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“Bracket creep” and its Effects on Income Distribution
Abstract
We present new empirical evidence for the way inflation reduces the inequality of the income distribution in the U.S. economy. The main mechanism emphasized in this paper is the "bracket creep" effect according to which inflation pushes income into higher tax brackets. Governments adjust the nominal income tax brackets slowly due to the rise in prices, typically less often than once every other year in the U.S. postwar history. We also develop a theoretical general equilibrium monetary model with income heterogeneity. In line with our time series evidence, it is rather the frequency of income tax schedule adjustments than the overall level of inflation that has a perceptible impact on the distribution of income. We find that a longer duration between two successive adjustments of the schedule reduces employment, savings, and output significantly.
... 34 Immervoll (2005). For an analysis of the effect of bracket creep in the US with a DSGE model, that finds bracket creep to decrease inequality see Heer and Süssmuth (2013). 35 More recent studies suggest that inflation's effect to reduce tax progressivity may become more important as compared to the revenue-increasing effect, as top income tax rates were reduced and as capital income is increasingly taxed at a flat rate. ...
This Economic Brief focuses on challenges related to recurrent immovable property and labour taxation during periods of high inflation. It discusses the update of property values and liquidity issues on the side of property tax payers as well as the bracket creep (or fiscal drag) in labour taxation. It highlights the relevance of these issues on the basis of recent empirical evidence and discusses current practices and possible solutions.
... Sebagai ilustrasi, pemerintah Amerika Serikat melakukan perubahan batasan penghasilan kena pajak di setiap lapisan yang dilakukan tiap tahun. Tujuan dilakukannya peraturan tersebut adalah membantu menstabilkan kondisi perekonomian nasional dan mengendalikan tingkat inflasi (Heer & Süssmuth, 2013). Berkaca dari pengalaman Amerika Serikat, pemerintah Indonesia melakukan penyesuaian tarif guna mengantisipasi kondisi inflasi yang tidak terkontrol. ...
In 2022, Indonesia would apply changes in tax brackets and rates for personal income tax. This adjustment is based on the Article 17 Paragraph 1 Tax Harmonization Law Number 7 of 2021. The government tries to accommodate the needs of the community through formulating process of this regulation. In particular, it provides convenience to the lower-middle income community and encourages an even distribution of income. People belonging to the high wealth income will be subject to the highest tariffs that have just been set through this law. Through a qualitative descriptive method in which data collection is carried out by taking from literature review; law, articles, books, and website, the author tries to analyze changes in brackets and rates of personal income tax. This study presents illustrations of the calculation to explain the difference in the amount of income tax payable before and after the implementation of the Tax Harmonization Law. In addition, the analysis of the principles of equity and democracy on the adjustment of layers and tax rates is elaborated in this paper. The results obtained explain that with the application of the new tax rate, taxpayers get a tax burden relief because the tax expense is lower due to the broadening of income range. However, wealthy taxpayers will pay more taxes because of the higher tax rates. This condition proves that the new tax rate supports vertical fairness in the taxation system. In addition, the implementation of regulations related to tax rates adjustment provides evidence that the implementation of democracy has been implemented. The adjustment of tax brackets and rates has a positive impact on the community and the government so that the allocation of tax revenues can run optimally to support the welfare of the community.
... It is, thus, said to be only defined mod 2π. Additionally, as illustrated in detail in Heer and Süssmuth (2013), there is a frequency, where the phase shift reaches π, that is, where the counterclockwisely rotated phase angle coincides with the horizontal originating from the circle center. It is this phase shift that cannot be distinguished from φ xy (ω) = −π. ...
