why is europe more equal than the us? new evidence on...

Why is Europe more equal than the US?

New evidence on European inequality &

prospects for a fiscal union

Lucas Chancel

CoDirector & Senior Economist, World Inequality Lab

Paris School of Economics

Lecturer, Sciences Po

Conversations on the Future of Europe

European University Institute

Florence, 10 February 2020

This presentation

• Revisiting standard views about inequality and redistribution in

Europe thanks to novel Distributional National Accounts

• ”Why is Europe More Equal than the US?”, T. Blanchet, L.

Chancel, A. Gethin WID.world Working Paper 2020.

(www.wid.world/europe2019)

• Prospects for equitable (and sustainable) growth in the EU in the

decades to come

• ”Treaty for the Democratization of Europe”, M. Bouju, L. Chancel,

S. Henette, T. Piketty, G. Sacriste, A.-L. Delatte, A. Vauchez et al.

(www.tdem.eu)

1

www.tdem.eu

What Do We Know about Inequality in Europe? Not enough

Disparate set of indicators (National accounts, surveys, tax data): hard

to compare and tell consistent stories.

⇒ Previous studies have struggled to answer simple questions:

• Is European inequality mainly driven by between or within country

inequality?

• How unequal is Europe when Eastern countries are factored in?

• What drives recent EU inequality dynamics: pre or post tax incomes?

2

Standard view #1: inequality in Europe is primarily about

between-country divergences

Average national incomes across European countries, 2018

850€ / month

1500-2000€ / month

2500-4000€ / month

5000€ / month

Source: Blanchet, Chancel and Gethin (2019) 3

Standard view #2: Europe more equal thanks to redistribution

Inequality in Europe and the US according to the OECD

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

USA Germany Denmark Sweden

Gin

i ind

ex

Market income (OECD data) Disposable income (OECD data)

Redistribution17%

Redistribution 30%

Redistribution 38%

Redistribution40%

Source: OECD (2011)4

Standard view #3: in tax matters, it’s unanimity rule or nothing

Average VAT and top corporate income tax in the EU, 1980-2018

Source:Blanchet, Chancel and Gethin (2019)5

Distributional National Accounts: distribute macro growth

• Distributional National Accounts (DINA) seeks to distribute100% of macroeconomic growth to individuals

• Reconciliation of the microeconomic study of inequality (disposable

income, poverty...) and macroeconomic issues (public debt,

aggregate growth...)

• Our method combines all available survey, tax and nationalaccounts data in a systematic way

• Based on the pioneering work by Kuznets (1953), Atkinson (1978)

• Improves from top incomes literature thanks to integration of

non-taxable incomes: more comparability across countries and over

time (Piketty, Saez, Zucman, 2018)

• International, collaborative, cumulative, open-source project

• 100 researchers working on all continents, covering more than 90

countries. All data series & codes available online on WID.world.

6

Income inequality in Europe: mobilizing all data sources

Top 10% income share in Europe:

DINA vs. tax vs. survey data, 1978-2015

20

25

30

35

40

shar

e of

inco

me

(%)

1980 1985 1990 1995 2000 2005 2010 2015

Top 10% income shareDINAtax & surveysraw surveys

Source: Blanchet, Chancel and Gethin, 2020

7

Rise in inequality since the 1980s in most countries

Top 10% shares in Europe, 1980 vs. 2017

Decreasinginequality

Increasinginequality

15

20

25

30

35

40

Top

10%

inco

me

shar

e (2

017)

15 20 25 30 35 40Top 10% income share (1980)


8

Rise in inequality since the 1980s in most countries

Top 10% shares in Europe, 1980 vs. 2017

ATBA BE

BG CY

CZFI

FRGB

GR

HRHU

IE

LT

MKNO

PL

RORS

SE

SK

CH

DE

EE ESIT

LULV

ME

DK

IS

NL

PT Decreasinginequality

Increasinginequality

15

20

25

30

35

40

Top

10%

inco

me

shar

e (2

017)

15 20 25 30 35 40Top 10% income share (1980)


9

EU vs. US: diverging pretax inequality trends

Top 1% and bottom 50% income shares in Europe and the US, 1980-2017

8

10

12

14

16

18

20

22

24

Shar

e of

inco

me

(%)

1980 1985 1990 1995 2000 2005 2010 2015

United States

West. & North.Europe

All Europe

All Europe

West. & Nort.Europe8

10

12

14

16

18

20

22

24

1980 1985 1990 1995 2000 2005 2010 2015

Europe

Bottom 50% Top 1%


10

Average annual growth 1980-2017: US 1.4%, EU 1.15%.

