Long-run Trends in Wealth Inequality and the Role of Inheritance
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Transcript of Long-run Trends in Wealth Inequality and the Role of Inheritance
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Long-run Trends in Wealth Inequality and the Role of Inheritance
Daniel WaldenströmUppsala University
Winter School in Inequality and Social Welfare, Canazei, 2012
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Outline of talk1. Introduction: Role of wealth in inequality trends
2. Wealth concentration over the path of development
– Cross-country evidence, 1774-2006
– The case of Sweden, 1873-2006
3. Inheritance − the role of "old wealth"
4. Concluding remarks
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(Part of the) Income/Wealth relationship
Wealth(Level,
distribution)
Income(Level,
distribution)
Inheritance
Capital income(rW)
Savings(sY)
Other processes(opportunity, insurance etc)
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Capital income share in total income, Sweden, top decile, 1912-2004
0%
10%
20%
30%
40%
50%
60%
70%
1912 1922 1932 1942 1952 1962 1972 1982 1992 2002
Cap
ital s
hare
of t
otal
inco
me
(exc
l. cap
ital g
ains
)
P90-99 P99-99.9 P99.9-99.99 P99.99-100
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Wealth matters to income mobility: Intergenerational transmission in Sweden
Björklund, Roine and Waldenström (2011), “Intergenerational Top Income Mobility in Sweden – Capitalist Dynasties in the Land of Equal Opportunity?”,
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Wealth matters to income mobility: Intergenerational transmission in Sweden
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
P90-95 P95-99 P99-99.9 P99.9-100
Income
FinAss
Educ
IQ
Non-cog
Björklund, Roine and Waldenström (2011)
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Link between inequality and development
• Large literature − no consensus– Equalization view (Stiglitz 1969; Becker & Tomes; Loury 1981)– Disequalization view (Ray; Mookherjee & Ray 2003)– History matters (Banerjee & Newman 1993; Galor and Zeira 1993)
• Kuznets (1953, 1955): Structural change– Shift from agericultural (trad.) to industrial (modern) sector
generates inverted U-like relationship– Also: concentration of capital and savings boost inequality
Inequality
Time
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Is there a Kuznets Curve in income inequality?
0
5
10
15
20
25
30
1903 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003
Shar
e of
tota
l inc
ome
(%)
USAUKCanadaFranceAustraliaNetherlandsSweden (incl. CG)Sweden (excl. CG)
Kuznetsinverted-U?
What about wealth inequality?
Long-run trends in wealth concentration:
Cross-country evidence
Ohlsson, H, J. Roine and D. Waldenström (2008), “Long-Run Changes in the Concentration of Wealth: An Overview of Recent Findings”, in Davies, J.B. (ed.), Personal Wealth from a Global Perspective, Oxford, Oxford University Press. Link
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Starting point• Main question: Is there a long-term linkage between
development and inequality? (cf. Kuznets)
• Further questions:– Common vs. specific trends across countries– Potential heterogeneity within the top wealth decile
• This study:– Reviews recent empirical findings of others– Presents new evidence on Nordic countries
Measurement and data• Estate data
– Incentives to minimze tax - but also to divide fairly– Homogenous source over time– Problems: Sample size, W of deceased (mortality multipl.)
• Wealth tax data– Large samples; Relatively homogenous over time– Problems: tax incentives, asset valuation, excludes items
• Survey data– Covers most asset items; Scattered points; Short history– Problems: sample size, response rates, top-coding
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Measurement and data
• Wealth concept: Net worth– Real + financial assets less debts (excl. pensions, human
cap.)
