Macro Roundup

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA)argue that the big tax reductions in the bill deserve the credit But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid. Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low. In 2021, corporate tax receipts grew dramatically to 1.7 percent of GDP, higher than CBO’s 2018 forecast. For 2022, CBO now forecasts corporate tax receipts will remain strong but fall to 1.6 percent of GDP, only slightly higher than it predicted in 2018. The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages. Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2). Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

William G. Gale, Kyle Pomerleau, and Steven M. Rosenthal, "The booming economy, not the 2017 tax act, is fueling corporate tax receipts,"Brookings Institution, June 3, 2022, https://www.brookings.edu/blog/up-front/2022/06/03/the-booming-economy-not-the-2017-tax-act-is-fueling-corporate-tax-receipts/

The booming economy, not the 2017 tax act, is fueling corporate tax receipts

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA) argue that the big tax reductions in the bill deserve the credit (Wall Street Journal, Goodspeed and Hassett). But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid.

Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low.

The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. From early 2020 to early 2021, Congress passed multiple bills designed both to cushion the economic and public health impact of the pandemic and help the economy recover.

These measures will pump more than $5 trillion into the economy over their respective 10-year budget horizons compared to the TCJA that totaled $1.9 trillion. The Fed’s accommodative monetary policy also stimulated the economy.

Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages.

Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2).

Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

“…But can pot make people violent?A study last year found that young people with such mood disorders as depression who were also addicted to pot were 3.2 times as likely to commit self-harm and die of homicide—often after initiating violence—than those who weren’t. A meta-analysis found the risk of perpetrating violence was more than twice as high for young adults who used marijuana. It’s possible that pot can trigger dangerous behavior in youths who may be predisposed to it for other reasons such as prenatal exposure to drugs….”

Allysia Finley, "Cannabis and the Violent Crime Surge,"Wall Street Journal, June 6, 2022, https://www.wsj.com/articles/cannabis-and-the-violent-crime-surge-marijuana-pot-use-thc-shootings-psychosis-mental-11654540197

Cannabis and the Violent Crime Surge

The stigma once attached to marijuana has vanished. Nineteen states have legalized cannabis for recreational use, and politicians of both parties increasingly treat it as harmless. Asked during the 2020 presidential campaign about her pot use in college, Kamala Harris giggled and said marijuana “gives a lot of people joy” and “we need more joy in the world.” But the public needs an honest discussion of its social and public-health risks, which include violence and mental illness.

Alex Berenson, author of “Tell Your Children: The Truth About Marijuana, Mental Illness and Violence,” pointed out that the New York Times had curiously removed from an article about the Uvalde school shooting a former co-worker’s recollection that he complained about his grandmother not letting him smoke weed. The Times didn’t append a correction to the story as it might be expected to do when fixing a factual inaccuracy.

Assuming the elided detail was accurate, it would fit a pattern. Mass shooters at Rep. Gibby Giffords’s constituent meeting in Tucson, Ariz. (2011), a movie theater in Aurora, Colo. (2012), the Pulse nightclub in Orlando, Fla. (2016), the First Baptist church in Sutherland Springs, Texas (2017), and Marjory Stoneman Douglas High School in Parkland, Fla. (2018), were reported to be marijuana users. It could be a coincidence, but increasing evidence suggests a connection.

Isn’t pot supposed to make you mellow? Maybe if you smoke only a joint on occasion. But youth nowadays are consuming marijuana more frequently and in higher doses than their elders did when they were young. This is leading to increased addiction and antisocial behavior.

THC, the chemical that causes a euphoric high, interacts with the brain’s neuron receptors involved with pleasure. Marijuana nowadays on average is about four times as potent as in 1995. But dabs—portions of concentrated cannabis—can include 20 times as much THC as joints did in the 1960s. It’s much easier for young people to get hooked. One in 6 people who start using pot while under 18 will develop an addiction, which doctors call “cannabis use disorder.” As they use the drug more frequently to satisfy cravings, they develop psychological and social problems.

That’s what happened to Colorado teenager Johnny Stack. His mother, Laura, wrote a harrowing book chronicling his descent into cannabis addiction. He started smoking weed at 14, after Colorado legalized it, and progressed to using more-potent products such as dabs. He gradually withdrew from social activities and developed psychosis. Substance-abuse treatment and a stay at a mental hospital failed to cure him because chronic marijuana use permanently rewired his brain. Delusional, he jumped off a six-story building and killed himself. Alas, he’s not an anomaly. “People who have taken large doses of the drug may experience an acute psychosis, which includes hallucinations, delusions, and a loss of the sense of personal identity,” the National Institutes of Health notes.