Europe much more successful at the bottom: 1% vs. 0%.

Pretax income growth by income percentile, 1980-2017

-2

-1

0

1

2

3

4

5

6

Aver

age

annu

al in

com

e gr

owth

(%)

10 20 30 40 50 60 70 80 90 99 99.9 99.9999.999

Income group (percentile)

United States All Europe


11

Most of European inequality occurs within countries

Theil index of inequality in Europe, 1980-2017

Inequality within countries: 80%

Inequality between countries: 20%

0

.1

.2

.3

.4

.5

.6

.7

Thei

l ind

ex

1980 1985 1990 1995 2000 2005 2010 2015


12

Most of European inequality occurs within countries

Poverty rates in Europe, 1980-2017

Source: Blanchet, Chancel and Gethin, 2020 13

”It’s pretax, stupid!”

Inequality and redistribution in Europe and the US:

Ratio of top 10% to bottom 50% average incomes before & after taxes

0

2

4

6

8

10

12

14

16

18

20

Rat

io o

f top

10%

to b

otto

m 5

0% in

com

e

EU 1980 EU 2017 US 1980 US 2017

Inequality before taxes and transfers Inequality After taxes and transfersPre-tax national income Post-tax disposable income

Post-tax national income


14

EU’s slower rise of pretax inequality: trade & technology?

• Lesser exposure to trade? Share of imports from low-income

countries rose slightly more in Europe than in the US (World Bank,

2019)

• Lesser exposure to new technologies? No evidence for higher

robot penetration in the US (Acemoglu and Restrepo, 2017)

15

EU’s slower rise of pretax inequality: access to universal public

services

Share of private spending in higher education

Source: Piketty, 2019

16

Today’s taxes impact tomorrow’s pretax income concentration

Total taxes per income group in the US, 1950 vs. 2018

Appendix Figure 15. Average tax rate by pretax income group in the US, 1950 vs. 2018

Source: Saez and Zucman (2019). All US federal, state, and local taxes are included. Taxes are expressed as a fraction of per adult pre-tax income.

172

When America taxed the top 1% heavily

(Average tax rates by pre-tax income groups, 1950 vs. 2018)

Notes: The figure depicts the average tax rates by income groups in 1950 and 2018. All

federal, state, and local taxes are included. Taxes are expressed as a fraction of pre-tax

income. P0-10 denotes the 10% of the adult population in the bottom of the pre-tax

income distribution, etc. Complete details at triumphofinjustice.org

This is all the more feasible that the progressive post-World War II tax

system, for all its virtue, was far from perfect. In violation of the “equal

income means equal tax” principle, capital gains were taxed less than

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

P0-10

P10-2

0

P20-3

0

P30-4

0

P40-5

0

P50-6

0

P60-7

0

P70-8

0

P80-9

0

P90-9

5

P95-9

9

P99-9

9.9

P99.9-

99.99

P99.99

-top 4

00

Top 4

00

% o

f pre

-tax

inco

me

1950

2018

Source: Saez and Zucman, 2019

17

The lack of a Fiscal Union limits EU Member States’ ability to

implement progressive taxation


18

Issues with the establishment of common minimum tax rates

• The implementation of common minimum tax rates on top income,

wealth (or carbon emissions) requires EU Council unanimity

• Since Amsterdam (1997) and Nice (2001), enhanced cooperation is

possible in tax and other matters

• It requires a minimum of 9 Member States + EU Council qualifiedmajority (i.e. 55% of votes at the Council, from countriesrepresenting 65% of EU population)

• Without EU Commission prior approval, qualified majority threshold

brought to 72% votes from countries represented 65% EU population

• 4 Member States representing 35% EU population can block the

move

• Qualified majority is an option, but an extremely constraining one

19

No common taxes but economic government

• Through a series of treaties (Treaty on Stability, Coordination and

Governance and Treaty establishing the European Stability

Mechanism), and legislative packages (the Six-Pack and Two-Pack,

European Semester), European economic govt. was implemented in

2010s (cf. Eurogroup).