Economic theory predicts the price dynamics of an unbacked asset to be inherently unforecastable. The same applies to exchange rates of unbacked currencies. Albeit, empirically investors are found to be driven by online and offline news media. This study analyzes the Bitcoin cryptocurrency price series and web search queries with regard to their mutual predictability and cause‐effect delay structure. Chinese Baidu engine searches and compounded Baidu‐Google search statistics predict Bitcoin price dynamics at relatively high frequencies ranging from two to five months. In the other direction, Granger‐causality runs from the cryptocurrency price to queries statistics across nearly all frequencies. In both directions, the reaction time computed from a phase delay measure for the relevant frequency bands with significant causality ranges from about one to four months. For either direction, out‐of‐sample forecasts are more accurate than forecasts of a benchmark stochastic process. Bivariate models including the Baidu Search Index slightly outperform competing models that include a Baidu‐Google composite index. Predictive power seems less diluted if the September 2017 trade regulations by the Chinese government are controlled for.
... While the conservative and liberal parties in Germany have recently suggested the compensation of extra income tax burden in the middle and higher income groups caused by the so-called 'bracket creep', the left-wings would like to see more stronger income tax discharges for the lower-income households and a significant increase of the income taxes for high incomes, emphasising the growing income divergence in this country (Bach, Haan and Ochmann, 2013). Although annual inflation rates have recently been quite modest in this country, the extra bracket-creep tax burden emerging in the time of continuously growing the country's tax revenue has been assessed unfair (Broer, 2011;Heer and Süssmuth, 2013;Lemmer, 2014). In this context, the real -i.e. ...
... While the conservative and liberal parties in Germany have recently suggested the compensation of extra income tax burden in the middle and higher income groups caused by the so-called 'bracket creep', the left-wing parties would like to see stronger income tax reductions for the lower-income households and a significant increase in income tax for high incomes, emphasising the growing income divergence in this country (Bach, Haan & Ochmann., 2013). Although annual inflation rates have recently been quite modest in this country, the extra bracket-creep tax burden emerging over the period of continuous growth in the country's tax revenue has been assessed as unfair (Broer, 2011;Heer & Süssmuth, 2013;Lemmer, 2014). In this context, the real, that is, inflation-adjusted, personal income is also widely seen in Germany as the indicator that more appropriately reflects the individual taxpayer's 'ability to pay' (see also Rietzler et al., 2014). ...
This study primarily aims to contribute to the ongoing debates on bracket creep and examine whether Germany needs to integrate inflation indexation into its personal income tax system in order to reduce distortions of tax liabilities and additional tax burdens. Germany has continuously flattened the personal income tax rates in the context of a series of tax reforms and modified its tax system. Under the consideration of the major goals of these reforms, this study compares the extent to which previous reform efforts, made in this country since 1958, led to changes in the real, inflation-adjusted average personal income tax burden of single earners in 2014. Furthermore this study examines the changes in progressivity of tax rates over the same period of time, which is measured by the coefficient of residual income progression (CRIP). According to the long-term real view adopted in this study, the evolution of the German personal income tax system made middle-income single earners worse off, while both the lower and higher income groups are significantly better off.
... While the conservative and liberal parties in Germany have recently suggested the compensation of extra income tax burden in the middle and higher income groups caused by the so-called 'bracket creep', the left-wing parties would like to see stronger income tax reductions for the lower-income households and a significant increase in income tax for high incomes, emphasising the growing income divergence in this country (Bach, Haan & Ochmann., 2013). Although annual inflation rates have recently been quite modest in this country, the extra bracket-creep tax burden emerging over the period of continuous growth in the country's tax revenue has been assessed as unfair (Broer, 2011; Heer & Süssmuth, 2013; Lemmer, 2014). In this context, the real, that is, inflation-adjusted, personal income is also widely seen in Germany as the indicator that more appropriately reflects the individual taxpayer's 'ability to pay' (see also Rietzler et al., 2014). ...
This paper adds to a growing literature on informal sector taxation in developing countries by describing and analysing the experiences of four African countries (Ghana, Tanzania, Zambia and Zimbabwe) that have implemented informal sector taxes in recent decades. These taxes are analysed in terms of their revenue, technical (that is, administrative effectiveness, equity and efficiency) and governance implications. The evidence suggests that the revenue potential from informal sector taxation is low, in part because of the difficulty in designing and administering effective informal sector tax regimes. Based on the experiences in these countries, negotiating with informal sector associations might be a useful strategy to improve administrative effectiveness and state-citizen relations.
