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PJSS 15 (3) pp. 367–386 Intellect Limited 2016
Portuguese Journal of Social Science Volume 15 Number 3
© 2016 Intellect Ltd Dossier. English language. doi: 10.1386/pjss.15.3.367_1
FREDERICO CANTANTE, RENATO MIGUEL CARMO, NUNO DE ALMEIDA ALVES AND ANTÓNIO FIRMINO DA COSTA CIES, ISCTE – Instituto Universitário de Lisboa
Trends in income inequality:
Comparing the United States
and Portugal1
ABSTRACT
This article presents a comparative analysis of the United States and Portugal in terms of economic inequality from the early twentieth century to the present decade. We use different measures of inequality from several statistical sources. The arti- cle revolves around three complementary points. The first is a synchronic and diachronic analysis of economic inequalities in Portugal and the United States, the second is the issue of redistribution of income and the final analysis addresses the evolution of top incomes in both countries.
INTRODUCTION
The article addresses economic inequality in Portugal and the United States and revolves around three different points. We first conduct a synchronic and diachronic analysis of economic inequality in the two countries using Organization for Economic Cooperation and Development (OECD) countries as a reference. What is the position of these two countries regarding economic inequality in the OECD universe? How did income inequality evolve in the last three decades in Portugal and the United States? Did they go through similar patterns or were there important differences between them? The anal- ysis then focuses on the issue of income redistribution. How big is the impact
KEYWORDS
economic inequality top incomes redistribution Portugal United States OECD
1. This study was carried out at the Observatório das Desigualdades (Inequality Observatory, CIES, ISCTE-Instituto Universitário de Lisboa) and was supported by the Fundação Luso-Americana para o Desenvolvimento (Luso-American
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of redistributive mechanisms in Portugal and the United States? Which redis- tributive mechanisms are more important in each country? The third point is an analysis of top incomes and their growth in the two countries over the long term. Is the intensity of income concentration at the top similar in Portugal and the United States? Have these inequality measures been historically stable or did they change quite significantly over the last century? To what extend has income concentration at the top been one of the main forces behind rising economic inequality in Portugal and the United States?
Income inequality has been the main focus of several studies of Portuguese and US societies. The uneven distribution of wages and income, which mainly rely on educational and class inequality, has been highlighted as the core explanation for the increase of economic inequality in Portugal over the last decades (Carmo et al. 2015; Cantante 2014; Costa et al. 2015; Martins et al. 2014; Rodrigues et al. 2012). This analytical perspective has been comple- mented by an analysis of redistribution policies, the impacts of which are considered comparatively low (Alves 2012; Rodrigues et al. 2012). Regarding the United States, most studies have highlighted the role of income and wealth concentration at the very top as the main driver of economic inequality (Piketty 2013; Krugman 2007; Piketty and Saez 2007).
This article will discuss and foster some of these analytical footsteps, developing a direct comparative analysis of these two very different countries for the first time: countries that share a common structural feature of high internal economic inequalities. For that, several measures of inequality and a variety of sources will be used.
A comparative analysis of a particular social fact or phenomenon entails examining the comparability of empirical universes of reference from a meth- odological and theoretical point of view. The cross-referencing, opposition or synthesis of information on two or more empirical study referents means questioning the pertinence and admissibility of this exercise on the basis of the profile or characteristics of the universes compared. So, how can a study that chooses economic inequality as a central subject use as empirical refer- ences two countries with aggregate income levels that are so very different?
With a gross domestic product (GDP) of 10,830.3 billion ($11,594.4bn) in 2011 the United States was the country with the highest aggregate income in the world. It was higher than the GDP of the entire euro area and substan- tially higher than that of China. Portugal’s GDP on the other hand was 184.0bn ($270.1bn). To get a clearer idea of the size of US GDP, it is around
63 times that of Portugal. This aggregate income gap could be attributed to another substantial difference in scale between the two countries: popula- tion. While the population of Portugal was around 10.5 million according to the 2011 census, that of the United States was approximately 308.7 million (2010 census). In other words, the US population is 29.4 times larger than Portugal’s. In spite of this huge demographic difference, it is much smaller than that in economic share. The disproportion between the aggregate income in the United States and Portugal is much greater than the demo- graphic disparity.
This means that GDP per inhabitant in the United States is much higher than in Portugal. In 2011, Portugal’s per capita GDP was 19,500 purchasing power standards (PPS),2 77% of that in the 27 EU countries (EU27=100%), while in the United States it was 37,100 PPS, 48% higher than the EU27. For an idea of the magnitude of this economic indicator in the United States, per capita GDP in Germany was 30,300 PPS, ‘only’ 21% higher than the EU average.
Development Foundation). The content of the article represents only the views of its authors.
2. PPS is an artificial currency unit. Theoretically, one PPS can buy the same amount of goods and services in each country. However, price differences across borders mean different amounts of national currency units are needed for the same goods and services depending on the country. PPS are derived by dividing any economic aggregate of a country in national currency by its respective purchasing power parities. PPS is the technical term used by Eurostat for the common currency in which national accounts aggregates are expressed when adjusted for price level differences using PPPs. Thus, PPPs can be interpreted as the exchange rate of the PPS against the euro. (Eurostat).
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Aggregate economic income indicators, such as GDP or gross national income (GNI) per capita,3 can be used as approximate predictors of the stand- ard of living of a country’s population. If we analyse the Human Development Index (HDI), we find that macro-economic indicators tend to be associated with differences in living standards. It is enough to compare the GNI per capita in countries with a very high HDI with those that have a medium or low HDI. This is not a linear ratio, however, and there are cases in which living standards (e.g. health and education) are higher than a country’s economic wealth and vice versa. One of the reasons for this is the internal distribution of income. A country may be very rich, but if income is concentrated in a minor- ity of the population, the standard of living and well-being of the majority will tend not to correspond to this level of income. The oil-exporting countries in the Middle East are a good example of this type of disparity.
