Increasing Inequality in Joint Income and Wealth Distributions in the United States, 1995 to 2016 Louis Chauvel, University of Luxembourg, IRSEI Eyal Bar-Haim, University of Luxembourg, IRSEI Anne Hartung, University of Luxembourg, IRSEI Philippe Van Kerm, University of Luxembourg, IRSEI and LISER

Outline Background Method Results Focus on income AND wealth (I and W diagnoses can differ)  Piketty, 2014; Wolff, 2016 Wealth to Income (W/I) ratio  skyrocketed in many countries (Piketty as usual) Expect changing roles of merit and inheritance  Killewald, Pfeffer, & Schachner, 2017 Expect massive changes between the 1990’s and the 2010’s  All & al. 20xx Method ISOgraph  a new way to detect level-specific inequalities and observe change New method for joint distributions Results Wealth inequality increased substantially and significantly Income inequality … the same The upper-middle class benefitted more (in I and W) relatively to the top elite or the median Increasing importance of wealth over income in inequality (higher W/I ratio)

Income and Wealth Distributions Historically, Most studies of inequality focused on income However, recent studies put more emphasis on wealth distribution Piketty, 2014; Saez & Zucman, 2016 Pfeffer, Schoeni, Kennickell, Andreski, 2016, Wolff, 2016 etc Little is known about the joint distribution of income and wealth Jantti, Sierminska, Smeeding 2008, Jenkins, 2009, etcetc The problem: data limitations + methodological voids in wealth inequality analysis Extremely skewed distributions of wealth and income Small fraction of the pop. can control a considerable share of the resource

Applications => in finance (stock market dynamics) "Why Has CEO Pay Increased So Much?", Xavier Gabaix & Augustin Landier, Quarterly Journal of Economics, vol. 123(1), 2008, p. 49-100 α=1/ζ≈1

Frank Cowell, Brian Nolan, Javier Olivera and Philippe Van Kerm 2017 “Wealth, Top Incomes and Inequality”, K. Hamilton and C.Hepburn (Eds.). Wealth: Economics and Policy, Oxford University Press.

Frank Cowell, Brian Nolan, Javier Olivera and Philippe Van Kerm 2017 “Wealth, Top Incomes and Inequality”, K. Hamilton and C.Hepburn (Eds.). Wealth: Economics and Policy, Oxford University Press. Saturation of inequality

Trends in overall inequality in wealth: Gini and Atkinson indices for the upper half of the distribution Source: LWS (US-SCF). Note: See Figure A.1 in the annex for the trends for the entire wealth distribution.

ISOGRAPH X = logit of the fractional rank r (=logitrank) of resource (income, wealth, etc.) [r between 0 and 1] Y = log medianized resource (resource divided by its median) ISO=Y/X is a measure of Level-specific inequalities If ISO=a (constant)  Champernowne-Fisk (double Pareto) distribution with a = Gini (Dagum, 1977) X=𝑙𝑜𝑔𝑖𝑡( 𝑟 𝑖 Y=ln⁡( 𝑖𝑛𝑐𝑜𝑚𝑒 𝑖 𝑚𝑒𝑑𝑖𝑎𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 ) 𝐼𝑆 𝑂 i = ln⁡( 𝑖𝑛𝑐𝑜𝑚𝑒 𝑖 𝑚𝑒𝑑𝑖𝑎𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 ) 𝑙𝑜𝑔𝑖𝑡( 𝑟 𝑖

ISOGRAPH Reading the ISOGRAPH (Chauvel, 2016; Chauvel & Bar-Haim, 2017) Each point represent ISO at the X (specific-level inequality) Differences in ISO at X level indicate variation in inequality levels The higher ISO, the higher contribution of this specific level to the overall inequality (=stronger stretch of the distribution)

ISOGRAPH Reading the ISOGRAPH Each point represent ISO at the X (specific-level inequality) Differences in inequality between levels indicate variation in inequality levels The higher ISO, the higher the inequality at this specific level (=stronger stretch of the distribution)

LIS examples of ISO on equivalized disposable income = “level of living” Source: LIS data, various years and countries

Data Variables LWS 1995 – 2016 (3 years intervals) 4200-6500 respondents each wave Stratified sample  large sub-sample of wealthy households (=> complicated weights => confidence intervals = bootstrapping) Variables Income – “disposable income” (after some taxes) per Consumption Unit Wealth – current value of total marketable wealth and assets, net of debt

Initial Result– U. K. /U. S. comparison – Net W (or the E. U Initial Result– U.K./U.S. comparison – Net W (or the E.U. a bunch of outliers…) U.K. U.S. This is almost a Zipf!!! W isograph W isograph I isograph I isograph x x Source: LWS 2013 and U.K. LWS 2011

Initial Results– U. K. /U. S. comparison – Net W (or the E. U Initial Results– U.K./U.S. comparison – Net W (or the E.U. a bunch of outliers…) U.S. W isograph Top 5%!!! U.K. I isograph x Source: LWS 2013 and U.K. LWS 2011

Result 1 – Income inequality increases U.S. Significant increase in income inequality for incomes with logit rank of 2 (top 11%) and above. No significant change for the highest 2% and around the median income. 2016 1995 ISO Significant increase in income inequality Logitrank(Income) X=2  Top 11% X=5.5  Top 2%

Result 2 – Wealth inequality increases Significant increase in wealth inequality for wealth above the median (logit rank 0). No significant change above the top 0.5% and around the median income. 2016 1995 ISO Significant increase in W inequality Logitrank(Wealth) X=0.5  Top 38% X=5.5  Top 0.5%

Joint Distribution of Income and Wealth by Logitranks Using logitranks instead of percentiles, The association is much clearer. Especially in the upper part of the distribution.

Result 3: stronger Income-Wealth Association (1992-2013) The income/wealth association became stronger over the years. Most of the increase is during the first decade of the 21st century. Significant increase in the I x W association R2 of Log(Income) x Log(wealth) R2 of LR(Income) x LR(wealth)

Result 4: increasing Wealth to Income ratios (W/I) (in Years …) Near to the top 2%, in 2016, Wealth=10 years of income 2016 1995 Above to the Median, On both years, Wealth= 2 years of income Significant increase in the W/I ratio Near to the top 2%, in 1995, Wealth=6 years of income

The 15 Proposals from Tony Atkinson’s ‘Inequality – What can be done?’ Conclusions Only bad news for equality: Income and wealth inequality increased over the period (R1 & R2) Wealth inequality increased almost everywhere above the median (R2) The very top fractiles (above top 1%) are less significantly affected (data or reality?) The wealth-income association increased: even more consistent relation income rich and wealth rich are more and more the same ones (R3) The W/I ratio increased (R4) mostly near to the top decile from 7 to 11 years … Plus initial result (R0): Wealth inequality in the U.S. is really exceptional (compared to Europe)  R0, R1, R2, R3, R4: 5 synergetic aspects of increasing inequalities in the U.S. The 15 Proposals from Tony Atkinson’s ‘Inequality – What can be done?’ Proposal 7: A public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property. Idea to pursue: a re-examination of the case for an annual wealth tax and the prerequisites for its successful introduction. Idea to pursue: a global tax regime for personal taxpayers, based on total wealth.