World Inequality Report 2018

Economists read the new Piketty report so you don’t have to

celebrities, Thomas Piketty, World Inequality Report 2018
Darling, is that a poor person? Source: Daniel Karmann/DPA

A team led by French rock-star economist Thomas Piketty recently published the World Inequality Report 2018, the first in an annual series of studies into economic disparities around the world. Mr. Piketty claims the report represents the cutting edge of empirical research. But do his figures add up? And where does Germany fit into the inequality picture?

The report’s chapter on Germany begins with a big historical claim. It points out that in 2013, the top 10 percent of earners — the top “decile” — took 40 percent of the country’s total income, exactly as much as they did in 1913, when the Kaiser was still on the throne in Berlin.

The implication is that nothing much has changed. Progress has been minimal, with entrenched inequality outlasting all of the intervening historical transformations. But this is a profoundly misleading claim.

First of all, a look at the very highest earners in this case shows that Germany’s top 1 percent took 18 percent of income in 1913, but only 13 percent in 2013. Second, and more seriously, the report bases its findings on gross income only. In Germany before World War I, there was no progressive income tax as there is today. The top rate of Prussian income tax was just 4 percent.

But in 2013, Germany’s top rate of income tax was around 47 percent. This meant that the country’s top 10 percent of earners paid more than half of all income tax raised by the government, with the top 1 percent paying a quarter of the total. So based on net figures rather than before-tax income, the share of national income received by Germany’s top earners has indeed fallen compared to 2013.

Thomas Piketty
Thomas Piketty is famous for his criticism of supply-side economics. Source: AFP

Mr. Piketty’s report also compares income disparity by continent and shows Europe enjoys the world’s lowest levels of income inequality. The top 10 percent of European earners take home 37 percent of the continent’s total. By contrast, North America’s top decile accounts for 47 percent, while in the Middle East, they grab a whopping 61 percent.

Honing in on the world’s very richest, profound inequality becomes much clearer still. In 1980, the top 1 percent of earners in the world took home 16 percent of all income. By 2006 this had risen to 22 percent, before falling slightly to around 20 percent today. The losers in this process have been low earners in developed countries, although they are still richer than average when compared to the whole world.

However, if poverty is viewed in absolute terms, a very different picture emerges, although this is not addressed by Mr. Piketty’s team. In 1981, 2 billion people lived in extreme poverty, 44 percent of us. The rise of China and India has transformed that picture: By 2015, the figure had been reduced to 700 million, or 10 percent of the global population.

Equality of opportunity counts

The report also considers wealth inequality, but leaves Germany out of its analysis. Perhaps this is because the team’s political prescriptions against inequality have largely been implemented in Germany, which enjoys progressive taxation and a comprehensive system of social benefits.

There is inequality in Germany, although at far less extreme levels than, for example, in the United States. Income inequality grew worse in Germany between 1995 and 2005 as lower skilled wages were squeezed. But since 2005, the situation has changed again: Overall income disparity has stabilized. A healthy labor market with declining unemployment means lower incomes have begun to rise again. In comparison to other industrialized countries, the situation is substantially more equal.

However, Germany does have serious problems, largely ignored by Mr. Piketty’s report. The dual system of education, which provides millions of workplace apprenticeships, offers career chances to many young people. But the rigid education system means access to university is very much tied to a student’s social background, resulting in lower equality of opportunity than in other countries.

In addition, serious structural problems with the tax and transfer systems can disincentivize those not working: Loss of benefits and high taxation can mean that people are often worse off in low-paid employment.

income inequality in germany, 1961 to 2013
Source: World Inequality Report 2018

There are frequent demands that Germany should impose redistributive taxes — on capital, on wealth or on inheritances — to increase equality. But in a world where people and capital can move easily, this is a recipe for capital flight and a brain drain. In response to this possibility, Mr. Piketty proposes a global financial register, designed to stop tax evasion through coordinated governmental action. In the real world, this is not very realistic, to put it mildly.

So Germany’s politicians should rather stick to reality and focus on reforming the tax-transfer system and opening up the country’s education and training to more fairness. In this way, they can help create a country where there is genuine equality of opportunity.

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