The use of indicators like GDP or GNI when characterizing a coun- try’s economic well-being and associated standards of living is a panoramic approach to their social reality. These are significant structural indicators because they provide information about ‘how much is produced and the aver- age income generated or distributed in a country, which, if used properly, can generate material well-being’ (Ramos 2013: 37). But a look at the economic pie tells us nothing about how it is sliced up. Refining our analysis of the social well-being and standard of living of a country’s population also means focusing on its income distribution structure, especially in terms of dispos- able income. Although there is a huge difference between the aggregate prod- uct generated in Portugal and the United States, both countries have very high levels of inequality in the distribution of income. While it is true that the amount of income produced and the way it is allocated per inhabitant is a feature that clearly sets Portugal and the United States apart among the OECD countries, domestic economic inequality brings them closer together.
ECONOMIC INEQUALITY AS A STRUCTURAL FEATURE OF SOCIETIES
Several studies have underscored the idea that economic inequality tends to have negative effects on the functioning of societies and the population’s living standards. The Spirit Level by Richard Wilkinson and Kate Pickett was perhaps one of the most important and effective contributions to the dissemi- nation of this argument (2009). They demonstrate that in the OECD countries the societies with higher levels of economic inequality are also those with the worst performance in such a variety of areas as levels of trust, life expectancy, infant mortality, obesity, children’s educational performance and murder rate, among others. Based on the above universe of countries, this theory defends that rather than aggregate income, an indicator that cannot be correlated to these types of social problems, economic inequality has multidimensional negative impacts on the way these societies are structured.
The view that inequality is not harmless and tends to have adverse effects on the community is now more widely accepted by academe and a number of international institutions. A good example of this is the fact that the United Nations Development Programme (UNDP) has produced a human develop- ment index adjusted to a country’s degree of economic inequality. The UNDP estimates that economic inequality in countries worldwide results in an aver- age 23.3% reduction in their human development index (HDI). This figure was 33.5% in the countries with a low HDI in 2012, 24.2% in those with a medium HDI, 20.6% in those with a high HDI and 10.8% in those with the
3. Gross domestic product is the result of production within a country, even contributions from non-residents. Gross national income is ‘the income received by a country’s residents, regardless of where the production processes in which they involved occur’ (Ramos 2013: 34).
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highest HDI. In this last group, the United States is one of the countries that showed the greatest loss, dropping thirteen places in the HDI rankings (United Nations Development Programme 2013).
If internal economic inequality has a negative effect on the functioning of societies and people’s general living standards, it must be taken into account when measuring well-being and social development. These statistical correla- tions make even more sense when comprehensively backed up by reflection on the structural nature of inequality and an analysis of the social processes that cause it to multiply. Following Pierre Bourdieu’s theoretic and conceptual heritage, Alain Bihr and Roland Pfefferkorn claim social inequalities tend to be passed down from one generation to the next (2008), to interact with each other and accumulate. In other words, they are systemic. Inequality carries a social history as baggage and potentially extends to different spheres of life in society (Carmo 2010). Inequality tends to condition social mobility processes and reduce the scope of opportunities within people’s reach. The social inequality production and reproduction processes, the intensity and sense of which also depend on the way institutions deal will them (e.g. school or public policies), have a potential effect on people’s life conditions and available opportunities. From the point of view of social structuring processes, inequal- ity has a potentially harmful effect on social mobility, development and use of skills and talents, tending to reproduce phenomena like poverty and social exclusion. Inequality of economic, educational or relational resources influ- ences inequality of opportunities (Dubet 2010).
The systemic negative effects of inequality, especially from an economic viewpoint, can also be analysed from a perspective of collective action and the influence wielded by lobbies in institutions and public policies. This is one of the analytical lines followed by Joseph Stiglitz (2012). He contends the economic elite in the United States has been imposing its interests and world- view on politics, thereby ensuring public policies help reproduce and intensify social inequality and perpetuate their dominant position in the social structure. Tax policies that favour the wealthy or channel revenue to them are exam- ples of rich people’s ideological, legal and institutional control of political deci- sion making. Stiglitz believes the takeover of political power by the country’s economic elite has helped reduce levels of trust and social cohesion, stiffen social structures (reducing equal opportunities) and weaken the tax revenue needed for public investment in education, infrastructure or technology. The most structural effect of inequality is, however, the creation of institutional, legal, political and cognitive conditions that guarantee its reproduction:
The more egalitarian societies work harder to preserve their social cohe- sion; in the more unequal societies, government policies and other insti- tutions tend to foster the persistence of inequality.
(Stiglitz 2012: 77)
Social and economic inequalities can be politically, legally and institution- ally increased or reduced. In other words, the structuring of inequalities is not unequivocal, the way they evolve and interact does not follow a logic inde- pendent of the way society deals with them, especially the way public poli- cies include and act on them. It is therefore necessary to bear in mind that the reproduction and accumulation of inequalities are not a teleological fatal- ity, a self-explanatory – self-referential social dynamic – but rather a possi- bility moulded by a number of other variables. In certain legal, political and
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institutional frameworks, inequality can therefore decrease and not be repro- duced. Tax policies are a particularly effective tool in mitigating economic inequality in terms of market and disposable income (Alvaredo et al. 2013; Atkinson et al. 2010), although the institutions that regulate the labour market and education resources are also important factors that help define how income is distributed (OECD 2011; Krugman 2007).