Roneet Lev, an addiction specialist who previously led the Emergency Department at Scripps Mercy Hospital in San Diego, said in a recent interview with the American Council on Science and Health that California cannabis emergency-room visits climbed 53% in the three years after the state legalized recreational marijuana in 2016. Daily marijuana emergency-room visits in San Diego nearly quadrupled between 2014 and 2019.

Cannabis-induced psychosis, she said, is fairly common. Some patients she treated experienced cannabinoid hyperemesis syndrome from long-term use, which causes “scromiting”—screaming and vomiting. There’s no antidote. Some patients spend weeks in the emergency room waiting for placement in mental-health clinics.

Countless studies have also linked chronic cannabis use to schizophrenia. A meta-analysis in January examining 591 studies concluded that early marijuana use among adolescents was associated with a significant increase in the risk of developing schizophrenia. Researchers have yet to prove a causal relationship, but the weight of evidence is hard to dismiss.

Some legalization proponents claim that other countries where marijuana is widely available have fewer mental-health problems than the U.S. But a study from Denmark last summer found that schizophrenia cases associated with pot addiction have increased three- to fourfold over the past 20 years as marijuana potency rose 200%.

Young people are especially vulnerable to cannabis’s effects because their brains are still developing. Scientists in a recent study reviewed scans of teenagers’ brains before and after they started using pot. They found that parts of the brain involved in decision making and morality judgments were altered in pot users compared to nonusers.

But can pot make people violent? A study last year found that young people with such mood disorders as depression who were also addicted to pot were 3.2 times as likely to commit self-harm and die of homicide—often after initiating violence—than those who weren’t. A meta-analysis found the risk of perpetrating violence was more than twice as high for young adults who used marijuana. It’s possible that pot can trigger dangerous behavior in youths who may be predisposed to it for other reasons such as prenatal exposure to drugs.

Also worrisome, legalization seems to be leading to more pregnant women using pot. About 20% of pregnant young women in California tested positive for marijuana in 2016. THC crosses the placenta and can impair neurological development. Prenatal exposure to marijuana has been linked to behavioral problems, mental illness and lower academic achievement in children and adolescents.

Maybe it’s time that lawmakers and voters rethink their pot-legalization experiment before more young lives are damaged.

Thomas Blanchet, Lucas Chancel, and Amory Gethin of the World Inequality Lab at the Paris School of Economics found that the United States “stands out as the country that redistributes the greatest fraction of national income to the bottom 50 percent.”...Government spending accounts for a smaller share of national income in the United States (35 percent) than in Europe (47 percent), but rates of public spending on education, health care, and benefits for the poor and disabled are similar. The greater cost of government in Europe results largely from its spending 11 percent more of national income on public pensions than the United States—which serves to crowd out private pensions that higher earners would have provided for themselves. To finance these state pensions, Europe imposes payroll and sales taxes at rates twice as high as in the United States. These additional taxes fall heavily on lower-income groups—making government bigger, while imposing higher costs on the poor.

Chris Pope, "America's Redistributive Welfare State,"City JournalWinter, 2022, https://www.city-journal.org/americas-redistributive-welfare-state

America’s Redistributive Welfare State

As part of a recent study on income disparities, Thomas Blanchet, Lucas Chancel, and Amory Gethin of the World Inequality Lab at the Paris School of Economics found that the United States “stands out as the country that redistributes the greatest fraction of national income to the bottom 50 percent.” This is not the American welfare state’s traditional reputation and seems to have come as a surprise to the left-leaning authors. How can it be so?

Government spending accounts for a smaller share of national income in the United States (35 percent) than in Europe (47 percent), but rates of public spending on education, health care, and benefits for the poor and disabled are similar. The greater cost of government in Europe results largely from its spending 11 percent more of national income on public pensions than the United States—which serves to crowd out private pensions that higher earners would have provided for themselves. To finance these state pensions, Europe imposes payroll and sales taxes at rates twice as high as in the United States. These additional taxes fall heavily on lower-income groups—making government bigger, while imposing higher costs on the poor.

