Capital in the Twenty-First Century (57 page)

In passing, however, it is worth mentioning that the period between the two world
wars seems to have been particularly tumultuous and chaotic almost everywhere, though
the chronology of events varied from country to country. In Germany, the hyperinflation
of the 1920s followed hard on the heels of military defeat. The Nazis came to power
a short while later, after the worldwide depression had plunged the country back into
crisis. Interestingly, the top centile’s share of German national income increased
rapidly between 1933 and 1938, totally out of phase with other countries: this reflects
the revival of industrial profits (boosted by demand for armaments), as well as a
general reestablishment of income hierarchies in the Nazi era. Note, too, that the
share of the top centile—and, even more, the top thousandth—in Germany has been noticeably
higher since 1950 than in most other continental European countries (including, in
particular, France) as well as Japan, even though the overall level of inequality
in Germany is not very different. This can be explained in various ways, among which
it is difficult to say that one is better than another. (I will come back to this
point.)

In addition, there are serious lacunae in German tax records, owing in large part
to the country’s turbulent history in the twentieth century, so that it is difficult
to be sure about certain developments or to make sharp comparisons with other countries.
Prussia, Saxony, and most other German states imposed an income tax relatively early,
between 1880 and 1890, but there were no national laws or tax records until after
World War I. There were frequent breaks in the statistical record during the 1920s,
and then the records for 1938 to 1950 are missing altogether, so it is impossible
to study how the income distribution evolved during World War II and its immediate
aftermath.

This distinguishes Germany from other countries deeply involved in the conflict, especially
Japan and France, whose tax administrations continued to compile statistics during
the war years without interruption, as if nothing were amiss. If Germany was anything
like these two countries, it is likely that the top centile’s share of national income
reached a nadir in 1945 (the year in which German capital and income from capital
were reduced to virtually nothing) before beginning to rise sharply again in 1946–1947.
Yet when German tax records return in 1950, they show the income hierarchy already
beginning to resemble its appearance in 1938. In the absence of complete sources,
it is difficult to say more. The German case is further complicated by the fact that
the country’s boundaries changed several times during the twentieth century, most
recently with the reunification of 1990–1991, in addition to which full tax data are
published only every three years (rather than annually as in most other countries).

Let me turn now to the poor and emerging economies. The historical sources we need
in order to study the long-run dynamics of the wealth distribution there are unfortunately
harder to come by than in the rich countries. There are, however, a number of poor
and emerging economies for which it is possible to find long series of tax data useful
for making (rough) comparisons with our results for the more developed economies.
Shortly after Britain introduced a progressive income tax at home, it decided to do
the same in a number of its colonies. Thus an income tax fairly similar to that introduced
in Britain in 1909 was adopted in South Africa in 1913 and in India (including present-day
Pakistan) in 1922. Similarly, the Netherlands imposed an income tax on its Indonesian
colony in 1920. Several South American countries introduced an income tax between
the two world wars: Argentina, for example, did so in 1932. For these four countries—South
Africa, India, Indonesia, and Argentina—we have tax data going back, respectively,
to 1913, 1922, 1920, and 1932 and continuing (with gaps) to the present. The data
are similar to what we have for the rich countries and can be employed using similar
methods, in particular national income estimates for each country going back to the
turn of the twentieth century.

My estimates are indicated in
Figure 9.9
. Several points deserve to be emphasized. First, the most striking result is probably
that the upper centile’s share of national income in poor and emerging economies is
roughly the same as in the rich economies. During the most inegalitarian phases, especially
1910–1950, the top centile took around 20 percent of national income in all four countries:
15–18 percent in India and 22–25 percent in South Africa, Indonesia, and Argentina.
During more egalitarian phases (essentially 1950–1980), the top centile’s share fell
to between 6 and 12 percent (barely 5–6 percent in India, 8–9 percent in Indonesia
and Argentina, and 11–12 percent in South Africa). Thereafter, in the 1980s, the top
centile’s share rebounded, and today it stands at about 15 percent of national income
(12–13 percent in India and Indonesia and 16–18 percent in South Africa and Argentina).

Figure 9.9
also shows two countries for which the available tax records allow us only to study
how things have changed since the mid-1980s: China and Colombia.
²⁷
In China, the top centile’s share of national income rose rapidly over the past several
decades but starting from a fairly low (almost Scandinavian) level in the mid-1980s:
less than 5 percent of national income went to the top centile at that time, according
to the available sources. This is not very surprising for a Communist country with
a very compressed wage schedule and virtual absence of private capital. Chinese inequality
increased very rapidly following the liberalization of the economy in the 1980s and
accelerated growth in the period 1990–2000, but according to my estimates, the upper
centile’s share in 2000–2010 was 10–11 percent, less than in India or Indonesia (12–14
percent, roughly the same as Britain and Canada) and much lower than in South Africa
or Argentina (16–18 percent, approximately the same as the United States).

FIGURE 9.9.
   Income inequality in emerging countries, 1910–2010

Measured by the top percentile income share, income inequality rose in emerging countries
since the 1980s, but ranks below the US level in 2000–2010.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Colombia on the other hand is one of the most inegalitarian societies in the WTID:
the top centile’s share stood at about 20 percent of national income throughout the
period 1990–2010, with no clear trend (see
Figure 9.9
). This level of inequality is even higher than that attained by the United States
in 2000–2010, at least if capital gains are excluded; if they are included, the United
States was slightly ahead of Colombia over the past decade.