As inequality is an important feature of any society and a factor that influ- ences society’s social, economic and political structuring processes, an analy- sis of inequalities in general and economic inequality in particular is a basic theoretical and methodological tool in a comparison of countries. In this case, we are comparing two societies with high degrees of economic inequality.
It is important to include a brief methodological note before discussing the different issues. The facts and arguments in this study are essentially based on a secondary analysis of official statistical sources or data produced by researchers and international institutions. In some cases, the information is directly comparable as the data are harmonized, though this is not always so. In these cases, we provide the available information while referring to the methodological differences behind the production of the statistics in question.
The impossibility of comparing data may simply be due to the fact they do not exist in one of the countries or that the periods for which information exists do not exactly coincide. When this happens, we combine a comparison of the available information with a presentation of the data for only one of the countries. As a rule, however, we present statistics that can be compared.
TWO SOCIETIES WITH A HUGE GAP BETWEEN RICHEST AND POOREST
The OECD has been warning of greater economic inequality in a number of its member countries in recent decades. It did so first in ‘Growing unequal? Income distribution and poverty in OECD countries’ (2008) and has contin- ued in more recent works, such as ‘Divided we stand: Why inequality keeps rising’ (2011). In both studies, the United States and Portugal are among the OECD countries with the highest levels of economic inequality. The data in the more recent survey show the United States and Portugal (plus Israel) at the top of the second group of countries with the greatest economic inequal- ity, behind Chile, Mexico and Turkey. The degree of inequality in disposable income in these last three countries vastly exceeds that of the other members with Gini coefficients of 0.4 (or in Chile close to 0.5).4
The data in Table 1 are an update of the information in the report mentioned above and refer to disposable monetary income per equivalent adult, i.e. the economic resources of households after social transfers, taxes and social security contributions.5
In 2010, the Gini coefficient was 0.380 in the United States and 0.344 in Portugal. These figures are the fourth- and sixth-highest in OECD countries and are way above the average. An analysis of the extent of economic inequal- ity in the two countries can be based on another two measures.
The S80/S20 ratio is a measure of inequality that compares the ratio between total income received by the top and the bottom quintile. In the United States, the income of the 20 per cent richest was 7.9 higher than the 20 per cent poorest, while in Portugal the ratio was 5.7.
An analysis of economic inequality using ratios can also use smaller groups (quantiles) for comparing distribution of income, e.g. the richest 10% and the poorest 10 per cent (S90/S10). Table 1 shows that the degree of economic
4. The Gini coefficient is a measure that synthesises the dispersion of a certain indicator in a single figure. When measuring income inequality, the coefficient is 0 if all individuals have the same income, or 100 or 1 if all the income is concentrated in one person. It thus measures the dispersion of income based on a hypothetical reference scenario of perfect equality. It is more sensitive to incomes closer to mean incomes and less sensitive to the disparities between the two extremes.
5. In recent years, the OECD has been using a scale of equivalence that consists of adjusting each individual’s income to the size of his or her household based on a scale of ‘equivalence elasticity’ of 0.5. This means that the income of the people in the household is adjusted by the square root of the size of the household. For example, in a household of four people, each one’s income would correspond to the division of the household’s total income by two (the square root of four). This method does not, however, distinguish between adults and children and means that ‘a household’s economic needs increase less than proportionally with its size’ (OECD 2008: 41–42).
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Source: Statistics, List of key indicators (OECD).
Note 1: Countries ranked in descending order of Gini coefficient.
Note 2: The data on Chile, Hungary, Ireland, Japan, New Zealand, Switzerland and Turkey are for 2009.
Table 1: Measures of inequality in disposable income in the OECD countries (2010).
Gini coefficient S80/S20 S90/S10
Chile 0.508 13.8 30.0 Mexico 0.466 12.7 28.5 Turkey 0.411 8.4 15.1 United States 0.380 7.9 15.9 Israel 0.376 7.8 13.6 Portugal 0.344 5.7 9.3 United Kingdom 0.341 5.6 10.0 Spain 0.338 6.6 13.1 Greece 0.337 6.0 10.8 Japan 0.336 6.2 10.7 Australia 0.334 5.7 8.9 Ireland 0.331 5.4 9.1 Canada 0.320 5.3 8.9 Estonia 0.319 5.3 8.8 Italy 0.319 5.6 10.2 New Zealand 0.317 5.1 8.0 South Korea 0.310 5.7 10.5 Poland 0.305 4.8 7.7 France 0.303 4.5 7.2 Switzerland 0.298 4.6 7.3 Netherlands 0.288 4.3 6.9 Germany 0.286 4.3 6.7 Hungary 0.272 4.0 6.0 Luxembourg 0.270 3.9 5.6 Sweden 0.269 4.0 6.1 Austria 0.267 3.9 5.9 Belgium 0.262 3.9 5.6 Slovakia 0.261 3.8 5.9 Finland 0.260 3.7 5.4 Czech Rep. 0.256 3.6 5.4 Denmark 0.252 3.6 5.3 Norway 0.249 3.7 6.0 Slovenia 0.246 3.6 5.3 Iceland 0.244 3.5 5.3
OECD 34 0.313 - 9.4
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inequality in the United States measured with this indicator is much higher than in Portugal. The income of the richest 10% was 15.9 times greater than that of the poorest 10%, while in Portugal it was 9.3, similar to the average for OECD countries (9.4).
The figures for these three measures of inequality in the United States are higher than in Portugal. Although Portugal’s inequality levels are higher than in most of the OECD countries in the Gini coefficient and S80/S20 ratio, its figure for the S90/S10 ratio is in line with the other OECD members.