... Finally, the effect of the bracket creep under a system of progressive taxation should not be neglected (Heer & Süssmuth, 2013). When incomes are pushed into higher tax brackets through inflation, the private sector is deprived of a larger proportion of its income. ...
In this paper a brief history of the Phillips curve is sketched. Empirical evidence from France, Germany, the United Kingdom and the United States during the latter half of the 20th century in support of a positive long-run relationship between price inflation and unemployment is presented. In order to reconcile the predominant theoretical view, which holds that inflation is neutral in the long run, with the observed data, two arguments are outlined, both of which build on unintended consequences of monetary expansion: 1.) redistributional effects on incomes and wealth, and 2.) business cycle fluctuations. The analysis hinges on further political interventions in response to these consequences, which tend to increase unemployment as they render labor markets less flexible. In this sense the relationship between price inflation and unemployment over the past 60 years can in part be interpreted as the outcome of an interventionist spiral.
... bracket creep has been found to cause disruptions even in low inflation environments. Heer and Süssmuth (2013) find that distortions are greater in long-term, low-inflation environments than in those of a short-term, high-inflation nature. The mechanism behind long-run distortions like this is intuitive. ...
This paper considers the consequences of automatically indexing the US federal income tax code to inflation. Indexation, implemented during the 1981 federal tax overhaul, and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard New Keynesian models with a generalized, progressive labor income tax. Additionally, fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply-side disturbances. Together, these results support a fiscal extension to the “good policy” hypothesis of the Great Moderation and encourage further indexation of the United States tax code.
Due to a lack of adequate before and after tax time series, the impact of inflation on the income distribution in the presence of a progressive tax system is widely unexplored. Contributions using U.S. data have not reached a consensus about income inequality decreasing, increasing or showing no significant association with inflation. Our study analyzes the relationship across the distribution. We use a recently available dataset on U.S. income before and after taxation on a quintile-by-quintile basis for 1962–2016. We find inflation (i) before taxes to, if any, slightly decrease inequality, (ii) to amplify tax progressivity, and (iii) after taxes to reduce the Gini coefficient by 0.4 of a standard deviation in response to a one percentage point inflationary shock. We attribute (i) to the creditor-debtor channel. Findings (ii) and (iii) indicate missing or incomplete indexation redistributing particularly from the fourth quintile to the two bottom quintiles.
Incomes are more unequally distributed in ethnically diverse populations than in more homogenous ones. In this paper, I help explain this pattern by showing that unanticipated inflation reduces the income share of the poor in ethnically fractionalized countries, while increasing it in ethnically homogenous populations. I propose a mechanism to explain the result, where inflation-hedging among the rich is more prevalent in ethnically fractionalized countries because inflation is more volatile. To identify episodes of unanticipated price increases, I construct a novel data set of inflation shocks across 189 countries, using the revisions to the inflation forecasts in IMFs World Economic outlook between spring and fall reports.
This study examines the impact of the increased non-taxable income on income tax revenue. The dataset encompasses observations during the period 2011 to 2015. The increased non-taxable income is as the independent variable, whereas the dependent variable is income tax revenue. The empirical analysis indicates that the increased non-taxable income has positive effect on income tax revenue and it is significant. If the national income increases, then the income tax revenue increases also. This study also finds that in 2015, the increased non-taxable income increases the income tax revenue. This could be happened because the increased non-taxable income will not also gives a direct effect to personal income tax, but also gives an indirect effect to corporate income tax. Research results are expected to be the reference of the government policy to take in improving non-taxable income.
This paper conceptually critiques the progressivity of the current personal income tax in Nigeria by drawing on the equity concept of taxation vis-à-visincome redistributionandtaxpayers' ability to pay tax. Whilst the study acknowledges the presumed progressivity and income redistribution notions embedded within the personal income tax regime, it provides conceptual analysis that consequently contradicts such notions in practice. Overall, the analysis suggests that the current personal income tax regime is more pro-rich than it is pro-poor, thus requiring the factoring in of the economic realities of the non-rich when amending the tax law in the future.