Because raising taxes is unpopular, politicians normally prioritize spending. For this reason, the U.S. established Medicaid, Medicare, Social Security, and various welfare benefits as safety nets. The middle class is expected to provide for its own health insurance through employment and most of its retirement through homeownership, private pensions, 401(k)s, and other investments.

In the early twentieth century, Europe’s welfare state was built along similar lines, through a combination of employer-sponsored benefits, private insurance, and public assistance targeted at the needy. But World War II crashed the continent’s private pension and insurance systems, forced the rationing of basic goods and services, and led governments to establish universal entitlements to provide for all citizens, regardless of their circumstances.

When Britain extended eligibility for state pensions and health-care services to the middle class, it did not increase funding proportionately. As a result, cash-benefit levels declined and the quality of medical services deteriorated—leaving the poor, who were already previously covered, worse off. The working class, which had not paid income taxes prior to the war, found itself paying for much of the expansion. Other European nations, such as France and Belgium, which enacted equivalent reforms to universalize entitlements at the end of the war, saw a similar effect.

For a while, the cost of the shift was masked by the rebound of ruined economies in the immediate postwar era. But over time, the expense of providing generous retirement benefits and comprehensive health-care services to all ballooned—tilting the bulk of government spending toward middle-class entitlements and eclipsing other spending priorities. France spends a much larger share of GDP (13.6 percent) on public pensions than does the United States (7.1 percent), owing to a lower retirement age (62 vs. 66) and disproportionately generous benefits for wealthier seniors. Yet, as 69 percent of American seniors receive private retirement benefits, incomes from private pensions in the U.S. (5.3 percent of GDP) are much higher than in France (0.3 percent), and the median disposable income of over-65s in the United States ($38,920) is also much higher than in France ($23,490).

Blanchet, Chancel, and Gethin make much of the fact that income is more unequally distributed in the U.S. than in Europe. The United States does not have greater inequality because it has more poor people, however, but because its nonpoor earn much more. In 2017, after adjusting for differences in the cost of living, only 19 percent of Americans lived in households with disposable incomes less than $20,000, compared with 22 percent in Germany, 27 percent in the United Kingdom, and 53 percent in Italy. By contrast, while 32 percent of Americans enjoyed disposable incomes greater than $50,000, only 12 percent of Germans, 12 percent of Britons, and 4 percent of Italians did so. Americans live in houses that are, on average, twice as large as those of Europeans. Indeed, the average resident of France, Germany, or Britain has less living space than the poorest quintile of Americans. Rates of homelessness are also substantially lower in the U.S. than in France, Germany, or the U.K. Only 3 percent of the U.S. population was undernourished in 2016, the same as in the E.U.

The swelling of Europe’s welfare states mostly imposes additional costs on those with modest incomes, rather than the rich—of which it has many fewer than the United States. While the richest 1 percent pay about 33 percent of their income in taxes in the U.S. and 35 percent in Europe, residents with below-average incomes pay much less in tax in the U.S. (16 percent) than in Europe (28 percent).

The United States has the highest levels of disposable income among G7 countries for nine out of 10 income deciles. Such comparisons give the impression that the poorest decile is little better off in the United States than in Europe. But the U.S. relies heavily on in-kind benefits, which traditional income statistics don’t count, to assist its neediest citizens. In 2018, American families with children below the poverty line averaged posttax earnings of $18,148—in addition to which government programs provided an average of $20,757 in cash, food, and housing benefits, along with $4,967 in child care and services and $14,960 in health-care benefits.

Blanchet, Chancel, and Gethin note that government spending on health care in the United States and Europe accounts for a similar share of GDP. However, American entitlements to health care are largely reserved for the elderly, disabled, and poor through Medicare and Medicaid, which covers 34 percent of the population. Health care for middle-class families is typically paid for privately through employer-sponsored insurance. When government and private-sector spending are included, the U.S. spends a total of 17 percent of GDP on health care, compared with 10 percent in the E.U.

Government budgets under single-payer health-care systems must be stretched to cover all, which typically leaves them short of funds for the costliest services. Britain’s National Health Service refuses to cover medical interventions that cost more than $40,000 per year of life saved. As a result, the sickest patients are often denied access to newly developed drugs or are treated with outdated equipment when major surgery is required. Even when procedures are nominally covered, a shortage of funds means that patients are regularly unable to make timely appointments with specialists for cancer care or forced to wait months for essential surgery.