This information refers to the last year for which data was available for each country and enables us to conduct a synchronic analysis. It is also useful to include diachronic information, however. Figure 1 shows changes in economic inequality in the United States, Portugal and OECD between 1980 and 2010. While there is information available for almost all these years for the United States, this is not the case for Portugal or the average of the OECD countries.
The Gini coefficient for economic inequality in Portugal in 1980 was around 14% higher than in the United States: 0.350 against 0.307. Between 1980 and 1993, when the Gini coefficient was 0.369, economic inequality in the United States increased by around 20%, and then fell slightly until 1999. It then increased irregularly and the figure in 2010 (0.380) was around 24% higher than in 1980.
Inequality in Portugal fell during the 1980s. There was a considerable rise in inequality in the first half of the 1990s followed by a slight drop in the second half. In spite of this change in direction, economic inequality was at a higher level at the end of the 1990s than at the beginning:
The reduction in inequality in the 1980s is closely associated with a more accentuated growth in incomes at the lower end of the scale. The rise in inequality in the 1990s was mainly due to changes at the upper end of
Figure 1: Inequality of disposable income (Gini coefficient), United States, Portugal and OECD (1980–2010).
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6. Specific public policies aimed to provide income to the most fragile fringes of the Portuguese society, namely the ones with very low or no income at all and the elderly populations that earn survival pensions.
the scale, where we find the households that benefited most from the economic growth.
(Rodrigues 2007: 305)
The first years of the new millennium witnessed an increase in economic inequal- ity and the Gini coefficient was 0.385 in 2004, about 17 per cent higher than in 1990 (0.329). From then until 2009 there was a progressive reduction in economic inequality in the country. Rodrigues et al. (2012) attribute this in part to social policies aimed at assisting the more disadvantaged strata of the population, such as Social Insertion Income and Elderly People’s Subsidy.6 In 2009, the Gini coef- ficient was 0.339, but increased to 0.344 in 2010. A comparison of the Gini coef- ficient in Portugal in 1980 and 2010 shows that it fell by around 1.7 per cent.
Figure 1 indicates several trends. First, it shows that the level of inequality in the two countries over the period in question was always higher than the OECD average. Second, it demonstrates that inequality increased in Portugal in the 1990s and 2000s, while in the United States it fell slightly or stabi- lized, especially between 1994 and 2000. Third, between 2004 and 2008–09 there was a substantial reduction in economic inequality in Portugal, while the 2000s in the United States witnessed an increase. An increase in economic inequality in 2010 interrupted the downward trend in Portugal and there was also a rise in inequality in the United States compared to 2008 (no informa- tion is available in the United States for 2009). We find that there was greater growth in economic inequality in the United States than in Portugal, being 10.5 per cent higher in the United States than in Portugal in 2010.
INCOME INEQUALITY AND MONETARY REDISTRIBUTION
The previous section provided information on inequality in disposable income, i.e. the household’s income after taxes, social security contributions and social transfers. It is analytically enlightening to determine the level of economic inequality before the state’s redistribution and to measure the role played by the state in mitigating market inequality (economic resources before redistri- bution by the state).
This can be done by comparing the Gini coefficient for economic inequal- ity with market income and disposable income. In 2010, Portugal was the seventh-highest OECD country (plus Russia) in terms of market income inequality for the population aged between 18 and 65, behind the United States. An analysis of inequality of disposable income shows that Portugal was still the seventh most unequal country of this universe of countries, while the United States was the third, after Chile and Russia.
The fact that the United States rose in the economic inequality rank- ings and Portugal’s position remained the same when we move from market income to disposable income shows that the impact of state redistribution is higher in Portugal than in the United States. Figure 2 shows the decrease in the Gini coefficient resulting from the effect of taxes and social security and also social transfers from the state to households in the OECD countries and Russia. State redistribution in Slovenia, Ireland, Belgium, Finland, Denmark, Austria and Luxembourg results in a reduction of more than 35% in economic inequality. In the Czech Republic, Norway, France, Slovakia and Sweden the impact varies between 35% and 30%. State redistribution in Portugal reduced economic inequality by around 26.6%, which was considerably more than in the United States, where it was 19.9%.
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Unlike South Korea or Canada, where the effect of state redistribution is fairly limited but inequality levels are relatively low, the United States (along with Chile, Israel and Russia) had both high economic inequality and low levels of monetary redistribution. The average impact of state redistribution was around 25 per cent in the OECD countries (OECD 2012).
According to Joumard et al. (2012), there is a positive relationship between market economic inequality in the OECD countries and the impact of redis- tribution policies (social transfers and taxes) for the total population. This relationship is not linear, however. Indeed, most of the countries with redistri- bution policies that reduce economic inequality more have comparatively low market income inequality. This is the case in the northern European countries, the Czech Republic and Belgium.
This conclusion is confirmed when we look at the impact of state redistri- bution in countries with high economic inequality. Redistribution policies in Portugal and the United States reduce economic inequality by less than 10% – below the OECD average – and in Chile by less than 5%.
When analysing the effects of state redistribution we must distinguish between those of monetary transfers and of taxes.
Monetary transfers to households account for around three-quarters of the reduction in economic inequality in the OECD countries (2012). According to
Source: Authors’ calculations based on the Statistics database, List of key indicators (OECD).
Note 1: There are no available Gini coefficient data on market income for Hungary, Mexico or Turkey and so these countries have not been included in Figure 2. The data for Ireland, Japan, New Zealand and Switzerland are from 2009.
Note 2: We have used the same method as the OECD for measuring the impact of redistribution policies (OECD 2011: 268–70).
Figure 2: Reduction in economic inequality associated with redistributive policies, pop. aged 18–65, OECD countries and Russia (2010) (%).
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7. Carlos Farinha Rodrigues et al. (2012) reached similar conclusions about Portugal. They state that in 2009 Portugal had one of the lowest efficacy and efficiency rates associated with social contributions in a universe of 15 EU-27 countries (2012: 177).