This paper explores theoretically and empirically the effects of monetary policy and inflation on income inequality in developed economies. The few empirical studies touching on this issue have given conflicting answers, and the impact on inequality remains puzzling. In an attempt to solve this puzzle we argue that the effects of monetary policy and inflation on inequality depend on the initial rate of inflation. Though in high inflation countries restrictive monetary policy is often beneficial for inequality, reducing inflation in economies with initially low inflation might increase inequality. Empirical investigations for the US and a sample of 15 OECD countries seem to support this hypothesis. This paper was written while Rossana Galli was visiting ILO. Comments can be sent to Rossana.Galli@lu.unisi.ch or to hoeven@ilo.org. 1
Inflation is often associated with a loss for the poor in the medium and long term. We study the short-run redistributive effects of unanticipated inflation in a dynamic optimizing sticky price model of the business cycle. Agents are heterogeneous with regard to their age and their productivity. We emphasize three channels of the effect of inflation on income distribution: (1) factor prices, (2) “bracket creep,” and (3) sticky pensions. Unanticipated inflation that is caused by monetary expansion is found to reduce income inequality. In particular, an increase of the money growth rate by one standard deviation results in a 1% drop of the Gini coefficient of disposable income if extra tax revenues are transferred lump-sum to the households.
This book provides a wide-ranging account of the literature on co-integration and the modelling of integrated processes (those which accumulate the effects of past shocks). Data series which display integrated behaviour are common in economics, although techniques appropriate to analysing such data are of recent origin and there are few existing expositions of the literature. This book focuses on the exploration of relationships among integrated data series and the exploitation of these relationships in dynamic econometric modelling. The concepts of co-integration and error-correction models are fundamental components of the modelling strategy. This area of time-series econometrics has grown in importance over the past decade and is of interest to econometric theorists and applied econometricians alike. By explaining the important concepts informally, but also presenting them formally, the book bridges the gap between purely descriptive and purely theoretical accounts of the literature. The asymptotic theory of integrated processes is described and the tools provided by this theory are used to develop the distributions of estimators and test statistics. Practical modelling advice, and the use of techniques for systems estimation, are also emphasized. A knowledge of econometrics, statistics, and matrix algebra at the level of a final-year undergraduate or first-year undergraduate course in econometrics is sufficient for most of the book. Other mathematical tools are described as they occur. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/0198288107/toc.html
This paper studies how the Hodrick-Prescott filter should be adjusted when changing the frequency of observations. It complements the results of Baxter and King (1999) with an analytical analysis, demonstrating that the filter parameter should be adjusted by multiplying it with the fourth power of the observation frequency ratios. This yields an HP parameter value of 6.25 for annual data given a value of 1600 for quarterly data. The relevance of the suggestion is illustrated empirically.
The effects of unemployment and inflation on quintile shares of family income in the United States are estimated by means of generalized least squares. Inflation is found to have a significant progressive impact on the distribution of income. The results also lend support to earlier findings regarding the regressive effects of unemployment. Copyright 1994 by MIT Press.
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
This paper examines the effects of inflation and associated financial instability on income distribution. Using both pooled cross country and single country time series models, the level of inflation, inflation variability, and the variability of the nominal exchange rate are shown to impact negatively on overall income equality. Looking at disaggregate measures of income distribution, the issue as to whether inflation is a progressive or regressive tax is found to be negatively correlated with the level of development and the sophistication of the financial structure. The paper argues that these results point towards financial variables as a partial way of rectifying the generally poor explanatory power of both cross-country and time series models of income distribution.
An examination of the inflation-indexing provisions contained in the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986.
An argument that raising federal revenues through suspending indexation of the personal income-tax code is inefficient in that it is inferior to direct increases in marginal tax rates.
We show that a theory of earnings and wealth inequality, based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units, accounts for the U.S. earnings and wealth inequality almost exactly.
