How income mobility and income growth explain income inequality trends

Proposes a new approach capable of explaining concomitant changes in income inequality and income mobility. Introduction Income mobility and income inequality are two topics that have been the subject of extensive research. Although both topics are clearly related, building a bridge between them remains a challenging task. The aim of this paper is to propose a new approach capable of explaining concomitant changes in income inequality and income mobility. Building on Jenkins and Van Kerm (2006) — hereafter referred to as JVK — the new method establishes a direct link between income-rank mobility, the distribution of winners and losers (i.e. the distributional effect of income growth) and changes in inequality. The application to US data covering the period between 1970 and 2009 illustrates how this approach can bring new insights on the dynamics of income distribution.   The relationship between mobility and inequality can be hard to grasp. As Duval-Hernandezet al. (2014) point out even a Nobel Prize-winning economist may not understand how both inequality and mobility can increase over the same period. Yet, Hernandez et al. (2014, p1) indicate that it is not only possible but also common to find increases in inequality even though “when we follow the same people over time, those who earned the least to begin with gained more in dollars than those who started at the top of the earnings distribution.”   Partly, this apparent contradiction is due to the fact that “the very concept of income mobility is not well-defined” (Fields and Ok 1999, p557). In response a stream of the literature has proposed mobility measures that have a clear relationship with inequality measures. Shorrocks (1978) popularised the idea that mobility can be measured by the extent to which inequality is reduced by an extension of the income-accounting period (see, for example, Bayaz-Ozturk et al. 2014 and Kopczuk et al. 2010 for recent applications of Shorrocks’ approach to the US).   This type of mobility measures bears a clear relationship with inequality measures in that more mobility is always synonymous with less inequality. The trade-off, however, is that they have distanced themselves from the most intuitive definitions of mobility. JVK addresses this limitation in the special case of the widely used Gini index. By drawing on the income tax literature, they show that if mobility is simply defined as income reranking the only remaining factor that explains changes in inequality is the degree to which income growth (i.e., the panel-income changes) is more favour able to the poorer individuals than to the richer individuals.   This paper adopts the same mobility concept as in JVK to propose a new method capable of explaining why and how income growth may reduce inequality or, according to JVK, be ‘pro- poor’. The new method is particularly helpful to shed light on the relationship between income mobility and inequality. We depart from JVK by recognising that over any time period some individuals will see their income increase while others will experience an income loss, and yet other individuals may face no change. It follows that how the income growth process affects inequality depends on the respective size a nd distribution of the income gains and losses. Moreover, distinguishing income gains and losses is relevant from a social welfare perspective as there is evidence that people treat them differently.   One of the major new insights of the application to US data for the 1970/2009 period is that most of the equalising effect of income growth occurs through income gains rather than income losses, a finding that persists even in times of recession. Finally, income mobility shows no clear long-term pattern but it declined during the Great Recession, which is in contrast with previous recessions.   &nbsp

Agricultural Distortions, Poverty and Inequality in South Africa

South Africa has rapidly reduced trade barriers since the end of Apartheid, yet agricultural production and exports have remained sluggish. Also, poverty and unemployment have risen and become increasingly concentrated in rural areas. This paper examines the extent to which remaining price distortions, both domestic and foreign, are contributing to the underperformance of the agricultural sector vis-à-vis the rest of the economy. We draw on a computable general equilibrium (CGE) and micro-simulation model of South Africa that are linked to the results of a global trade model. This framework is used to examine the effects of eliminating global and domestic price distortions. Model results indicate that South Africa’s agricultural sector currently benefits from global price distortions, and that removing these would create more jobs for lower-skilled workers, thereby reducing income inequality and poverty. We also find that South Africa’s own policies are biased against agriculture and that removing domestic distortions would raise agricultural production. Job losses in nonagricultural sectors would be outweighed by job creation in agriculture, such that overall employment rises and poverty falls. Overall, our findings suggest that South Africa’s own policies are more damaging to its welfare, poverty and inequality than distortionary policies in the rest of the world. Existing national price distortions may thus explain some of the poor performance of South Africa’s agricultural sector and rural development.Distorted incentives, agricultural and trade policy reforms, national agricultural development, Agricultural and Food Policy, International Relations/Trade, F13, F14, Q17, Q18,

Comparing Welfare Change Measures withIncome Change Measures in Behavioural Policy Simulations