America’s health-care system is therefore remarkably progressive in its financing and at ensuring better access to care. The 82 million low-income Americans covered by Medicaid in 2019 paid no premiums, deductibles, or coinsurance for health-care services. Because insurance is generally comprehensive, the share of household consumption dedicated to out-of-pocket medical expenses is lower in the United States than in most other developed nations.

American health care can improve. Employer control of insurance makes plans unresponsive to individual needs, creates gaps in coverage when people move between jobs, and weakens the incentive for hospitals to control costs. These problems can and should be fixed. But throwing more money at health care, as with other social programs, tends to run into diminishing returns.

The welfare states facing the greatest struggles are those that rely on a single payer to finance all activities. The sovereign debt crises in Portugal, Ireland, Italy, Greece, and Spain were primarily due to the expansion of public pensions that largely replaced private retirement finance. Maintaining broad access to essential health-care services, as medical capacities develop and citizens live further into old age, is also likely to prove hardest for countries where the government is expected to provide these services to all.

Governments best help those in need when they limit benefits to them, rather than trying to provide for the entirety of society—an approach that requires everyone to pay higher taxes, including the poor.

Thomas Blanchet, Lucas Chancel and Amory Gethin, "Why Is Europe More Equal Than The United States,"Paris School Of Economics, November 9, 2021, https://wid.world/document/why-is-europe-more-equal-than-the-united-states-world-inequality-lab-wp-2020-19/

“…Why do our conclusions contradict the standard view on redistribution in Europe and the US? We find that this is the case for three main reasons. First, OECD estimates rely exclusively on surveys, while we systematically distribute the entire national income by combining surveys with tax data and national accounts. Second, standard estimates of redistribution only allocate direct taxes and transfers to individuals, thereby ignoring corporate taxes, indirect taxes, and in-kind transfers. Distributing these components of government revenue and expenditure reverts the rankings of Europe and the US in terms of redistribution. This is because indirect taxes are much higher in Europe than in the US and fall disproportionately on low-income earners. Third, our benchmark measure of redistribution compares pretax incomes to Post tax incomes, while the standard view tends to compare factor incomes (sometimes referred to as market incomes) to posttax incomes. Because many European countries have a greater share of pensioners than the United States, and because public pension systems are much more developed in Europe than in the US, including pensions in the analysis leads to increasing estimates of redistribution more in the former than in the latter. However, as we now show, our conclusions are strongly robust to using one or the other of these two income concepts….”

Predistribution vs. Redistribution: Revisiting the Europe-US inequality gap

“…Figure VIIa directly answers this question by representing the share of national income transferred by the tax-and-transfer system between pretax income groups in Eastern Europe, Western and Northern Europe, and the United States in 2017. The bottom 50% and the middle 40% are net beneficiaries of redistribution in all three regions, but the US tax-and-transfer system appears to be unequivocally more progressive. The bottom 50% in the US received a positive net transfer of 6% of national income in 2017, compared to about 4% inWestern and Northern Europe and less than 3% in Eastern Europe. Meanwhile, the top 10% saw their average income decrease by 8% of national income in the US after taxes and transfers, compared to about 4% in Western and Northern Europe and 3% in Eastern Europe. The middle 40% benefits slightly more from redistribution in the US (2%) than in Europe (less than 1%)….”

The Net Impact of Taxes and Transfers on Inequality

“…FigureVIbprovides a complementary picture of the magnitude and progressivity of government expenditure by plotting total transfers received by the bottom 50% in European countries and the United States, expressed as a share of national income. The US ranks third in terms of the smallest share of national income transferred to the bottom 50% (about 13%), due mainly to lower expenditure on pensions. In Europe, transfers received by the poorest half of the population are smallest in Serbia (11%), followed by Romania (12%), Estonia (14%), and Poland (14%). Meanwhile, Denmark, the Czech Republic, Sweden, the Netherlands, Belgium, and Finland stand out as the European countries allocating the greatest share of national income to the poorest half of the population (22-23%, corresponding to slightly less than half of all government revenue in these countries)….”