• It possesses instruments (of surveillance, control and conditionality)

to reshape the fiscal social pacts of the EU Member States.

• European and National Parliaments largely excluded from this

economic govt. Representative democracy values of the EU (cf.

TEU art. 2 & 13) seriously eroded.

20

Treaty for the Democratization of Europe: parliament to estab-

lish new EU taxes

• Idea: bypass EU unanimity rules and rely on parliaments to deal with

tax matters

• Treaty establishes a European Assembly, composed of national and

EU MPs, with power over new corporate, income, wealth (and

carbon) minimum top marginal tax rates.

• Enters into force as soon as any two countries are willing to sign it.

• Half of taxes collected are directly redistributed to participating

countries, other half used to fund joint projects (e.g. higher

education, climate change, migration).

21

Treaty for the Democratization of Europe: tax revenues

• Minimum corporate tax rate set to 37% (15% above actual 22%

average in the EU, back to early 1990s period): tax revenue = 1.5%

GDP

• Additional top marginal income tax rate set to 10% above EUR

100k and 20% above EUR 200k (implying an average 50% rate

above 100k on average and 60% above 200k on average): tax

revenue = 1% GDP

• Introduction of a top marginal wealth tax rate of 1% above EUR 1

million and 2% above EUR 5 million: tax revenue = 1.1% GDP

• Introduction of minimum carbon tax rate of EUR 30 per ton (with

rapid increase reachin EUR 100) = 0.4% GDP

22

Treaty for the Democratization of Europe: budget

• Overall, 4% of GDP of participating countries is levied

• 2% given back to these countries, 2% invested in common projects

(innovation, climate change, migration)

23

Treaty for the Democratization of Europe: dumping

What about tax dumping?

• Corporate taxes: nothing prevents countries from implementing

formulary apportionment (i.e. Amazon, Chanel or Mercedes’ taxable

profits in Italy computed on the basis of global share of sales made

in Italy).

• Tax sovereignty becomes an asset rather than a brake issue

• Potential European Court of Justice challenge over ”hidden import

tariff” but key difference since the measures disappears as soon as

companies’ home countries increase corporate tax rates

• If forbidden by ECJ on these grounds: serious arguments for

progressive parties to adopt ”exit” positions.

24

Treaty for the Democratization of Europe

What about tax dumping?

• Income and wealth taxes: countries can introduce or increase exit

taxes, i.e. taxes to be paid in the case of international change of

fiscal address. In practice, tax mobility due to changes in top wealth

taxes are found to be low (French wealth tax based multiplied by x4

between 1989 and 2017).

• Carbon taxes: EU ETS sectors: carbon floor mechanism

implemented by the UK before Brexit, compatible with EU

legislation. No evidence of important carbon leakage.

25

• Income and wealth taxes: countries can introduce or increase exit

taxes, i.e. taxes to be paid in the case of international change of

fiscal address. In practice, tax mobility due to changes in top wealth

taxes are found to be low (French wealth tax based multiplied by x4

between 1989 and 2017).

• Carbon taxes: EU ETS sectors: carbon floor mechanism

implemented by the UK before Brexit, compatible with EU

legislation.

26

Concluding remarks

• Despite persistent average income gaps, European inequality mostly

occurs within countries

• Inequality on the rise in Europe since the 1980s (top 0.1% avg.

growth: 2.5-3%, bottom 50%: 1%)

• Europe’s relative resistance is mostly about pretax incomes

• ”Predistribution” driven by market regulations access to public

services, but also progressive taxation

• Common market without tax union fuels tax competition and limits

MS ability to invest in public services tax mobile taxpayers

• Proposal: parliamentary assembly to implement minimum

progressive tax rates. Franco-German assembly established in 2019

as a precursor?

27

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