This paper presents a method of computing welfare changes (compensating and equivalent variations) arising from a tax or social security policy change, in the context of behavioural microsimulation modelling where individuals can choose between a limited number of discrete hours of work. The method allows fully for the nonlinearity of the budget constraint facing each individual, the probabilistic nature of the labour supply model and the presence of unobserved heterogeneity in the estimation of preference functions. An advantage of welfare measures, compared with changes in net incomes, is that they take into account the value of leisure and home production. The method is applied to hypothetical income tax policy changes in Australia and comparisons are made at the individual and the aggregate level. At the aggregate level a social welfare function is specified in terms of money metric utility. It is shown that policy evaluations based on welfare changes can be substantially different from those using only individuals' net income changes.Welfare change measures;equivalent variation; compensating variation; labour supplymodelling;nonlinear budget constraint

Tax Policy Design and The Role of a Tax-Free Threshold

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.

Abolishing the Tax-Free Threshold in Australia: Simulating AlternativeReforms

This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a tax and benefit system with benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. Four alternative policy changes, each involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality, were examined using the Melbourne Institute Tax and Transfer Simulator. A range of implications were examined, including labour supply responses to tax changes, and the effects of policy changes on inequality and social welfare. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that it is impossible to improve labour supply incentives at the same time. In order to achieve improved incentives, either revenue or distribution neutrality has to be sacrificed.

A journey home: what drives how long people are homeless?

Abstract: This paper uses survival analysis to model exits over time from two alternative notions of homelessness. We are unique in being able to account for time-invariant, unobserved heterogeneity. We find that duration dependence has an inverted U-shape with exit rates initially increasing (indicating positive duration dependence) and then falling. Like previous researchers, we find results consistent with negative duration dependence in models which ignore unobserved heterogeneity. Exit rates out of homelessness fall with age and with the education level of mothers. Women are more likely than men to exit homelessness when it is broadly conceived, but appear to be less likely to exit when it is narrowly defined. Finally, higher paternal education and exemptions from welfare-related activity requirements due to either mental or physical health conditions are all associated with higher exit rates

Understanding changes in the distribution and redistribution of income: A unifying decomposition framework

Over recent decades income inequality has increased in many developed countries. Although the tax and transfer system is the main institutional tool through which income is redistributed, the role it played in these changes is often poorly understood. By building a bridge between existing approaches, we propose a method allowing for the decomposition of historical changes in various income distribution and redistribution measures into (i) the immediate effect of tax-transfer policy reforms in the absence of labour supply responses, (ii) the effect of labour supply changes induced by these reforms, (iii) the impact of changes in the distribution of other determinants, including the effect of employment changes not induced by policy reforms. We illustrate the use of our decomposition method by analysing the case of Australia between 1999 and 2007. We find that the direct effect of tax-transfer policy reforms accounts for about half of the observed increase in income inequality over the period. About one fifth of this direct effect was offset by labour supply responses to these policy reforms. Although ageing, increased educational attainments and changes in income unit structures played a limited role, we find evidence that the increased dispersion of wages and capital incomes substantially increased income inequality

Recent trends in income redistribution in Australia: Can changes in the tax-benefit system account for the decline in redistribution?

We examine trends in the redistributive impact of the tax-beneÖt system in Australia between 1994 and 2009 using a framework that allows us to separate the contributions of taxes, beneÖts and taxes and beneÖts combined. Furthermore, we identify the e§ect of tax-beneÖt policy reforms on income redistribution over the period. We Önd that after reaching a peak value in the late 1990s, the redistributive e§ect of taxes and beneÖts declined sharply. Although reforms to the tax-beneÖt system contributed to the decline in redistribution, their contribution was limited compared to the role played by the changes in market income distribution

Identifying tax implicit equivalence scales

© 2017, Springer Science+Business Media New York. This paper describes a simple and tractable method for identifying equivalence scales that reflect the value judgements implicit in a tax and transfer system. The approach depends on two identifying assumptions and a functional description for transfer payments that can be estimated using common publicly available data sources. We use this approach to evaluate tax implicit equivalence scales for the tax-transfer systems of 12 European countries that applied in 2012. Cross-country averages for the tax implicit scales generate a surprising set of stylised results: at low incomes, each additional household member increases the tax implicit scale by approximately 0.5, relative to 1.0 for the first adult; at high incomes, the average tax implicit scales describe variation that is remarkably similar to the modified OECD scale. However, substantial cross-country variation underlies these average scales, suggesting important differences in value judgements implicit in the respective tax-transfer systems; differences that can otherwise be difficult to discern when systems are complex and opaque