Daily Chart: Guess Who has the Largest Welfare System? // (Steven Hayward)
If there are two things you know about progressives today it is that they are obsessed by income inequality and have a bad case for envy for Scandinavian socialism. They constantly suggest Sweden or Denmark as models for social welfare policy. Guess which industrial democracy has the highest redistribution in national income to the lower income bracket? It turns out that it is. . . The United States. Behold:
The y-axis indicates the important calculation of how income inequality in America decreases when you take into account all income transfers and social welfare spending. This is something most leftists ignore in their inequality jeremiads. The U.S. income tax rates might be lower than European rates, but in aggregate America’s tax system is more advanced than any European country.
The interesting thing about these findings is that they come from a brand-new academic article by three left-leaning economists (one of them from Berkeley, the others from the Paris School of Economics), that uses some novel deep dives into data: ” Why is Europe More Equal Than the United States?” Although the article is behind a paywall the headline is misleading in many aspects. The study utterly discredits or casts serious doubt on several popular claims of egalitarian leftists.
One of the most popular leftist themes is that America has higher income inequality than Europe due to our (relatively low) income tax rates. But:
The large gap between the US and Europe in posttax inequality levels is not explained by differences in taxes and transfers. Contrary to popular belief, the United States appears to redistribute more of its national income to the lowest 50 percent than any other European country . This contrasts sharply with the widely held belief that “redistribution” and not “predistribution” is the reason Europe is less equal than the United States. . . In-kind transfers and indirect taxes are more progressive in America than in Europe in general. [Emphasis added. ]
Inadvertently, the authors also embrace key arguments that conservatives often make:
High top marginal tax rates, for example, can make it difficult for top earners to negotiate higher wages, which can lead to a decrease in pretax inequality. Transfers to the bottom of the distribution may also have an impact on the motivation to work or acquire skills . [Emphasis added. ]
Perhaps a generous welfare state is a disincentive for working? You should forget about it. This is especially true in academic journals. It’s unbelievable that peer reviewers allowed this to happen. (For more information, see Steve Moore’s and his friends in today’s NY Post.
More:
Only a fraction of the Europe-US inequality gap can be explained by the lower top marginal tax rates in the United States. . . The decrease in top marginal tax rates may explain the increase in top income concentration in Europe , but it cannot explain the faster pace at which pretax inequality rose here. . . The difference between Europe and the United States cannot be explained by a positive relationship between lower pretax inequality, higher redistribution and a greater share of national income being redistributed to the bottom 50% than in European countries.
Also, Ronald Reagan is not to blame for the rise in income inequality.
The conclusion makes Robert Reich’s talking points explicitly invalid.
We found that the structure of taxes, transfers and other factors cannot be attributed to the fact that Europe is more equal than the United States. This is contrary to the widespread view. Redistribution seems to reduce inequality in the United States more than in Europe. . .
How can the authors explain the differences in income inequality between the U.S.A. and Europe? Let’s not forget the perverse obsession of the left with income inequality. They make a distinction between “predistribution” and “redistribution,” although “predistribution” is not fully defined, but it generally refers to better national health care and education.
Because the two regions have been exposed to technological change and globalization in a similar manner over the past decades, our results shed light on the importance predistribution policies such as access to education or labor market regulations in explaining international differences in pretax income growth.
It would be interesting to see this study expanded to include statistical analysis of differences in demographics, immigration levels, educational attainment, and other factors between the U.S.A. and Europe. I bet the charts that such a treatment would produce will be equally unflattering for the egalitarian left. Kudos to this paper’s authors for reporting findings that were contrary to their “priors.”
Chaser–Guess which European nation has seen the greatest increase in its upper income share?
Another reason why the left hates Hungary.