Modern business cycle theory and growth theory uses stochastic dynamic general equilibrium models. In order to solve these models, economists need to use many mathematical tools. This book presents various methods in order to compute the dynamics of general equilibrium models. In part I, the representative-agent stochastic growth model is solved with the help of value function iteration, linear and linear quadratic approximation methods, parameterised expectations and projection methods. In order to apply these methods, fundamentals from numerical analysis are reviewed in detail. In part II, the authors discuss methods in order to solve heterogeneous-agent economies. This part of the book also serves as an introduction to the modern theory of distribution economics. Applications include the dynamics of the income distribution over the business cycle or the demographic transition in a large-scale overlapping generations model. In an accompanying home page to this book, computer codes to all applications can be downloaded. "This is perhaps the perfect book to learn how to solve quantitative macroeconomics models. Its balance between theory, choice of models, computational insights and use of examples make it an excellent teaching tool. One of the very few books a professional macroeconomist should have: I always learn something important when I consult it." José-Víctor Ríos Rull, University of Minnesota "This book not only does an excellent job in explaining the existing tools, but it also teaches the reader on how to write her/his own programs and it provides the reader with the tools to help advance the state of the art of dynamic macroeconomics. " Wouter J. Den Haan, University of Amsterdam "This is an excellent book for economists who do quantitative research. It will be an invaluable teaching tool for graduate macroeconomic courses." Ayse Imrohoroglu, University of Southern California"... provides the reader with exactly the necessary computational tools to solve the dynamic general equilibrium models macroeconomists care about. It is therefore the perfect complement to Stokey, Lucas and Prescott's and Sargent and Ljungqvist's theoretical treatment of modern macroeconomics." Dirk Krueger, University of Pennsylvania.
This paper develops a set of approximate band-pass filters designed for use in a wide range of economic applications. In particular, we design and implement a specific band-pass filter which isolates business-cycle fluctuations in macroeconomic time series. This filter was designed to isolate fluctuations in the data which persist for periods of two through eight years. This filter also 'detrends' the data, in the sense that it will render stationary time series that are integrated of order two or less, or that contain deterministic time trends. We apply our filter to several of the key macroeconomic time series, and describe the picture of the U.S. postwar business cycle that emerges from our analysis. We also provide detailed comparisons with several alternative detrending methods.
Using a simple simulation model, this paper assesses the impact of relative movements in asset prices on the distribution of wealth during the 1969–75 period. Because of the strong negative correlation between wealth level and the ratio of debt to wealth, this particular inflation induced a substantial drop in the overall level of wealth inequality. Moreover, comparing the portfolios of different demographic groups, we found that middle-aged households gained relatively to younger and older ones, married couples gained relatively to singles, whites gained relatively to non-whites, and home-owners gained relatively to renters. The biggest gainers from this inflation were home-owners with large mortgages and the biggest losers the large stock holders.
This paper uses Social Security Administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality
and mobility in the United States. Annual earnings inequality is U-shaped, decreasing sharply up to 1953 and increasing steadily
afterward. Short-term earnings mobility measures are stable over the full period except for a temporary surge during World
War II. Virtually all of the increase in the variance in annual (log) earnings since 1970 is due to increase in the variance
of permanent earnings (as opposed to transitory earnings). Mobility at the top of the earnings distribution is stable and
has not mitigated the dramatic increase in annual earnings concentration since the 1970s. Long-term mobility among all workers
has increased since the 1950s but has slightly declined among men. The decrease in the gender earnings gap and the resulting
substantial increase in upward mobility over a lifetime for women are the driving force behind the increase in long-term mobility
among all workers.
This paper establishes stylized facts about business cycles in the late 19th century, using spectral analysis techniques which allow an intuitive description and analysis of cyclical structure in economic fluctuations. Analysis of industrial production data for 13 countries permits the following generalizations. In the advanced North Atlantic economies, a fairly regular long cycle with a periodicity of 7–10 years is identified in all countries. This component explains a substantial fraction of overall variation in industrial production. There is some evidence of a less regular, less powerful short cycle of 3–5 years duration. In peripheral economies experience is varied, but it is more often the short cycle that exercises greater influence. The long cycle component is shown to be highly correlated among the core economies, much less so between core and peripheral economies, and least of all among peripheral economies. The long cycle is more highly correlated among countries with important trading ties and those on a metallic monetary standard throughout the period.