8. Alves (2012) doesn’t include the old age pensions in the redistributive process, whereas Joumard et al. (2012) do. This may indicate that old age pension have a low redistributive impact.
9. The impact of taxes on reducing income inequality depends on the size and progression of the tax burden.
Joumard et al. (2012), these payments had reduced economic inequality in these countries by around 19% by 2010 and there was ‘no clear link between the degree of market income inequality and the redistributive impact of trans- fers’ (2012: 10). In countries like the Czech Republic, Finland, Sweden and Denmark monetary transfers have high impacts on reducing inequality, while Portugal and the United States are in the group with the lowest impacts in this regard: a 4.3% reduction in Portugal and 4.1% in the United States against an OECD average of 7.9%.7
Portugal and the United States are similar in terms of the low impact of monetary transfers on reducing market economic inequality, although the reasons for the small size of the impact are different. According to these authors, in the United States it is due to the small amount of monetary trans- fers compared to the OECD average, while in Portugal it is because of the ‘lower progressivity’ of these transfers (2012: 11). Alves (2012) agrees that the impact of monetary transfers in Portugal is low; nevertheless, he states that this fact is explained by the small volume of social transfers to the bottom groups, not because of the way it is channelled. According to him, Portugal is one of the European Union members with the more progressive social transfers.8
On the subject of the effects of taxes and social security contributions in reducing economic inequality, Joumard et al. (2012) conclude that there are no significant differences among the OECD countries.9 Even so, the United States, along with Australia, Denmark, Germany, Israel and Italy, is in the group of countries in which the difference between inequality levels before and after income tax was the greatest. In other words, they are the OECD coun- tries in which taxes have the highest impact on reducing economic inequality. The United States is the only OECD country in which taxes actually have a similar impact on reducing economic inequality to that of monetary transfers to households (Joumard et al. 2012; Förster and Whiteford 2009). The mitigat- ing effect of taxes on economic inequality in Portugal is also higher than the OECD average (Joumard et al. 2012).
The relatively high impact of taxes on reducing economic inequality in the United States shown in this study is quite surprising, considering the country’s tax policy has been held as one of the main causes of income being concen- trated at the top and of economic inequality in general (Stiglitz 2012; Krugman 2007). Piketty and Saez (2007) used government data to analyse the progres- siveness of the US tax system on the basis of its impact on income concen- tration in the top groups. They conclude there has been a reduction in the progressive nature of tax in the United States in recent decades and that this has favoured an increase in income concentrated in the top percentile and frac- tiles. On the one hand, the ‘federal tax system reduced income concentration the most in the 1960s and 1970s when income concentration was relatively low’; on the other hand, ‘the federal tax system has a relatively modest effect on the top 0.1 per cent income share in recent years when income inequality has become higher’ (Piketty and Saez 2007: 14–15). According to the authors, the reduction in the progressive nature of the US tax system was due to the reduction in marginal rates on top incomes, the system of exemptions and tax benefits and the taxation of capital income at lower marginal rates.
As a complement to these approaches, we show the personal income tax rates of the highest brackets in the OECD countries in 2012. The amount to which these rates apply varies substantially from one country to another and the rate actually charged may vary on the basis of exemptions, tax benefits and the taxable income structure for each individual or tax unit.
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10. In Portugal a rate of 46.5% was charged on gross income over €153,330 a year in 2012, plus an additional charge of 2.5%. Income in the top bracket (over €80,000) was taxed at 48% in 2013. A surtax of 3.5% was charged on all taxpayers plus an additional solidarity charge of 2.5% on taxable income between €80,000 and €250,000. All income over €250,000 was subject to an additional 5 per cent solidarity charge.
Source: OECD Tax Database (OECD).
Table 2: Top statutory personal income tax rates in the OECD countries (%) (2012).
Denmark 60.2 Sweden 56.6 Belgium 53.7 Netherlands 52.0 Spain 52.0 France 50.7 Japan 50.0 Austria 50.0 United Kingdom 50.0 Finland 49.0 Greece 49.0 Portugal 49.0 Italy 48.6 Ireland 48.0 Israel 48.0 Canada 48.0 Australia 47.5 Germany 47.5 Iceland 46.2 United States 41.9 South Korea 41.8 Switzerland 41.7 Luxembourg 41.3 Slovenia 41.0 Norway 40.0 Chile 40.0 Turkey 35.7 New Zealand 33.0 Poland 32.0 Mexico 30.0 Estonia 21.0 Slovakia 19.0 Hungary 16.0 Czech Rep. 15.0
In 2012, Denmark was the OECD country in which the tax rate on the top income bracket was the highest at 60.2%. This rate was 50% or more in eight countries. As in Finland and Greece, the highest gross income bracket in Portugal was taxed at 49%.10 The rate in the United States was 41.9%. Among the coun- tries analysed in Table 2, ten had top rates of 40% or less. The Czech Republic (15%), Hungary (16%), Slovakia (19%) and Estonia (21%) had the lowest rates.
Our analysis of the impacts of taxes and social transfers on reduc- ing economic inequality is based on different methodological strategies,
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11. As in Alvaredo et al. (2013), OECD (2011), Alvaredo (2010) and Atkinson et al. (2010), we have not used data on top incomes including capital gains in the United States in our direct comparison between the two countries. One of the reasons for this is that there is no information on the distribution of capital gains declared for Portugal (Alvaredo 2010: 564–65).
conceptual definitions and information sources influencing the conclusions reached. It is therefore necessary to regard this type of information with caution and compare the different methodological approaches and analytical perspectives available in the literature.