• Wealth owners:– Wealth tax data: Households (tax units; >18yrs)– Estate data: Adults (18 yrs + ); deceased– Survey data: Households (everyone in dwelling)– Historically, households difficult to define
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Measurement and dataMain methodology:• Compute shares of total household wealth (using
Pareto interpolation) that goes to the top 1%, top10% etc of all potential wealth holders
• The shares of both wealth and population are defined in relation to reference totals– Reference total for wealth: All personal wealth in the
economy (not only taxed wealth)– Reference total for the population: All potential tax units
(not just those who file tax returns)
French wealth concentration, 1807-1994
0
10
20
30
40
50
60
1800 1840 1880 1920 1960 2000
Shar
e of
tota
l wea
lth (%
)
P99-100
P95-99
P99.9-100
P90-95
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U.K. wealth concentration, 1774-2001
0
10
20
30
40
50
60
70
80
90
100
1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Shar
e of
tota
l wea
lth (%
)
P95-100
P99-100
P95-99
England and Wales (1740-1937) U.K. (1938-)
Lindert (2000) Atkinson et al IRS (2006)
15
10
15
20
25
30
35
40
45
1770 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990
Shar
e of
tota
l wea
lth (%
)
P99-100 (adults)
P99-100 (households)
P90-95 (households)
P95-99 (households)
U.S. wealth concentration, 1774-2001Shammas (1993) Lindert
(2000) Kopzcuk & Saez (2004)
Wolff (1987, etc)
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Swiss wealth concentration, 1913-1997
5
10
15
20
25
30
35
40
45
50
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Shar
e of
tota
l wea
lth (%
)
P99-100
P95-99
P99.9-100
P90-95
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Danish wealth concentration, 1789-1996
0
10
20
30
40
50
60
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Shar
e of
tota
l wea
lth (%
)
P99-100
P90-95
P95-99
P99.9-100
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Norwegian wealth concentration, 1789-2002
0
5
10
15
20
25
30
35
40
45
50
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Shar
e of
tota
l wea
lth (%
)
P99-100
P95-99
P99.9-100
P90-95
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Swedish wealth concentration, 1800-2002
0
10
20
30
40
50
60
70
1800 1840 1880 1920 1960 2000
Shar
e of
tota
l wea
lth (%
)
P99-100 (wealth tax based) P90-99 (wealth tax based) P99-100 (SCB, 1975-2000)P90-99 (SCB, 1975-2000) P99-100 (estate based) P90-99 (estate based)P99-100 (Spånt, 1920-75) P90-99 (Spånt, 1920-1975)
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Cross country top percentile (P99-100)
10
20
30
40
50
60
70
1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Shar
e of
tota
l wea
lth (%
)
UK*
Denmark
Sweden
France
USA
Switzerland
Norway
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Cross-country "next four" (P95-99)
15
20
25
30
35
40
45
1740 1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Shar
e of
tota
l wea
lth (%
)
UK*
Denmark
Sweden
France
USA
Switzerland
Norway
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Heterogeneity between countries and within the top
Period: ≈1780-1914
Fractile: Top1% Next 4%
France Increase Flat
Switzerland - -
UK Increase Decrease
US Increase Flat?
Denmark Decrease Flat
Norway Decrease Increase
Sweden Flat Flat
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1914-2000
Top1% Next 4%
Decrease Flat
Flat Flat
Decrease Flat
Decrease Flat?
Decrease Flat
Decrease Decrease
Decrease Decrease*
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Summing up cross-country evidence
1. Industrialization: no uniform impact on wealth inequality– Inequality increased in the US, UK (top1%), France– Flat (or decreasing) inequality in Nordic countries– Role of country size? Timing of industrialization?