“…As for taxes, total government expenditure is significantly lower in the US (35% of national income) than in Europe (47%).36 The difference between the two regions is due to cash transfers, which represent 9% of national income in the US compared to 23% in Europe. Within cash transfers, pensions are the aggregate that differs the most between the two regions (16% of national income in Europe versus 5% in the US), followed by family and social assistance transfers (5% vs. 3%) and unemployment and disability benefits (1.6% vs. 1.4%). Meanwhile, in-kind transfers in health, education, and other collective government expenditure are very similar in Europe and the US (25-26%, of which about 7% goes to health). Total government expenditure is higher in Northern Europe (51% of national income) and Western Europe (48%) than in Eastern Europe (42%), due mainly to the larger size of social assistance transfers (5% inWestern and Northern Europe vs. 3.5% in Eastern Europe) and in-kind transfers (29% vs. 25% vs. 23%, respectively) in Western and Northern Europe. Figure VIa presents the distribution of transfers across posttax income groups in Europe and the US, expressed as a share of posttax national income. Unsurprisingly, transfers are progressive in both the US and Europe: they represent over 60% of the posttax incomes of bottom deciles, compared to less than 30% of those of the top 1%. Pensions represent a smaller share of posttax income in the US than in Europe for all posttax income groups, while the distribution of other cash transfers is relatively similar between the two regions. Health payments are the most progressive type of transfers. In Europe, this is directly due to the fact that we distribute health expenditure on a lump-sum basis, assuming as a first approximation that all individuals benefit from the same in-kind transfer (see methodology). Health expenditure is also highly progressive in the United States, where public health spending is significant and targeted towards the very poor (via Medicaid). Other in-kind transfers are neither progressive nor regressive, because we assume that they are distributed proportionally to posttax disposable income (we come back to this assumption in the next section)…”

The Structure and Distribution of Transfers

“…By doing so and by narrowing down the analysis to the employed and working-age (20-64) population, the analysis remains consistent and cross-country comparisons meaningful. The main conclusions are unchanged. Because social contributions fall on labor income and are generally set at fixed rates, they tend to be flat for most groups within the bottom 90% and regressive at the top. This turns the tax systems of Western and Northern European countries into approximately flat tax systems, while those of most Eastern European countries become strongly regressive at the top end of the distribution. Because social contributions are smaller in the United States than in Europe, the US tax system remains more progressive than that of all European countries (with the exception of the UK)….”

“…Figure Vb ranks European countries and the United States according to a simple measure of tax progressivity: the ratio of the total tax rate faced by the top 10% to that of the bottom 50%. The composition of bars correspond to the composition of taxes paid by the top 10%. The US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70% higher than that of the poorest half of the population. By this measure, the European country with the most progressive tax system is the United Kingdom, followed by Norway, the Czech Republic, and France. Many European countries have values close to 1 on this indicator, corresponding to relatively flat tax systems, in which top income groups face a tax rate approximately equal to that of the bottom 50%....”

“..Figure Va represents the level and composition of non-contributory taxes paid by pretax income group in Eastern Europe, Western and Northern Europe, and the United States in the past decade.34 Two results clearly stand out. First, while taxes paid are lower in the US than in Europe for most pretax income groups, the taxation profile is unambiguously more progressive in the United States. The top 1% face a tax rate higher than 30% in the US, which is relatively comparable to what we observe in Western and Northern Europe. Meanwhile, bottom income groups are taxed an average rate that is nearly twice as small in the US as in Europe. Second, the difference in tax progressivity between the two regions is mainly driven by indirect taxes, which represent a significantly larger share of national income in Europe than in the US. These taxes tend to be regressive, because they are paid proportionally to consumption…”

“…Before investigating the distributional impact of taxes, it is useful to briefly compare the size and composition of government revenue in Europe and the United States.33 In 2007-2017, taxes and social contributions amounted to 47% of national income in Europe, compared to 28% in the United States. The United States collected less tax revenue than any European country, from Romania (32%), the country with lowest tax revenue, to Denmark (57%), which displayed the highest tax to national income ratio. The gap between the two regions was driven by two components of revenue: social contributions, which represented 19% of national income in Europe versus 8% in the US, and indirect taxes (14% versus 7%). Meanwhile, both regions collected comparable amounts of revenue from income and wealth taxes (10-11%) and from corporate income taxes (3%). The macroeconomic tax rate was larger in Northern Europe (52%) than in Western Europe (48%) and Eastern Europe (41%), due mostly to the larger share of national income collected in income and corporate taxes. If one excludes contributory social contributions from the analysis (that is, contributions financing the pension and unemployment systems), then the gap between Europe and the US decreases but remains significant: 23% of national income was collected in non-contributory taxes in the US in 2007-2017, compared to 30% in Europe….”

