Extent of Inequality Significantly Overestimated
Research
05.07.2024
ZEW Study: Well-Known Estimate of Inequality after Taxes and Transfers in the US Relies on Questionable Assumption
The extent of inequality is a frequent topic of academic and political debate. A recent ZEW Mannheim study shows that a well-known study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman significantly overestimates inequality after taxes and transfers in the US. The three authors assume that many government transfers are distributed as unequally as monetary income. This assumption is not very plausible and, as the current ZEW study shows, is clearly refuted, at least for public spending on education.
In a cross-sectional perspective, public spending on education is roughly equal across income levels. If such an equal distribution is assumed for all government spending that cannot be directly allocated to individuals, then inequality after taxes and transfers is much lower than under the assumption of the Piketty study. For their study, the Mannheim researchers analysed data on more than three million US citizens.
Gap halved – inequality remains high
“Piketty, Saez, and Zucman have considerably advanced inequality research. However, in the mentioned study, they significantly overestimate inequality after taxes and transfers,” explains Professor Holger Stichnoth, head of the “Inequality and Public Policy” Research Group at ZEW and co-author of the ZEW study.
“Our study shows that the share of national income going to the richest ten per cent shrinks by about five percentage points, while the income of the poorer half increases by about the same amount, if one does not assume that people with higher incomes also benefit more from government spending. This halves the difference between the two shares from around 20 to around ten percentage points,” says Dr. Lukas Riedel, co-author and researcher in the “Inequality and Public Policy” group, summarising the main findings.
According to the Piketty study, the average income of the richest ten per cent in the US was about ten times higher than that of the bottom 50 per cent in the mid-2010s. However, even under the more plausible distributional assumption of the ZEW study, the gap after taxes and transfers remains large. Under this assumption, the income of the top ten per cent is about seven times higher than that of the bottom 50 per cent. The inequality in market income is even greater.
Publication in a renowned journal
The data for the ZEW study comes from the 2017 American Community Survey (ACS), which surveyed about 3.2 million people in 1.4 million US households. The paper was published in the prestigious journal “International Tax and Public Finance” and is freely available: https://doi.org/10.1007/s10797-024-09832-1