Instruments such as the Inquérito às Condições de Vida e Rendimento (Survey on Income and Living Conditions) in Portugal and the Current Population Survey in the United States gather empirical information for analysis of the main trends in income distribution. From a methodological point of view, however, they are not the most reliable or appropriate instruments for meas- uring and analysing the groups at the top end of the income bracket. Such phenomena as sample underrepresentation of these groups, their propensity for under-declaring income or refusal to participate in surveys explain this limitation. Tax data have therefore been used to analyse the top incomes. It is this kind of information that we will use in the next section to compare the top incomes in Portugal and the United States.
GREATER CONCENTRATION OF INCOME AT THE TOP
Ever since Thomas Piketty published his seminal work Les Hauts Revenus en France au 20ème Siècle (2001), a number of researchers have been producing studies on top incomes based on government tax data for many countries. These data are estimates based on tax sources and complement statistical information from surveys. The analysis that will be carried out in this article relies on statistical information gathered in the World Top Incomes Database.
Table 3 shows levels of concentration of pre-tax income of several groups in the top income brackets in Portugal and the United States (excluding capi- tal gains).11 The latest available data for Portugal refer to 2005. As preliminary information for 2011 is available for the United States, we will present its data from 2005 and 2011. The degree of concentration of income in the top quan- tiles is significantly more pronounced in the United States than in Portugal in all the groups analysed. While in 2005 the richest 10% in Portugal had
Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database, http://topincomes.g-mond.parisschoolo- feconomics.eu.
Note: Pre-tax figures.
Table 3: Income share held by the top quantiles, United States and Portugal (%).
United States Portugal
Difference % between United
States and PT in 2005
2005 2011 2005 10% richest 44.94 46.54 38.25 17.5 5% richest 33.12 33.91 26.01 27.3 1% richest 17.68 17.43 9.77 81.0 0.5% richest 13.72 13.34 6.42 113.7 0.1% richest 7.76 7.36 2.48 212.9 0.01% richest 3.29 3.29 0.69 376.8
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38.3% of the total income, in the United States they had 44.9%, a concen- tration level 17.5% greater than Portugal. The more we narrow the range of income groups, the greater the difference between the levels of concentration in the two countries. The richest 1% in the United States accounted for 17.7% of the country’s total income while in Portugal they accounted for 9.8% (81% difference). The difference in level of concentration between the two countries grows if we compared fractions of the richest 1% group. While in Portugal the richest 0.01% accounted for around 0.7% of total income, they accounted for 3.3% in the United States (a difference of around 377%).
One of the advantages of tax data is the possibility of using them to build wide-ranging historical series. We now look at statistical information on the evolution of income concentration levels in the top groups.
Figure 3 shows the share of total income of the richest 1% and 0.1% in Portugal and the United States. The data for the United States refer to 1913– 2011, while those for the richest 1% and 0.1% in Portugal refer to 1976–2005 and 1936–2005, respectively.
Between 1913 and the Wall Street Crash in 1929 there was not only a high level of income concentration in these groups but it was also tending to grow. This timeframe was part of the so-called Gilded Age, which began in the late nineteenth century and witnessed the emergence of great fortunes, low taxation on income and wealth and deregulation of the financial markets (Krugman 2007). From 1929 onwards, the economic and financial shock caused by the Great Depression and Franklin D. Roosevelt’s New Deal, income concentration began a downward trend in the top groups. This trend lasted until the United States entered the Second World War, when there was a highly pronounced reduction in concentration of income in the richest groups of the population. Over the next 30 years, the share of income held by the richest remained relatively low. This was the result of the structur- ing effect of the measures taken to sustain the war economy between 1941 and 1945 (e.g. control and levelling of salaries), a progressive tax policy and the bargaining power of the trade unions. The late 1970s and 1980s marked the beginning of an ongoing increase in the concentration of income in the top groups. According to several authors, this was associated with Ronald Reagan’s policy of deregulating the financial sector, which helped a restricted number of professional groups directly or indirectly linked to financial services to increase their wealth (Stiglitz 2012; Horn et al. 2009; Krugman 2007).This increase in concentration of income in the top tail of the distribution was accompanied by a rise in the preponderance of wage income in the economic resources of these groups (Piketty 2013; Piketty and Saez 2003).
The available data allows us to analyse the performance of top incomes in the United States during the current financial crisis. According to Emmanuel Saez (2013a), between 2007 and 2009, the real average income of the rich- est 1% fell by 36.3%, which was higher than the country’s average reduc- tion (17.4%). This represents a 23.5% decrease to 18.1% of their share of total income. This fall was largely due to loss of capital income, which fell from $895 billion in 2007 to $236bn in 2009. If we consider capital income, the share of income held by the richest 10% fell from 49.7% to 46.5%. However, if we exclude capital income from the analysis, there is hardly any change, as it went from 45.7 to 45.5%. In aggregate terms, 49% of total income losses in the period were borne by the richest 1% (Saez 2013a). This trend began to turn around in 2009, however. The real average income of the richest 1% increased 11.7% between 2009 and 2011, while for the remaining population it fell 0.4%.
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12. Between 1939 and 1941, this inequality measure rose from 4.6 per cent to the 5.2 per cent mentioned.
According to the author’s preliminary data (Saez 2013b), this trend grows stronger if we take 2012 into account. The income of the richest 1% increased 19.6% from 2011 to 2012, while that of the rest of the population rose only 1%. He states that the income of the richest 1% grew 31.4% between 2009 and 2012, while that of the remaining 99% increased only 0.4%. This means that 95% of the gains in income in the first three years of recovery went to the richest.
