54 research outputs found
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How to boost the European Green Deal’s scale and ambition
The European Green Deal (EGD) is the European Union’s flagship strategy to tackle climate change. This policy paper compares the ambition and scale of the EGD with the current relevant scientific literature. The goal is to assess whether the current proposals are capable of fulfilling the EU’s commitment to limit global warming to 1.5°C in line with the Paris Agreement. Before embarking on the details of that question it is crucial to emphasize three core messages which emerge from climate science:
1. Tackling climate change requires that greenhouse gas emissions (GHG) are cut to net zero. Importantly, this net zero goal allows for positive emissions as long as they are offset by negative emissions. However, the technological and ecological uncertainties involved in large scale deployment of negative emissions technologies, means the emissions goal should be thought of as being close to an absolute zero goal.
2. There is not much time left to take action globally and in Europe. The latest estimates of global, as well as European carbon budgets, suggest that at current emission rates global warming will increase by more than 1.5°C in less than ten years. In addition, self-reinforcing feedback loops which push earth onto an irreversible warming path (hothouse earth) might set in from global temperature increases as little as 2°C.
3. The price of inaction will be high and most likely underestimated by the general public. While Europe will not suffer the worst consequences of climate change, heat waves, floods and droughts will still cause severe human suffering and economic damage. In addition, by 2070 up to 3.5 billion people could live in regions unsuitable for human habitation. This has the potential to trigger an unprecedented global migration wave.
The question which emerges against this background is whether the EGD is ambitious enough to avoid the worst consequences of climate change. First, and most important, is the overall emissions reduction targets. While the EGD proposes to cut emissions by 50% to 55% percent by 2030 compared to 1990 levels, recent research suggests that in order to stay well below 2°C, a reduction of 65% by 2030 would be required, as would reaching net zero by 2040 rather than 2050.
The EGD currently assumes that reducing GHG emissions by 40% by 2030 requires additional annual investments of € 260 billion. This is likely an underestimation of the volume of required investments for several reasons. First, increasing the reduction target towards 55% or even 65% will require faster and broader action. Second, increasing energy efficiency renovation of buildings alone is likely to require annual investments of € 490 billion. Third, scaling up Research and Development (R&D) investment to 3% or 4% of GDP in the EU27 requires additional annual investments of between € 75 and € 200 billion. Many of the required carbon neutral processes, especially in manufacturing, do not exist yet, and will require an increased expenditure in R&D for a successful transition. Taken together, this suggests that annual investment requirements of up to € 855 billion in the EU27 would be required for a successful transition.
Setting and delivering on more ambitious GHG emission reduction targets requires the use of all possible policy tools. The EGD is a promising start in this context as it relies on a broad set of instruments from regulations, carbon markets, taxes and public investment. Given the limited time available the EGD should go a step further and upgrade the Sustainable Europe Investment Plan into a comprehensive climate master plan which determines clear targets and timelines for renewable energy capacity, building renovations, transport infrastructure, R&D targets etc. This would not only provide the private sector with clear long-term signals but also allow for timely monitoring of the EU’s progress
On the current state of German-speaking economics: Paradigmatic orientations and political alignments of German-speaking economists
A sample of 708 full professors (Lehrstuhlinhaber_innen) of economics at German-speaking universities (Austria, Germany and Switzerland). Very low percentage of female economists (13%). Dominance of microeconomic research orientation (50.35%). Paradigmatic classification based on two approaches reveals strong dominance of a neoclassical mainstream (91.27% and 76.11%). Heterodox approaches are marginalized and situated at small universities (e.g. Bremen, Darmstadt, Oldenburg, Lüneburg and Jena). Rather strong reference to ordoliberal concepts in Germany (8.04%). Only a minority of German-speaking economists is doing research on the financial crisis (14.45%). The German Economic Association is by far the most important academic association (60% are member of the GEA). A substantial part of German-speaking economists (particularly from those active in economic policy advice) are connected to ordoliberal and German neoliberal think tanks, institutions and initiatives (e.g. Walter Eucken Institute, Kronberger Kreis, INSM or the Hamburger Appell)
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Rank Correction: A New Approach to Differential Nonresponse in Wealth Survey Data
This paper develops a new approach for dealing with the under-reporting of wealth in household survey data (differential nonresponse). The current practice among researchers relying on household wealth survey data is one out of three approaches. First, simply ignore the problem. Second, fit a Pareto distribution to the tail of the survey data and use that distribution. Third, add rich list data to the sample and fit a Pareto distribution to the combined data Vermeulen (2018). We propose a fourth approach - the rank correction approach - which improves over the first two and does not require information drawn from publicly available rich lists. We show by means of Monte Carlo simulations that this rank correction approach substantially reduces nonresponse bias in the Pareto tail estimates. Applying the procedure to wealth survey data (HFCS, SCF, WAS) yields substantial increases in aggregate wealth and top wealth shares, which are closely in line with wealth summary statistics from other sources such as the World Inequality Database. As such the rank correction approach can serve as a complement and robustness check to Vermeulen (2018) rich list approach and as an attractive alternative to the second approach in situations where rich list data is not available or of poor quality
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A Comment on Fitting Pareto Tails to Complex Survey Data
Taking survey data on household wealth as our major example, this short paper discusses some of the issues applied researchers are facing when fitting (type I) Pareto distributions to complex survey data. The major contribution of this paper is twofold: First, we provide a novel take on key aspects of Pareto tail fitting and a new and easy way of implementing the latter. Second, we summarise key results on goodness of fit tests in the context of complex survey data. Taken together we think the paper provides a concise and useful presentation of the fundamentals of Pareto tail fitting with complex survey data
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Was Pareto right? Is the distribution of wealth thick-tailed?