2. Other factors matter (20th experience)– Geopolitical shocks, Crises, Redistribtion
3. Little support for Kuznets-type "inverse-U"– Trends rather look like an inverse-J (or inverse-S)
Wealth concentration in Sweden, 1870-2006
Roine, J. and D. Waldenström (2009), “Wealth Concentration over the Path of Development: Sweden, 1873–2006”, Scandinavian Journal of Economics, 111(1), 151–187. Link
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Questions
• Closer at changes in wealth concentration
• Evolution during episodes:– Industrial take-off (1870-1910)
– Rise of the welfare state (educational reforms, home ownership, redistribution) (1930-1970)
– Globalization and deregulation (1980- )
• Role of offshore wealth
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50
60
70
80
90
100
Shar
e of
tot
al h
ouse
hold
wea
lth
(%)
Top wealth decile in Sweden
Top 10%
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10
20
30
40
50
60
Shar
e of
tota
l hou
seho
ld w
ealth
(%)
Bottom 90%
Top 10-1%
Top 1%
Wealth distribution in Sweden, 1870-2005
Industrial take-off Education, welfare state,home ownership
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0
5
10
15
20
25
30
35
40
1911 1916 1921 1926 1931 1936 1941 1946 1951
Wea
lth
shar
es (
%)
P99.9-100 P90-99 P99-99.9
Interwar era: High-wage earners accumulate wealth
18701871187218731874187518761877187818791880188118821883188418851886188718881889189018911892189318941895189618971898189919001901190219031904190519061907190819091910191119121913191419151916191719181919192019211922192319241925192619271928192919301931193219331934193519361937193819391940194119421943194419451946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420050
10
20
30
40
50
60
Shar
e of
tota
l hou
seho
ld w
ealth
(%)
?Bottom 90%
Top 10-1%
Top 1%
Wealth distribution in Sweden, 1870-2005
Industrial take-off Education, welfare state,home ownership
Globalization,deregulation...
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What has happened since 1980?• Sweden in the 1980s and 1990s:
– High taxes on wealth, inheritance, property– Booming financial markets– Liberalized capital account (since 1989)
• Potential impact: Capital flight– Private wealth (and wealth owners) leaves Sweden– Wealth is moved to closely held companies
• If so, what is the effect on the wealth distribution?
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Wealth concentration in Sweden since 1950 (official series)
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
15
20
25
30
35
40
45
50
Wea
lth
sahr
e (%
)
Bottom 90%
Top 1%
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Wealth concentration in Sweden since 1950(adjusted for foreign wealth of Swedish hh's)
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
15
20
25
30
35
40
45
50
Wea
lth
sahr
e (%
)
Bottom 90%
Top 1%incl. foreign wealth
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How estimate the wealth of the rich?• We add wealth to the top percentile (≈50,000 hh's)• Three additions:
1. Household wealth abroad• Accumulated mismatches in Balance of Payment• Unaccounted savings in the Financial Accounts
2. Wealth of super-rich Swedes in Sweden• Unlisted wealth; Source: Rich Lists in magazines 1983-
3. Wealth of super-rich Swedes abroad• Unlisted wealth; Source: Rich Lists in magazines 1983-
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Balance of Payments mismatch, six countries
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1975 1980 1985 1990 1995 2000 2005
Acc
umul
ated
BoP
mis
mat
ch a
s sh
are
of G
DP
Switzerland
USA
NorwaySweden
DenmarkFinland
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Comparing top wealth percentile: Sweden vs USA
15
20
25
30
35
40
45
1945 1955 1965 1975 1985 1995 2005
Sha
re o
f tot
al w
ealth
(%)
+ BoP mismatch
Official series
+ Rich Swedes abroad
+ Rich Swedes at home
USA
+ BoP error, dom. and for. super-rich
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Summing up: Swedish wealth inequality trends
1. Industrial take-off had a small effect on wealth concentration – But possibly larger on the composition of the wealthy ...
2. 20th century: Equalization– Before 1950 the top 1% lost to the medium-rich
– 1950-1980 rise of "popular wealth"
– After 1980, wealth compression halts
3. Adding estimates of foreign wealth and large domestic unlisted fortunes reverses trend 1980-
The Importance of Old Wealth: Estimating Long-Run Flows of
InheritanceOhlsson, H., J. Roine and D. Waldenström (2012), “The Role of Inheritance in Sweden, 1860–2010”, mimeo.
Waldenström (2012), “Household Wealth in Sweden, 1810–2010”, mimeo.
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How important is inheritance?• Next question: How important are inheritances
relative to other sources of income?
• Households get rich from two sources: – they save out of their income (new wealth) – they receive transfers from others (old wealth)
• Conventional story: Old wealth mattered in the past, today new wealth (growth-based) is all that matters.
• But is this really true...?
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Annual inheritance flow as share of national income: France, 1820-2008
Source: Piketty, Thomas (2011), “On the Long-Run Evolution of Inheritance: France 1850–2050”, Quarterly Journal of Economics 126(3), 1071–1131.