Where Portugal is concerned, Figure 3 shows that levels of income concen- tration in the 1930s and 1940s were much higher than in 2005. In 1936 the richest 0.1% were estimated to receive 5.2% of the population’s total income. Although Portugal did not take part in the Second World War, these figures went down during the period. The share of total income in the hands of the richest 0.1% fell from 5.2% in 1941 to 3.1% in 1946. During this period, the marginal rates on the highest incomes went from 8.5% to 30% (Alvaredo 2010).12 Between 1950 and 1970 there was a slight drop in the level of income concentration in this group, and this trend accelerated after that (also for the richest 1%) until a break in the series in 1982.
Since the series restarted in 1989 concentration of income has increased progressively in the two quantiles analysed in Figure 3. The marginal rates on the highest incomes did not undergo any significant changes in the period, which, according to Alvaredo, indicates the taxation framework was not a decisive factor in the increase of top incomes (2010: 13). A study by Rodrigues et al. (2012) makes an initial approach to this phenomenon. According to these authors, wage inequality grew deeper between 1985 and 2009 and the concentration of this income in the top quantiles increased sharply by 50.7% in the richest 1%, 60.9% in the richest 0.1% and 126.7% in the richest 0.01%. In other words, the employment market was a source of inequality and
Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu.
Note: Pre-tax figures.
Figure 3: Income share of the richest 1 per cent and 0.1 per cent in the United States and Portugal (1913–2011).
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concentration of economic resources in very small groups of the population with relatively well-defined occupations (Cantante 2013).
After showing the data on concentration of income at the top in the two countries, we now conduct a brief comparative analysis of these trends.
A comparison between the group of the richest 1% in Portugal and the United States is only possible after 1976. In that year, income concentration for these groups in the United States and Portugal was similar: about 7.9% in both countries. In 1989, these groups’ share of the income had fallen slightly (6.8%) in Portugal while in the United States it has risen quite significantly to 12.6%. From 1989 to 2005, the variation rate of these indicators increased a bit more in Portugal than in the United States: 42.8% and 40.2%, respectively. Although this rise was slightly more accentuated in Portugal than in the United States, the extent of the concentration of income in the top 1% in 2005 was much greater in the United States than in Portugal: 17.7% to 9.8%.
Regarding the concentration of income in the 0.1% group, we find that breadth of this phenomenon was greater in Portugal than in the United States from the mid-1940s to early 1970s. Indeed, this occurs not only in comparison with the United States, but with countries like Spain, France or the United Kingdom (Alvaredo 2010). From 1980 onwards, there was a much sharper increase in this indicator in the United States than in Portugal (which was not the case for the richest 1%). It was in this period that the United States stood out as the most unequal in terms of distribution of income (and wealth) in the most developed countries in the world and the fourth-highest of all OECD countries, behind Chile, Mexico and Turkey. As mentioned above, the data shown here for the United States do not include capital gains. If we take this income component into account, the level of concentration of income in the top groups increases substantially. For example, in 2011 the richest 1% had around 20% of total US income, and between 1980 and 2007 their share of the income grew by around 135% (Alvaredo et al. 2013).
CONCLUSION
Portugal and the United States are two countries in which income distribu- tion is quite unequal. This gap is more pronounced in the United States than in Portugal, but if we place them in the universe of OECD countries we find their profiles are fairly similar. Economic inequality is a structural phenom- enon with important, multi-dimensional impacts on the way societies work. Although economic inequality may be reproduced or intensified by social, economic, institutional and political dynamics, this trend is not inevitable. A diachronic analysis of economic inequality in the two countries shows just that, as the extent of this phenomenon varies considerably over the years. Consider, for example, the increase in inequality in the United States prior to the 1929 crisis or in the late 1970s and early 1980s, two periods that witnessed tax reductions and deregulation of the financial markets. On the other hand, we can see the equalization of income distribution for several decades under the New Deal and later in the war economy in the United States or on a smaller scale in Portugal between 2004 and 2009.
The increase of top income concentration is one of the most notable phenomena resulting from the analysis of income distribution. The increase of income inequality in most of the OECD countries in the last decade can be explained in part by this dynamic. Both in Portugal and the United States the market income held by these groups has increased significantly in recent
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decades. The data presented in this article shows that top income concentra- tion has been more intense in the United States than in Portugal. If we look at the very top income groups (1 per cent fractiles), we conclude they have been pushing up overall inequality in a more profound way in the United States than in Portugal.
As in most advanced countries, top income concentration has put pressure on the state’s ability to reduce disposable income inequality. Although the phenomenon of economic inequality may be associated with issues as diverse as labour and trade union rights or access to education, this study essentially addresses redistribution policies in Portugal and the United States on the basis of social payments and taxation. Our conclusion is that, in general terms, Portugal has higher economic redistribution levels than the United States, although both countries average below European and OECD countries. While the data from population surveys in the United States shows that the state’s redistribution has not managed to reduce inequality in disposable income in the last decade, Portugal experienced a progressive reduction in economic inequality in the second half of the 2000s. This trend was mainly due to poli- cies on the transfer of income to more disadvantaged households, such as the Social Insertion Income and Elderly People’s Subsidy.
The redistributive role of taxes and social transfers in the two countries is quite different. While in Portugal the reduction in economic inequality is essentially due to social transfers, in the US taxes and monetary trans- fers to households have equivalent weights in the redistribution process. Nonetheless, analyses by authors such as Joseph E. Stiglitz, Paul Krugman, Thomas Piketty and Emmanuel Saez have been demonstrating that the US tax policy has in recent decades resulted in a considerable increase in the concentration of income at the very top. As we show in this article, top rates of income tax are considerably lower in the United States than in most European countries, including Portugal. Nevertheless, both in Portugal and the United States – but also in most OECD countries – there is a big difference between top rates regarding income as a whole and capital income taxes (Piketty 2013). Capital income earners, who are typically the richest among the rich, benefit from tax systems that tend to be harsher on labour revenue and which are more beneficial to wealth and wealth income. This fact isn’t easy to capture using the available data, but it forms a legal frame that boosts income inequal- ity and reinforces the concentration of income and wealth at the very top.
