Monday, July 11, 2016

The inequality debate summarized

There is considerable evidence that the two biggest contributors to widening inequality are the rising housing prices in cities and low capital gains tax rates.

A Demand Institute study documents the distribution of housing wealth and its increases in the US since 2000 among various income quintiles.   
As Mathew Rognlie has shown, housing has been the driving force behind the returns to capital induced inequality story. 

The other major contributor has been the low capital gains tax rate, a result of tax rate decreases in 1994 and 2004 in the US. Since they hold the major share of financial assets, most of the benefits have been concentrated among the richest 1%, even 0.1%.
This is a universal script, across developed and developing countries. The battle against inequality, at a policy level, will be won or lost in these two terrains. Capital gains has to be taxed at a much higher rate and cities have to go vertical.

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