The EconomistNovember 30th 2019 BriefingInequality 232
1point out that allocating missing income is
tricky. Mr Slemrod says he has not yet stud-
ied the disagreement.
In line with the prevailing theories on
inequality, Messrs Auten and Splinter ulti-
mately find that the top 1% share of pre-tax
income has risen since the 1960s, though
by less than other estimates.
But it is inequality in incomes after tax-
es and benefits that really conveys differ-
ences in living standards, and in which
Messrs Auten and Splinter find little
change. Some economists argue these fig-
ures are distorted by the inclusion of Med-
icaid. But it is hard to deny that the provi-
sion of free health care reduces inequality.
The question is whether “non-cash bene-
fits” should properly count as income.Money, it’s a hit
Many of these debates also spill over into
criticism of the second part of the conven-
tional wisdom on inequality: that middle
incomes have stagnated. Messrs Piketty,
Saez and Zucman argue that the rising
share of the top 1% of earners has come at
the expense of the bottom 50%. It follows
that if the top 1% have not done as well,
someone else must have done better.
Sure enough, just as a wide range of esti-
mates of inequality exist, so too is there an
enormous variation in estimates of the
long-term growth of middle incomes. A lit-
erature review by Stephen Rose of the Ur-
ban Institute, a think-tank, describes six
possible figures for American real median
income growth between 1979 and 2014,
ranging from a fall of 8% using Messrs Pi-
ketty and Saez’s methodology from 2003 to
an increase of 51% using the cbo’s.
The third part of the conventional
thinking on inequality—that productivity
growth has outstripped incomes—was a
central thesis of Mr Piketty’s bestseller. In-
deed, it gave the book its title. He argued
that at the top of the income distribution a
new rentier class was emerging which
made most of its money from investing or
inheriting rather than working. That has
seemed consistent with data across therich world showing a rising share of gdp
going to capital rather than to workers. But
those data are also coming under increas-
ing scrutiny.
Not long after the publication of “Capi-
tal in the Twenty-First Century”, Matthew
Rognlie, now of Northwestern University,
argued that the rise in America’s capital
share was accounted for by growing re-
turns to housing, not by the shares and
bonds which are held disproportionately
by the top 1% of American households.
In another paper published in February,
another group of economists examine
sources of income among the top 1% of
American earners. Much of their income
comes from pass-through businesses,
whose profits are easily mistaken for in-
come from investments. But the authors—
Matthew Smith of the Treasury, Danny Ya-gan of the University of California, Berke-
ley, Owen Zidar of Princeton and Eric Zwick
of the University of Chicago—find that the
profits of pass-through firms fall by three-
quarters after their owners retire or die,
suggesting that most of the earnings de-
pend on labour. Many doctors, lawyers and
consultants run pass-through firms—peo-
ple who should probably be considered
self-employed. Including their income in
the capital share overstates its rise.
Lately economists have broadened
these criticisms internationally. In a recent
working paper, Gilbert Cette of the Bank of
France, Thomas Philippon of New York
University (nyu) and Lorraine Koehl of in-
seein France adjust for distortions in the
data caused by self-employment and prop-
erty income. They find that the labour
share has declined in America since 2000,Class war
Labour share of income*, %Source:GermánGutiérrez
andSophiePiton*Shareofbusinessvalue-added
goingtowages,salariesandbenefits2United StatesAdvancedeconomies
ExcludingUS1970 80 90 2000 151070656055A
s is perhapsappropriateforthe
country which produced the song
“Money, Money, Money”, Sweden has one
billionaire for every 250,000 people, one
of the highest rates in the world. It is also
one of the world’s most unequal coun-
tries in terms of the distribution of
wealth. An estimate from The Economist
finds that the value of Swedish billion-
aires’ fortunes is equivalent to a quarter
of the country’s annual gdp. Only in tax
havens such as Cyprus or Monaco, or
captured economies such as Russia or
Georgia, are plutocrats more dominant.
Yet among ordinary Swedes, billion-
aires are surprisingly popular. “Only the
royal family, Astrid Lindgren, Abba and
Bjorn Borg could compete in popularity,”
wrote one newspaper in 2018 on the
death of Ingvar Kamprad, the founder of
Ikea. Talk of levying harsh taxes on the
wealthy is met with a shrug. “The debate
that you have in America or Britain about
taxing the super-rich just doesn’t exist
here,” says Janerik Larsson of Timbro, a
free-market think-tank.
The popularity of billionaires is partly
owing to the perception that they have
made their money not by exploiting
ordinary Swedes, but by creating multi-
nationals such as h&m, Volvo and Spot-
ify. They are also relatively modest. Even
on posh streets there are few fancy cars;
rich people eat Smørrebrød in popular
restaurants along with everybody else.
Many rich families set up foundations to
dispense vast sums to good causes. The
offices of the Wallenberg Foundations,
linked to one of Sweden’s most powerfuldynasties,areina nondescript building
in Stockholm (though this week the
family defended its bank amid allega-
tions of money-laundering).
If surprisingly few Swedes hanker for
punitive taxes on the rich, that is also
because many have concluded that they
do not work. Sweden introduced wealth
taxation in 1911, followed by three big
increases in 1934, 1948 and 1971. By the
early 1980s Swedes with a household
wealth of about $600,000 (in today’s
prices) faced a marginal tax rate of 4%.
Combined with heavy taxation of in-
come, the effective tax rate on invest-
ment exceeded 100% in some cases.
Despite these punitive rates, wealth
taxation only made a minor contribution
to Sweden’s generous welfare state—at
most during the post-war period, it
raised 0.4% of gdp. From the 1970s on-
wards its popularity waned. Kamprad
fled to Switzerland in 1973; Hans Rausing,
whose father founded Tetra Pak, a pack-
aging firm (and who died earlier this
year), escaped to Britain in the 1980s. By
that decade “people could with impunity
evade the tax,” argue Magnus Henrekson
and Gunnar Du Rietz, two economists,
not least because of the relaxation of
foreign-exchange controls in 1989.
The inclusion of various exemp-
tions—including the exemption of hold-
ings of land and forest from 1991—in-
creased the complexity of the
administration of the tax. With biparti-
san support, Sweden abolished the in-
heritance tax in 2005 and the wealth tax
in 2007. Before long, Kamprad returned.Intherichman’sworld
Wealth inequality in SwedenSTOCKHOLM
Where billionaires are surprisingly popular