We fit log-normal, exponential, Pareto type I and Pareto type II distributions to US wealth data from 1989 to 2019 and examine the goodness of fit. Unlike earlier literature this paper uses high quality data, covering the entire US population, yielding powerful and unbiased tests. Beyond the 91st percentile the type II distribution consistently provides the best fit to the data and supports the hypothesis of a thick-tailed wealth (and by extension income) distribution. In addition, our results highlight the changing shape of the tail with decreasing concentration up to the 98th percentile and increasing concentration beyond. Our results suggest that practitioners modelling the distribution of wealth in situations where only limited data is available, a type I Pareto distribution might still serve as a valuable bias correction tool but should only be fitted to the top 1% of the population
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A European wealth tax for a fair and green recovery
The European Union faces the twin crises of Covid-19 and climate change. Confronting both crises leads to an unprecedented demand on public resources which in turn leads to the question of how to raise the required funds a) without jeopardising a weak economy recovering from the pandemic and b) without undermining broad political support for climate action.
This policy study investigates the potential of a European net wealth tax to raise substantial revenues while supporting the economy and the consensus on climate action. To achieve this, household survey data from the European Central Bank (covering 22 EU countries) are analysed. To address the problem of under-reporting of wealth at the top of the distribution in survey data, a Pareto distribution is fitted to the right tail of the data and used to create an amended data set which also represents these missing rich, whose wealth goes unreported.
The Pareto-amended data show that household wealth is highly concentrated among the wealthiest households: the richest 1% hold 32% of total net wealth in the EU22 while the poorest half of all households only hold about 4.5% of total net wealth. These data are then used to estimate revenues for four different tax models. The results show that annual revenues between €192 billion (1.6% of GDP) and €1,281 billion (10.8% of GDP) across the EU22 are possible. Non-progressive (flat tax) designs yield revenues at the low end of this range while strongly progressive designs are responsible for the high revenue estimates at the upper end of this range. Conversely, the models’ ability to actively reduce the current concentration of wealth in Europe varies with the degree of progressivity of the tax design. In sum, a net wealth tax exhibits high revenue potential, which is a direct result of the observed high levels of inequality and is far larger than that for other proposals currently being discussed at the European level.
A combination of clever design choices, more resources and better infrastructure for the EU’s tax authorities would make a European net wealth tax feasible. With respect to the tax design, high exemption thresholds between €1 million and €2 million, paired with progressive tax rates and a broad tax base, imply that only the richest 1% to 3% of all households are taxed and thus the problem of illiquid tax subjects is avoided, while keeping the revenue potential high. Boosting tax authorities’ resources to enforce the tax and to build appropriate infrastructure, such as real estate valuation databases and company registers, will ensure high levels of compliance and enforcement. Best practice examples such as Switzerland (valuation) and Norway (third party reporting) exist and can be used as a point of reference for successful implementation. To strengthen compliance an implementation at the European level is desirable.
The results of this policy study show that overall, a European net wealth tax has the potential to make a substantial contribution to the EU’s efforts to organise a decisive response to the twin crises of Covid-19 and climate change. A net wealth tax is not only attractive because its revenue potential ranks amongst the highest of the potential alternatives that are currently being discussed at the European level, but also because of its ability to reduce historically high levels of wealth inequality in Europe
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Can a European wealth tax close the green investment gap?
This paper analyses the European Commission’s assessment of investment needs as implied by the EU’s Paris commitment. We find that official estimates of the green investment gap until 2050 are likely to seriously understate actual investment required. Against this backdrop, we assess the potential of a European wealth tax to close this investment gap. In doing so, we first provide a detailed estimate of the wealth distribution across 22 EU member countries and then develop a microsimulation model for recurring wealth taxes in these countries. The model is based on household survey data from the HFCS, but compensates for missing observations at the top of the wealth distribution by means of a Pareto model. Taking different tax designs into account, we generally find a substantial revenue potential that could contribute significantly to closing currently existing green investment gaps. We also find that compensating for the ‘missing rich’ is essential for sensibly evaluating progressive tax designs
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Policy Brief: A European Wealth Tax
The distribution of wealth in the European Union is heavily concentration at the top. The richest 1% of households hold a third of total aggregate net wealth while the poorest 50% of households hold less than 5% of total net wealth. The flipside of this strong concentration of wealth is the high revenue potential of wealth taxes. The estimates presented here suggest that a progressive tax on net wealth could generate revenues between 3% and 10.8% of GDP
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Correcting for the missing rich: An application to Wealth Survey Data
It is a well-known criticism that if the distribution of wealth is highly concentrated, survey data are hardly reliable when it comes to analyzing the richest parts of society. This paper addresses this criticism by providing a general rationale of the underlying methodological problem as well as by proposing a specific methodological approach tailored to correcting the arising bias. We illustrate the latter approach by using Austrian data from the Household Finance and Consumption Survey. Specifically, we identify suitable parameter combinations by using a series of maximum-likelihood estimates and appropriate goodness-of-fit tests to avoid arbitrariness with respect to the fitting of the Pareto distribution. Our results suggest that the alleged non-observation bias is considerable, accounting for about one quarter of total net wealth in the case of Austria. The method developed in this paper can easily be applied to other countries where survey data on wealth are available
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