It is important, however, to be aware of the significant limitations of the data available
for measuring the dynamics of the income distribution in poor and emerging countries
and for comparing them with the rich countries. The orders of magnitude indicated
here are the best I was able to come up with given the available sources, but the
truth is that our knowledge remains meager. We have tax data for the entire twentieth
century for only a few emerging economies, and there are many gaps and breaks in the
data, often in the period 1950–1970, the era of independence (in Indonesia, for example).
Work is going forward to update the WTID with historical data from many other countries,
especially from among the former British and French colonies, in Indochina and Africa,
but data from the colonial era are often difficult to relate to contemporary tax records.
²⁸

Where tax records do exist, their interest is often reduced by the fact that the income
tax in less developed countries generally applies to only a small minority of the
population, so that one can estimate the upper centile’s share of total income but
not the upper decile’s. Where the data allow, as in South Africa for certain subperiods,
one finds that the highest observed levels for the top decile are on the order of
50–55 percent of national income—a level comparable to or slightly higher than the
highest levels of inequality observed in the wealthy countries, in Europe in 1900–1910
and in the United States in 2000–2010.

I have also noticed a certain deterioration of the tax data after 1990. This is due
in part to the arrival of computerized records, which in many cases led the tax authorities
to interrupt the publication of detailed statistics, which in earlier periods they
needed for their own purposes. This sometimes means, paradoxically, that sources have
deteriorated since the advent of the information age (we find the same thing happening
in the rich countries).
²⁹
Above all, the deterioration of the sources seems to be related to a certain disaffection
with the progressive income tax in general on the part of certain governments and
international organizations.
³⁰
A case in point is India, which ceased publishing detailed income tax data in the
early 2000s, even though such data had been published without interruption since 1922.
As a result, it is harder to study the evolution of top incomes in India since 2000
than over the course of the twentieth century.
³¹

This lack of information and democratic transparency is all the more regrettable in
that the question of the distribution of wealth and of the fruits of growth is at
least as urgent in the poor and emerging economies as in the rich ones. Note, too,
that the very high official growth figures for developing countries (especially India
and China) over the past few decades are based almost exclusively on production statistics.
If one tries to measure income growth by using household survey data, it is often
quite difficult to identify the reported rates of macroeconomic growth: Indian and
Chinese incomes are certainly increasing rapidly, but not as rapidly as one would
infer from official growth statistics. This paradox—sometimes referred to as the “black
hole” of growth—is obviously problematic. It may be due to the overestimation of growth
of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation
of income growth (household surveys have their own flaws), or most likely both. In
particular, the missing income may be explained by the possibility that a disproportionate
share of the growth in output has gone to the most highly remunerated individuals,
whose incomes are not always captured in the tax data.

In the case of India, it is possible to estimate (using tax return data) that the
increase in the upper centile’s share of national income explains between one-quarter
and one-third of the “black hole” of growth between 1990 and 2000.
³²
Given the deterioration of the tax data since 2000, it is impossible to do a proper
social decomposition of recent growth. In the case of China, official tax records
are even more rudimentary than in India. In the current state of research, the estimates
in
Figure 9.9
are the most reliable we have.
³³
It is nevertheless urgent that both countries publish more complete data—and other
countries should do so as well. If and when better data become available, we may discover
that inequality in India and China has increased more rapidly than we imagined.

In any case, the important point is that whatever flaws the tax authorities in poor
and emerging countries may exhibit, the tax data reveal much higher—and more realistic—top
income levels than do household surveys. For example, tax returns show that the top
centile’s share of national income in Colombia in 2000–2010 was more than 20 percent
(and almost 20 percent in Argentina). Actual inequality may be even greater. But the
fact that the highest incomes declared in household surveys in these same countries
are generally only 4 to 5 times as high as the average income (suggesting that no
one is really rich)—so that, if we were to trust the household survey, the top centile’s
share would be less than 5 percent—suggests that the survey data are not very credible.
Clearly, household surveys, which are often the only source used by international
organizations (in particular the World Bank) and governments for gauging inequality,
give a biased and misleadingly complacent view of the distribution of wealth. As long
as these official estimates of inequality fail to combine survey data with other data
systematically gleaned from tax records and other government sources, it will be impossible
to apportion macroeconomic growth properly among various social groups or among the
centiles and deciles of the income hierarchy. This is true, moreover, of wealthy countries
as well as poor and emerging ones.

Let me now return to the explosion of wage inequality in the United States (and to
a lesser extent Britain and Canada) after 1970. As noted, the theory of marginal productivity
and of the race between technology and education is not very convincing: the explosion
of compensation has been highly concentrated in the top centile (or even the top thousandth)
of the wage distribution and has affected some countries while sparing others (Japan
and continental Europe are thus far much less affected than the United States), even
though one would expect technological change to have altered the whole top end of
the skill distribution in a more continuous way and to have worked its effects in
all countries at a similar level of development. The fact that income inequality in
the United States in 2000–2010 attained a level higher than that observed in the poor
and emerging countries at various times in the past—for example, higher than in India
or South Africa in 1920–1930, 1960–1970, and 2000–2010—also casts doubt on any explanation
based solely on objective inequalities of productivity. Is it really the case that
inequality of individual skills and productivities is greater in the United States
today than in the half-illiterate India of the recent past (or even today) or in apartheid
(or postapartheid) South Africa? If that were the case, it would be bad news for US
educational institutions, which surely need to be improved and made more accessible
but probably do not deserve such extravagant blame.