Dean’s Convocation: Edward Prescott Part 1

Instead of contributing to the @NZSuperfund? @TaxpayersUnion

Spending on health or education could have been increased by a quarter or the company tax rate cut by up to 10 percentage points but for the Cullen Fund.

nzsuperfund policy alternatives

Did the rise of welfare state cause more inequality in wealth?

 Markus Poschke and Barış Kaymak have just put out a paper arguing that increased social spending is a major driver of wealth inequality:

Another important and often overlooked third factor is the rise in the generosity of government transfers since 1960, mostly due to the expansion of public pensions (social security) and the introduction of public health insurance for the elderly (Medicare).

Combined spending on these two programs accounted for almost 9% of US GDP in 2010, up from less than 3% in 1960…

These government programmes tend to curb the need to rely on personal savings for retirement, especially among low and middle-income households, and might thus explain why their share in total wealth has declined.

This makes a good to good degree of sense. I have previously argued that using the arguments of Edward Prescott that it is not wise for people on ordinary income to save for their retirement when they can go down to the local Social Security office and claim an old age pension.

It is even less wise to save that for retirement if those savings reduce your eligibility for an old age pension. Far better just to invest in a nicer house and pass it on to your children. Poschke and Kaymak note that measures of private wealth inequality miss these claims to old age pensions:

… statistics on wealth inequality that do not capture households’ claims on the public sector are incomplete and overstate top wealth shares.

This is not a new argument. Back when the Ricardian theories of budget deficits came to prominence and before that in debates on theories of the public debt, the more Keynesian sides of those arguments did argue that people were irrational for not including their old age pension entitlements under social security schemes in their calculations of their wealth.

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Some of their taxes were paying for their future old age pension and were another form of wealth rather than a tax. As such, taxpayers should regard this part of their taxes as investments and not cutting back their labour supply in response as they do to other taxes.

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Source: Barış Kaymak and Markus Poschke The evolution of wealth inequality over half a century: The role of taxes, transfers and technology, Journal of Monetary Economics (2016).

How much of the rise in wealth inequality is due to this failure to measure Social Security wealth as represented by old age pension entitlements? Their estimate is about 25%:

…technological factors play a dominant role not only for changes in income inequality, as is well known, but also for wealth inequality. As high-earning households save part of their additional income, their share of wealth also rises.

This channel accounts for about half of the total increase in wealth inequality. Tax cuts and the expansion of transfers each account for about half of the remainder…

While tax cuts encourage saving, larger transfers reduce saving incentives for retirement, in particular for low and middle income groups. This implies that these groups’ share of private wealth declines.

Note though that this is partly due to the fact that measures of private wealth inequality, like those compiled by Saez and Zucman, do not include claims to future government transfers, like social security, which constitute wealth for their owners.

@BernieSanders @GrantRobertson1 why does anyone bother to work in #Denmark?

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But @BernieSanders says the Social Security crisis is a lie!

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Taxation of personal income and social security contributions as a percentage of US, British, Danish, German, French and New Zealand GDPs since 1965

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Source: Tax – Social security contributions – OECD Data and Tax – Tax on personal income – OECD Data.

Income tax plus employee contributions less cash benefits as % of earnings by family type in USA, Britain, Canada, Sweden, France, Italy, Denmark, Germany, Australia and New Zealand

Those much admired northern European welfare states tax families and individuals much more than do the Anglo-Saxon welfare states.

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Source: Taxing Wages 2015 – OECD 2015.

Income tax and social security contributions as a percentage of gross wage earnings in the USA, Britain, Canada, Germany, Denmark, Italy, France, Sweden, Australia and New Zealand

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Source: Taxing Wages 2015 – OECD 2015.

Income tax plus employee and employer social security contributions as % of labour costs in US, Britain, Germany, Italy, Canada, Australia, Sweden and Denmark

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Source: Taxing Wages 2015 – OECD 2015.

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Social Security contributions as a percentage of GDP in the G7 countries

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Source: Revenue Statistics 2015 – OECD 2015.

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