The literature on endogenous growth cycles predicts countercyclical R&D expenditure. Aggregate R&D expenditure in G7 countries from 1973 to 2000 tends to be procyclical. Implications for future theoretical research are discussed.
This note argues that it is hardly the case that the profession is fully aware that the application of different filters to the data leads to different outcomes and that we have enough evidence to claim that these differences are unimportant to evaluate the fit models to the data.
This paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the U.S. is replaced by a flat tax, as proposed by Hall and Rabushka (1995), (The Flat Tax, 2nd ed. Hoover). The central aspects of such reform, the impact of tax reform on capital accumulation and labor supply, as well as its distributional consequences, are analyzed in a dynamic general equilibrium model. Main results are that, (i) the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation; (ii) mean labor hours are relatively constant across tax systems, but aggregate labor in efficiency units increases; (iii) in all circumstances analyzed, the distributions of earnings, income and especially wealth become more concentrated.
This paper examines the business cycle properties of a small set of a real US macroeconomic time series using a variety of detrending methods. It is shown that both quantitatively and qualitatively ‘stylized facts’ of US business cycles vary widely across detrending methods and that alternative detrending filters extract different types of information from the data. Implications and suggestions for current macroeconomic practice are provided.
The paper develops a procedure for finding a discrete-valued Markov chain whose sample paths approximate well those of a vector autoregression. The procedure has applications in those areas of economics, finance, and econometrics where approximate solutions to integral equations are required.
We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, we make three major changes to the way in which this basic theory is implemented: (i) we mix the main features of the dynastic and the life-cycle abstractions, that is, we assume that our households are altruistic, and that they go through the life-cycle stages of working-age and of retirement; (ii) we model explicitly some of the quantitative properties of the U.S. social security system; and (iii) we calibrate our model economies to the Lorenz curves of U.S. earnings and wealth as reported by the 1992 Survey of Consumer Finances. Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems, that are additional explicit features of our model economies.
Band-pass filters are useful in a wide range of economic contexts. This paper develops a set of approximate band-pass filters and illustrates their application to measuring the business-cycle component of macroeconomic activity. Detailed comparisons are made with several alternative filters commonly used for extracting business-cycle components. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
We give semiparametric identification and estimation results for econometric models with a regressor that is endogenous, bound censored and selected,called a Tobin regressor. First, we show that true parameter value is set identified and characterize the identification sets. Second, we propose novel estimation and inference methods for this true value. These estimation and inference methods are of independent interest and apply to any problem where the true parameter value is point identified conditional on some nuisance parameter values that are set-identified. By fixing the nuisance parameter value in some suitable region, we can proceed with regular point and interval estimation. Then, we take the union over nuisance parameter values of the point and interval estimates to form the final set estimates and confidence set estimates. The initial point or interval estimates can be frequentist or Bayesian. The final set estimates are set-consistent for the true parameter value, and confidence set estimates have frequentist validity in the sense of covering this value with at least a prespecified probability in large samples. We apply our identification, estimation, and inference procedures to study the effects of changes in housing wealth on household consumption. Our set estimates fall in plausible ranges, significantly above low OLS estimates and below high IV estimates that do not account for the Tobin regressor structure.
The paper focuses on satisfaction with income and proposes a utility model built on two value systems, the `Ego' system - described as one own income assessment relatively to one own past and future income - and the `Alter' system - described as one own income assessment relatively to a reference group. We show how the union of these two value systems and the use of relative deprivation measures can lead to a model able to accommodate a wide range of theories on income and happiness. The model is then tested using the Consortium of Household Panels for European Socio-economic Research (CHER), a collection of 19 panel surveys including over 1.2 m. individual observations. We find absolute income to sit at the intersection between the `Ego' and the `Alter' systems and to play the most prominent role in explaining satisfaction with income. Relative deprivation is also found to be important for understanding the income-happiness nexus while we find income expectations to be less relevant once we control for absolute income. Overall, the `Alter' system (the cross-section comparison with others) seems to be more relevant in valuing income than the `Ego' system (the longitudinal self-comparison of income).
