

• The trial will last for 2 years and a documentary will be based in the
pilot.

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5. Basic Income as a policy option

What is Basic Income?

BI is an unconditional transfer paid to every citizen as a form of social security.

Examples:
USA: Alaska Permanent Fund distributes part of state’s oil revenues to all its
residents on a per capita basis.
Canada: MINCOME programme provides benefits only to individuals whose
income is below a certain level.

Economic Trends and Social Concerns linked to growing interest in BI:

• Growing inequality
• Rise in atypical forms of employment
• Digital transformation – risk of job losses due to automation
• Imbalances between work, family and leisure

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 5. Basic Income as a policy option

Problems With Existing Cash Supports

• Incomplete coverage: low-income groups are less likely to benefit than
better-off families.
• Not all social transfer are designed to redistribute from rich to poor.
• Rapidly evolving labour markets: blurred line between traditional
employment and independent work.

(Basic Income, 2017, p.1) 29/11/2017 | 32

 5. Basic Income as a policy option

Basic Income Debate in OECD Countries

• Switzerland: proposal to give everyone the right to a basic income was
rejected in a 2016 referendum.

• Finland: Experimenting the impact of paying monthly BI on recipients

behaviour.

• Netherlands: 25 municipalities are experimenting changes to social

assistance to examine the effectiveness of different policy options to
stimulate labor market.

• France: Discussing changing existing social assistance with a higher basic

income. But recipients of BI also have to pay means-tested contribution.

• USA: Elon Musk wants to conduct his own BI experiment.

(Basic Income, 2017, p.2) 29/11/2017 | 33

 5. Basic Income as a policy option

What Would Be A Realistic BI Amount?

• Option 1: Take existing spending on benefits for working-age population and
children, and spread it equally as a flat-rate amount. The total BI amount
would be received by every citizen. However, without additional taxes, BI
would be very low to overcome poverty.

• Option 2: Use the levels of guaranteed minimum-income benefits in existing

social protection system as a target value for BI. Again, BI would be below
the poverty line.

• Option 3: Abolish any existing tax-free allowances to finance BI. Commonly

included in BI proposals.

For BI to be at meaningful levels, there has to be additional benefit

expenditures, and thus higher tax revenues to finance them.

(Basic Income, 2017, p.3) 29/11/2017 | 34

 5. Basic Income as a policy option

Financing The Costs

• Large tax-revenue changes are needed to finance a BI at meaningful levels.
• Tax reforms should be included as part of budget-neutral BI proposals.
• In Finland and the UK, additional tax revenue would contribute larger share
of gross BI expenditures, than the tax allowance abolishing methods of
France.

Table 1: Hypothetical reform in

which BI replaces existing
working age benefits and tax
free allowances.

(Basic Income, 2017, p.4) 29/11/2017 | 35

 5. Basic Income as a policy option

Gainers and losers of a

comprehensive basic income
 Since the current social benefit systems are complex, replacing them
would incur in affecting income for the different ranges of population

 In countries like France and Italy since

the social insurance is heavily funded,
implementing a BI would benefit the
majority of households.

 Regarding low income

households, couples would
largely gain more from a BI than
a single person, leaving lone
parents in a difficult position.

(Basic Income, 2017, p.5) 29/11/2017 | 36

 5. Basic Income as a policy option
Would a basic income reduce poverty?
 Many poor that currently do
not benefit from a social
security plan could see a
direct benefit from an BI
initiative
 But it would often not lower
poverty overall
(Basic Income, 2017, p.6)
 Unemployed and early
retirees that depend on the
social security structure
would see a very significant
income reduction, and would
fall into poverty
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 5. Basic Income as a policy option

Simple, but no without problems

 Basic income could provide an income security, incentivizing
individuals for other responsibilities or interests such as:

Social work Entrepreneurship Starting a family

 But there are major concerns on possible “side effects”, such as:

It does not act as a

Reduce work incentive Reduce wages
financial stabilizer

(Basic Income, 2017, p.7) 29/11/2017 | 38

 5. Basic Income as a policy option

BI making social protection more

accessible?
 A large scale basic income would incur in a financing challenge that
would probably derive in an increase in taxes.

 A partial Basic Income reform would be difficult to distinguish

between a normal income support, leaving larger parts of social
benefits would not result in a complete solution to coverage problem.

A solution could be to introduce it gradually to different groups?

The debate must continue to reach a better coverage for the
ones in need

(Basic Income, 2017, p.8) 29/11/2017 | 39

 References
 Inequalityforall (2013) website: http://inequalityforall.com/about-the-film/
 Thomas B. Edsall (2012, August 3) Separate and Unequal website:
http://www.nytimes.com/2012/08/05/books/review/the-price-of-inequality-by-joseph-e-stiglitz.html
 Mark J. Roe and Frederick Tung (2013) Breaking Bankruptcy Priority: How Rent-Seeking Upends
the Creditor‘s Bargain website:
https://dash.harvard.edu/bitstream/handle/1/16251727/RoeTung_Proof.pdf?sequence=1
 Americans for tax fairness. (2014). Taxing Wealthy Americans [PDF]. Retrieved from
https://americansfortaxfairness.org/files/12-ATF-Taxing-Wealthy-Americans-fact-sheet.pdf
 Buffet, W. (2012, November 25). A Minimum Tax for the Wealthy [Editorial]. Retrieved November
24, 2017, from The New York Times website: http://www.nytimes.com/2012/11/26/opinion/ buffett-a-
minimum-tax-for-the-wealthy.html
 Piketty, T., Saez, E., & Stantcheva, S. (2011). Taxing the 1%: Why the top tax rate could be over
80%. VOX - CEPR's Policy Portal.
 Basic income as a policy option: can it add up? (2017, May). Retrieved from OECD website:
http://www.oecd.org/employment/future-of-work.htm
 Wolf, M. (2014, September 30). Why inequality is such a drag on economies. Financial Times.
Retrieved from https://www.ft.com/cms/s/0/8b41dfc8-47c1-11e4-ac9f-00144feab7d
 Vernengo, M. (2014, August 23). Keynesian vs. Supply-side Economics: Causality. Retrieved from
NAKED KEYNESIANISM website: http://nakedkeynesianism.blogspot.com.es/2014/08/keynesian-
vs-supply-side-economics.html

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