The Structure and Distribution of Taxes

“…TableIVprovides a more detailed picture of the rise of pretax income inequality by showing the real average annual income growth of selected income groups in our four regions of interest over the 1980-2017 and 2007-2017 periods.30 National incomes grew at a modest yearly rate in the past four decades in Europe and the US: 1% in Western Europe, 1.2% in Eastern Europe, 1.4% in the US, and 1.8% in Northern Europe. In all regions, however, growth rates have been markedly higher the further one moves towards the top end of the distribution. The average pretax income of the top 1% thus rose at a rate of 1.9% in Western Europe, 3.2% in Northern Europe, 3.3% in the US, and 3.8% in Eastern Europe. Meanwhile, middle-income groups saw their average pretax incomes grow at a rate closer to the average of the full population in all regions. The bottom 20% benefited the least from real national income growth: their average income increased at a rate of 1.2% in Northern Europe and 0.7% in Western Europe, while it decreased at a rate of 1.3% in Eastern Europe and fell on average by 1.1% every year in the United States….”

“..The US ranks third of all the countries considered here, with an increase in the top 10% share of almost 14 percentage points. In Western Europe, Germany is the country where the top 10% share grew the most (+ 9 percentage points)…”

“…We now turn to documenting the evolution of pretax income inequality in Europe and the US. FigureIIashows the evolution of the top 10% pretax income share in the US, Eastern Europe, Western Europe, and Northern Europe from 1980 to 2017. The United States remained more unequal than most European countries throughout the entire period, but the gap between Europe and the US has widened significantly over time.27Indeed, the top 10% rose most rapidly and steadily in the US (from 34% to 48%), followed by Eastern Europe (from 24% to 36%), Western Europe (from 30% to 35%), and Northern Europe (from 26% to 31%). From 1980 to 2017, Eastern Europe shifted from being the least unequal to the most unequal European region. A significant part of this change occurred between 1989 and 1995, following thedisintegration of the Soviet Union and the transition of Eastern European countrie to market economies…”

The Distribution of Pretax Income Growth

“…How do pretax incomes vary in Europe and the United States today? Table III provides a first answer to this question by displaying the average incomes and income shares of key income groups in Western Europe, Northern Europe, Eastern Europe, and the US in 2017. The average national income per adult stood at e52,700 in the US at purchasing power parity, compared to e44,900 in Northern Europe, e35,300 in Western Europe, and e21,700 in Eastern Europe. In Europe, only Norway (e55,000) and Luxembourg (e102,000) have higher average national incomes than the US.23Things look very different at the bottom of the pretax income distribution. Thebottom 50% earned only about e12,300 in the US in 2017, compared to e21,600 inNorthern Europe and e14,600 in Western Europe. Of the twenty-seven countriesconsidered in this paper, the US thus ranks third in terms of average national incomeper adult but nineteenth when it comes to the average income of the poorest 50%.24On average, pretax income inequality at the bottom is lowest in Northern Europe(with a bottom 50% share of 24%), followed by Western Europe (21%) and EasternEurope (20%). With a bottom 50% pretax income share of only 11.7%, the US is byfar the most unequal of all countries, followed by a distant Serbia (16%) and veryfar from the values observed in the Czech Republic, Iceland, Norway, and Sweden(all above 25%).25These differences appeared even more pronounced at the verybottom of the distribution: the average income of the poorest 20% was e11,600 inNorthern Europe in 2017, more than three times larger than its counterpart in theUnited States (e3,800).The same differences are visible at the top end of the distribution: the top 1% captured 21% of total pretax income in the US in 2017, compared to 12% in Eastern Europe, 11% in Western Europe, and less than 9% in Northern Europe. In 2017, the top 0.001% average pretax income exceeded e92 million in the US, nearly ten times the value observed in Northern Europe. The European countries with lowest top 1% income shares are the Netherlands, Slovenia, Iceland, Belgium, and Finland (less than 9%), while those with highest top income concentration are Germany, the United Kingdom, Greece, and Poland (13-15%).26 In summary, while the US stands out as being richer than most European countries today, differences in average national incomes mask substantial heterogeneity. With inequality levels surpassing by far those observed in any European country, theUS displays bottom pretax average incomes that barely exceed those observed inpoorer Eastern European countries. In contrast, the lower inequality levels and higheraverage incomes observed in Northern Europe imply significantly better standardsof living for the majority of the population than in the United States….”