This article presents a new data set on inequality in the distribution of income. The authors explain the criteria they applied in selecting data on Gini coefficients and on individual quintile groups' income shares. Comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect intertemporal and international comparability. Based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality. They do find a strong positive relationship between growth and reduction of poverty. Copyright 1996 by Oxford University Press.
We propose a procedure for representing a time series as the sum of a smoothly varying trend component and a cyclical component. We document the nature of the co-movements of the cyclical components of a variety of macroeconomic time series. We find that these co-movements are very different than the corresponding co-movements of the slowly varying trend components.
This paper estimates the effect of changing union density on earnings differentials and inequality among male workers in the U.S. and on industry earnings differentials among OECD countries. For the U.S. the evidence indicates that the fall in union density contributed to the 1980s increase in earnings inequality. Cross section-based estimates of union wage effects suggest that 40-50% of the rise in the white collar premium. 15-40% of the rise in the college premium. and 20% of the rise in the standard deviation of In earnings for all men are attributable to the fall in union density. Longitudinal-based estimates of union wage effects suggest that deunionization contributed less to the rise in differentials. Still. the dispersion of earnings grew as much among organized workers as among otherwise comparable nonunion workers, so that overall dispersion would have risen substantially even if the entire work force had been organized. Deunionization was thus a factor in the rise in inequality but not the factor. The cross-country comparisons show that earnings distributions are more compact among union workers than among nonunion workers in OECD countries with different union densities, types of union movements, and with very different union/nonunion wage differentials, making the relation between unionism and dispersion a general outcome of unionism. not something specific to U.S. institutions. In addition, they indicate that earnings differentials by industry are smaller and increased less in the 1980s in highly unionized countries than in less unionized countries, suggesting that strong national union movements can partially offset market pressures for rising inequality.
This paper investigates the impacts of macroeconomic activity and policy on the poverty population. It is shown that both the poverty count and the income share of the lowest quintile of income recipients move significantly with the business cycle. The differential impact of inflation versus unemployment on low income groups is analyzed at length.The evidence indicates that unemployment has very large and negative effects on the poor, while inflation appears to have few effects at all. In addition, changes in tax policy since 1950 have led to decreasing progressivity in the overall tax structure. Special attention is given to changes in the poverty rate over the past decade and to prospective changes in the remainder of the 1980s.
A monthly labor input series designed to correct for the fact that all hours worked are not of the same quality is constructed and its properties compared with unadjusted hours worked. This efficiency unites series is constructed from BLS data on hours worked and earnings by age and sex. The cyclical fluctuations displayed by the efficiency units series are smaller on average than those displayed by hours worked, although the difference is not large. However, the secular behavior of the series is quite different: hours worked per capita displays a significant positive trend while efficiency units per capita does not. Copyright 1993 by John Wiley & Sons, Ltd.
We develop optimal finite-sample approximations for the band pass filter. These approximations include one-sided filters that can be used in real time. Optimal approximations depend upon the details of the time series representation that generates the data. Fortunately, for U.S. macroeconomic data, getting the details exactly right is not crucial. A simple approach, based on the generally false assumption that the data are generated by a random walk, is nearly optimal. We use the tools discussed here to document a new fact: There has been a significant shift in the money-inflation relationship before and after 1960. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
This article describes some facts about financial inequality in the United States that a good theory of inequality must be able to explain. These include the facts that labor earnings, income, and wealth are all unequally distributed among U.S. households, but the distributions are significantly different. Wealth is much more concentrated than the other two. Wealth is positively correlated with earnings and income, but not strongly. The movement of households up and down the economic scale is greater when measured by income than by earnings or wealth. Differences across the three variables remain when the data are disaggregated by age, employment status, educational level, and marital status of the heads of U.S. households. Each of these classifications also has significant differences across households. All the facts are based on data taken from the 1992 Survey of Consumer Finances and the 1984–85 and 1989–90 Panel Study of Income Dynamics.
