America: As Egalitarian as Germany, Sort of

by Will Wilkinson on October 3, 2007

I was surprised to discover that U.S. market income (i.e., pre-tax) inequality is lower than the U.K.’s, the same as Germany’s, and only slightly higher than Sweden’s, as can be seen in this chart (click for full size):

Pre-Tax and Disposable Income Inequality

This is from Brandolini and Smeeding’s 2007 “Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes” [pdf]. While the U.S. pre-tax Gini is still on the high side of the median of these 16 OECD countries, it is remarkable how much differences in tax and transfer policies push the U.S. to the top in inequality in disposable income. This is striking to me because, at a glance, it suggests that the U.S. is not all that distinctive in the way the basic structure of the economy affects the distribution of market income. Unions in Germany and the U.K. are rather more powerful than in the U.S., but (again, at a glance) appear to do nothing to reduce inequality relative to the U.S. Of course, eyeball empiricism isn’t dispositive. But it seems to me to fit pretty well with the weak effect of the relationship between declining unions and rising inequality found in other research, and suggests that the structure of basic American political-economic institutions is not especially conducive to inegalitarian outcomes.

After reading David Sirota’s response to Alan Greenspan’s suggestion for reducing inequality discussed in this Free Exchange post, it occurred to me that unions may play the same special role for some folks on the left that tax cuts play for some folks on the right: whatever is good, more unions (or tax cuts) will bring it about.

Viewing 3 Comments

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    Inequality of income is not in itself bad, but stagnation of median income means that the impulse to increase productivity is weakened, and the more so, the longer this situation lasts. Since the redistribution of pretax income towards the superrich, is the cause of perhaps more than all of this shift, we have reason to fear that it may go further.
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    Stronger unions also have a stronger political capability in protecting their membership, which might have the effect of a marginal shift in the post-tax imbalance.

    Somehow, I'm not comforted by the idea that it's only tax maneuvers that make the US more unequal. That would be true IF the budgets were relatively balanced between the countries.

    My "Willie Sutton" instincts (put the taxes where there's money to be found) don't beat the ability to lobby when it will come to politicians allocating who will pay for those increasing ex-SSTF deficits. What we've seen from weaker unions isn't just the shift from DB to DC pensions--it's also a decline in the ability to moderate the political power of the superrich.

    Unions aren't a panacea by any stretch, but the strange argument that pre-tax differences are no worse than elsewhere argues for the need for stronger political influence of the lower-compensated, and unions are the closest proxy to that you're going to find.
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    There's much attention to rising income inequality these days. Has anyone measured how significant the effect of lowering tax rates on the rich has encouraged them to claim their wealth as income, rather than 'hide' it in any number of ways? So while income appears to be rising disproportionately for the super rich, it may just be more visible.
 

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