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SUGGESTED CITATION
Cantante, F., Carmo, R. M., de Almeida Alves, N. and da Costa, A. F. (2016), ‘Trends in income inequality: Comparing the United States and Portugal’, Portuguese Journal of Social Science, 15: 3, pp. 367–86, doi: 10.1386/ pjss.15.3.367_1
CONTRIBUTOR DETAILS
Frederico Cantante is a Ph.D. student in sociology. He has an undergradu- ate degree in law and in sociology. He is a research assistant at CIES-IUL and in the Observatory of Inequalites. His main research interests are social and economic inequalities. His recent publications include: ‘The persistence of class inequality: The Portuguese labour force at the turn of the millennium’, Sociological Research Online, 20: 4 (2015), pp. 1–17 (with Renato Miguel do Carmo and Margarida Carvalho) and, Cantante, F. (2014), ‘Desigualdades
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Económicas Multi-Escalares: Portugal No Contexto Global’ (‘Multi-scale economic inequalities: Portugal in the global context’) Análise Social, 212:XLIX&3, pp. 534–66.
Contact: CIES, ISCTE – Instituto Universitário de Lisboa, Edifício ISCTE-IUL, Avenida das Forças Armadas 1649-026, Lisboa, Portugal. E-mail: [email protected]
Renato Miguel Carmo is a sociologist at CIES-ISCTE – Instituto Universitário de Lisboa. He is coordinator of the Inequality Observatory and member of the European network Inequality Watch. His research interests are social and spatial inequalities, with such issues as social exclusion, territorial marginaliza- tion, spatial mobility and social capital at the core of his individual and collec- tive research projects. His most recent publications are (with M. Carvalho and F. Cantante) ‘The persistence of class inequality: The Portuguese labour force at the turn of the millennium’, Sociological Research Online, 20: 4 (2015); (with F. Cantante and N. Alves) ‘Time projections: Youth and precarious employ- ment’, Time & Society, 23: 3, pp. 337–357 (2014); and (with S. Santos) ‘Social capital and sociodemographic changes: From non-differentiation to multi- focalisation’, Sociologia Ruralis, 54: 2, pp. 186–205 (2014).
Contact: CIES, ISCTE – Instituto Universitário de Lisboa, Edifício ISCTE-IUL, Avenida das Forças Armadas 1649-026, Lisboa, Portugal. E-mail: [email protected]
Nuno de Almeida Alves is head of the department of Social Research Methods at ISCTE – University Institute of Lisbon and a member of CIES, ISCTE – Instituto Universitário de Lisboa. He has conducted research on chil- dren and young people, with particular focus on the use of information tech- nologies and impact of job precariousness on transitions to adulthood. He has published several books and articles in this area and on other themes, including: (with D. Cairns, A. Alexandre and A. Correia), Youth Unemployment and Job Precariousness: Political Participation in the Austerity Era, Basingstoke: Palgrave Macmillan (2016); (edited with A. Delicado, A. Alves, T. Carvalho and D. Carvalho), Infâncias Digitais, Lisbon: Fundação Calouste Gulbenkian (2015); and (with A. Delicado, A. Alves and T. Carvalho), ‘Internet, children and space: Revisiting generational attributes and boundaries’, New Media & Society, 17: 9, pp. 1436–53 (2015).
Contact: CIES, ISCTE – Instituto Universitário de Lisboa, Edifício ISCTE-IUL, Avenida das Forças Armadas 1649-026, Lisboa, Portugal. E-mail: [email protected]
António Firmino da Costa has a Ph.D. in sociology, professor at the Department of Sociology at ISCTE – Instituto Universitário de Lisboa, researcher at CIES, ISCTE – Instituto Universitário de Lisboa, co-ordinator of the Knowledge Society, Competencies and Communication research group (CIES) and direc- tor of the Inequality Observatory, chairman of the Portuguese Sociological Association (APS) Ethics Council. He was Vice-Rector for Research at ISCTE – Instituto Universitário de Lisboa from 2010–13, co-ordinator of the sociology doctoral programme at ISCTE-IUL (2003–11), director of CIES from 2000–06 and editor of Sociologia: Problemas e Práticas from 1995–2000. His research interests include social inequality, science and society, literacy and education,
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cultural identities and urban cultures, and research methodology. His recent publications include: (with E. Pegado, P. Ávila and A. R. Coelho), ‘Evaluating the Portuguese national reading plan: Teachers’ perceptions on the impact in schools’, Educational Research for Policy and Practice, 14: 2, pp. 119–38 (2015); (with R. M. Carmo [eds]) Desigualdades em Questão: Análises e Problemáticas, Lisbon: Mundos Sociais (2015); (with J. T. Lopes and A. Caetano [eds]), Percursos de Estudantes no Ensino Superior: Fatores e Processos de Sucesso e Insucesso, Lisbon: Mundos Sociais (2014).
Contact: CIES, ISCTE – Instituto Universitário de Lisboa, Edifício ISCTE-IUL, Avenida das Forças Armadas 1649-026, Lisboa, Portugal. E-mail: [email protected]
ERRATUM
The author details have been amended since the original publication of this article, where only one of the authors was attributed. The publisher apolo- gizes for this error.
Frederico Cantante, Renato Miguel Carmo, Nuno de Almeida Alves and António Firmino da Costa have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this work in the format that was submitted to Intellect Ltd.
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