Recent developments in business cycle theory are reviewed. The principal finding is that the growth model, which was developed to account for the secular patterns in important economic aggregates, displays the business cycle phenomena once it incorporates the observed randomness in the rate of technological advance. The amplitudes and serial correlation properties of fluctuations in output and employment that the growth model predicts match those historically experienced in the United States. Further, the model continues to display the growth facts it was developed to explain.
Poverty is arguably the most pressing economic problem of our time. And because rising inequality, for a given level of income,> implies greater poverty, the distribution of income is also a central concern. At the same time, monetary policy is one of the modern age's most potent tools for managing the economy. Given the importance of poverty and the influence of monetary policy, it is natural to ask if monetary policy can be used as a tool to help the poor.> In a presentation at the Federal Reserve Bank of Kansas City's 1998 symposium, "Income Inequality: Issues and Policy Options," Christina and David Romer examined the influence of monetary policy on poverty and inequality both over the business cycle in the United States and over the longer run in a large sample of countries. They argued that although expansionary policy induces a decline in the poverty rate, the decline is eventually reversed. Second, monetary policy that aims to restrain inflation and minimize output fluctuations is likely to be associated with improved conditions for the poor over time.
This paper analyses how inflation-induced erosions of nominally defined amounts built into relevant tax rules (bracket creep) alter distributional and revenue-generating properties of income taxes and social insurance contributions. Using a multi-country tax-benefit model, it provides quantitative estimates for Germany, the Netherlands and the UK. In the absence of automatic inflation adjustment mechanisms, effects on individual tax burdens can be substantial even with low inflation. Bracket creep is found to reduce tax progressivity. At the same time, overall tax revenues increase. This second effect more than compensates for the decline in progressivity and leads to an overall increase of relevant redistribution measures. Existing adjustment regimes used in the Netherlands and the UK are successful at preventing large tax burdens changes resulting from inflation-induced nominal income changes.
This paper analyzes how inflation-induced erosions of nominally defined amounts built into relevant tax rules ("bracket creep") alter distributional and revenue-generating properties of income taxes and social insurance contributions. Using a multi-country tax-benefit model, it provides quantitative estimates for Germany, the Netherlands and the U.K. In the absence of automatic inflation adjustment mechanisms, effects on individual tax burdens can be substantial, even with low inflation. Bracket creep is found to reduce tax progressivity. At the same time, overall tax revenues increase. In terms of tax systems' equalizing capacities, which depend on both these factors, the second effect dominates: if tax systems were left unadjusted then inflation would lead to lower and slightly more equally distributed household incomes. However, existing inflation adjustment regimes in the Netherlands and the U.K. successfully prevent large tax burdens changes. Copyright 2005 Blackwell Publishing Ltd.
In this paper, the authors develop an applied general equilibrium model to examine the effects of tax-favored retirement accounts on the capital stock. The results from their benchmark model indicate that a modest individual retirement account (IRA) contribution limit similar to that in effect during the early 1980s raises the steady-state capital stock by 6.18 percent; approximately 9 percent of IRA contributions constitutes incremental saving. The authors' results lend support to recent suggestions that retirement accounts with favorable tax treatment only for contributions above some base amount might provide more stimulus to saving than conventional IRAs. Copyright 1998 by American Economic Association.
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
This paper compares the age-wealth distribution produced in life-cycle economies to the corresponding distribution in the US economy. The idea is to calibrate the model economies to match features of the US earnings distribution and then examine the wealth distribution implications of the model economies. The findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the US. Furthermore, the model economies produce the US wealth Gini and a significant fraction of the wealth inequality within age groups. However, the model economies produce less than half the fraction of wealth held by the top 1 percent of US households.
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.