“..The efforts made by the Luxembourg Income Study (LIS) to harmonize existing surveys, for instance, have been extremely helpful to improve the comparability of pre-2000 inequality statistics in Europe. Yet, because of sampling issues and misreporting at the top of the income distribution, surveys can picture evolutions that are inconsistent with those suggested by tax data. In this paper, we combine for the first time all these sources in a meaningful way, using new techniques and a consistent methodology. We show that correcting for the weaknesses of existing estimates does lead to substantively different conclusions on the level and evolution of inequality in Europe, the distributive impact of taxes and transfers, and how inequality and redistribution compare across European countries….”

Core Evidence

“..the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers. While Western and Northern European countries redistribute a larger fraction of output than the US (about 47% of national income is taxed and redistributed in Europe versus 35% in the US), the distribution of taxes and transfers does not explain the large gap between Europe and US posttax inequality levels. Quite the contrary: after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country. This finding stands in sharp contrast with the widespread view that “redistribution”, not “predistribution”, explains why Europe is less unequal than the US (e.g.,OECD, 2008;2011). In other words, Europe has been much more successful than the US at ensuring that its low-income groups benefit from relatively good-paying jobs. We show that the differences between our conclusions and those of the OECD are driven by several factors, including the greater underrepresentation of top incomes in US surveys, the fact that we account for indirect taxes and in-kind transfers, which are moreprogressive in the US than in Europe overall, and the inclusion of pensions in the definition of pretax income….”

“…Between 1980 and 2017, the share of pretax income that accrued to the richest 1% Europeans rose from 8% to 11% before taxes and transfers and from 7% to 9% after taxes and transfers. In the US, the top 1% pretax income share rose from 11% to 21% over the same period, and the top 1% post tax income share from 9% to 16%....”

Steve Notes

The bottom 20% in the US earn effectively zero, suggesting they don’t have jobs vs Northern Europe,which earns 21.6 euros suggesting they have significant jobs. That seems like apples to oranges. The amount transferred to the bottom 20% in the US seems very small compared to the amount calculated in the table we made of the many experts estimating the amounts. 6k euros vs tens of thousands of dollars. Lastly, they mix retirees with the poor so straightforward comparisons are very complicated/impossible. Perhaps they break them out in the online data table.

And also

3.2 delta/36.6 (average national income per capita) = 8.7% vs the chart above, which says 4.4%. I did this for the other (three) countries and found the same result: the allocation in the table seemed to be twice the number in the chart. I only have the chart for the US and not the table. So I believe I have to double the number in the chart to produce an equivalent table. But that’s too bold a leap for me to use publicly. Perhaps I don’t understand the chart or my math is wrong. I interpret the chart to be: what percent of national income is being distributed to the bottom 50% on net (i.e. less taxes plus services). On net, the US distributes more to the poor than other countries and national income per capita is larger so dollar-wise (or euro-wise in this case) more gets distributed both percentage-wise and even more so dollar-wise. Several other things made my ears perks up: Not presenting a comparable US page is a red flag. They use Piketty and Saez data for the US. But those estimates were criticized by Auten and Splinter. Pages 67 and 68 in the appendix show the (supposedly real) growth in average income (both are inflated to 2017ppp adjusted euros). But what inflation index did they use for the US and Europe, and are those indexes similarly accurate? When you inflate/deflate over that long a time period, the indexes matter. I’m always leery of data that changes significantly in a couple years. The significant down tick in the US and uptick in Europe makes my ears perk up. Things seldom change quickly. And, as far as I know, the incomes of American lesser-skilled workers grew faster than the economy on average (so their share would be growing).

Taking France as an example. It says the difference between pre and post tax income for the bottom 50% is 4.4% of national income. 21.0 (post tax per capita income for the bottom 50%, measured in 2017 purchasing poser adjusted euros) - 17.8 (pretax income for the bottom 50%) = 3.2 delta between pre and post

They have a chart like this for each country which show the net effect (i.e., minus taxes plus services)

And also

Blanchet Comment, “The figure for net redistribution shows the aggregate amount of income that is redistributed (on net) to each group, while you are calculating the change in each group’s average income. That is where the factor 2 comes from. The bottom 50% receives 4.4% on national income on net, but since that is distributed across half of the population, the change in that group’s average is twice as large. We don't show the US in our appendix because for them we are not making our own estimates, but use the data from:https://gabriel-zucman.eu/usdina/We always use the GDP implicit price deflators as price indexes, which in principle are harmonized across countries to the same extent that GDP numbers are.”