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Annual inheritance flow as share of national income: Sweden, 1860-2010
18601870188018901900191019201930194019501960197019801990200020100
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
Economic inheritance flow Fiscal inheritance flow
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Basic approach
• Piketty (2011): the importance of inheritance depends on ratio between economic growth rate g and returns to capital r.– With r > g, old wealth accumulates faster than new wealth is
created
• Let– B = Aggregate inheritance flow– Y = national income, – W = aggergate private wealth– m = mortality rate– μ = ratio aveW of deceased/aveW of the living.
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• Then, compute the inheritance flow over income as:
B/Y = μ m W/Y∙ ∙
• In a dynastic model, heirs save a fraction g/r of the return on their inerited wealth, making the wealth-income ratio W/Y stationary.
• Steady-state bequest flow B/Y = (W/Y)/H – H = generation length
• If W/Y = 400% and H = 30, then B/Y = 13%.
Basic approach
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B/Y = μ m W/Y (France) ∙ ∙Mortality rate (m) in France
Wealth-Income ratio (W/Y): France
AveW of decendents/living (μ): France
Inheritance flow/Income (B/Y): France
Source: Piketty (2011)
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Constructing W, Y, m, μ for Sweden• Y: National income data exist (disposable less so)
• m: Decendents over population. Data exist.
• μ: AveW of decendents/living. Difficult. Estimated from estate and wealth tax sources.– Gift-correction: +15%
• W: Real and financial assets less debts. No solid annual data prior to 1970 (1950). Construct new series back to early 19th century...
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Constructing W: Real assets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1850 1890 1930 1970 2010Agricultural net assets (farmland, forestry, livestock) Real estate (buildings, housing) Consumer durables
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Constructing W: Financial assets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1850 1890 1930 1970 2010
Bank deposits and currency Shares and mutual funds BondsOther claims Private pension savings
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Constructing W: Debt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1850 1890 1930 1970 2010
Informal liabilities (Other debt) State Financial sector
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Debt components up to 1970.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1830 1850 1870 1890 1910 1930 1950
Commercial banks Savings banks
Mortgage associations, Credit companies Insurance companies
State Informal liabilities (Other debt)
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Asset composition
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1850 1890 1930 1970 2010
Real assets Financial assets
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Swedish household wealth over GDP, 1810-2010
0
0.5
1
1.5
2
2.5
3
1810 1850 1890 1930 1970 2010
Real assets / GDP Financial assets / GDP Debts / GDP
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Wealth-Income ratio (W/Y): Sweden
1810182318361849186218751888190119141927194019531966197919922005200%
300%
400%
500%
600%
700%
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B/Y = μ m W/Y (Sweden) ∙ ∙
Wealth-Income ratio (W/Y): Sweden
200%
300%
400%
500%
600%
700%
1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
AveW of decendents/living (μ): Sweden
0%
50%
100%
150%
200%
250%
300%
1860 1880 1900 1920 1940 1960 1980 2000
Mortality rate (m) in Sweden
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1860 1880 1900 1920 1940 1960 1980 2000
Inheritance flow/Income (B/Y): Sweden
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
1860 1880 1900 1920 1940 1960 1980 2000
Economic inheritance flow Fiscal inheritance flow
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So, does inheritance have a role?
1. Evidence from France and Sweden suggests that:– Inheritance was important up to WWI– After 1950, inheritance did not matter (small W/Y)– Today, inheritance flows are again become more significant
(W/Y is growing)
2. Piketty's main lesson: – "with r > g (say, r=4-5% vs g=1-2%), then wealth coming
from the past is being capitalized faster than growth, and inherited wealth dominates self-made wealth"
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4. Concluding remarks
1. Before industrialization, wealth was highly unequal
2. Wealth equalized during 20th century– But not due to Kuznets-curve
– Instead: Political shifts (education, redistribution) and Exogenous shocks (wars, crises)
3. Current globalization and modest growth rates in Western world suggest increased future role of wealth and inheritance