Lunch Seminar on the Japanese Economy at the Maison Franco-Japonaise Income Inequality in Japan from Historical and Comparative Perspectives April 11, 2007 Chiaki Moriguchi Northwestern University & NBER Email: [email protected] Today's Talk Part 1. Income Inequality in Japan from Historical Perspectives – Is today's Japan "equal society"? – If so, since when? – How did it happen? New findings from Moriguchi and Saez (2006). Part 2. Income Inequality in Japan from Comparative Perspectives – Is Japan's historical experience unique? – What can other countries' experience tell us? Recent findings from high income studies in major OECD countries by Atkinson, Piketty, Saez et al. (2006). 2 Income Inequality in Japan: What We Know ♦ Japan widely perceived as "equal society." OECD income distribution studies – Sawyer (1976) – Atkinson et al. (1995) ♦ Is income inequality rising in Japan? – Tachibanaki (2001): "Equal society is a myth." – Ohtake (2005): "Increase in inequality due to demographic change, not due to structural change." 3 Income Inequality in OECD Countries in the late 1980s Table A: Income Before Tax & Transfers Table B: Income After Tax & Transfers Country Year Gini Coeficient Country Year Gini Coefficient Ireland 1987 0.461 U.S. 1986 0.347 Sweden 1987 0.439 Switzerland 1982 0.346 U.K. 1986 0.428 Ireland 1987 0.341 France 1984 0.417 U.K. 1986 0.323 U.S. 1986 0.411 Italy 1986 0.321 Switzerland 1982 0.407 France 1984 0.311 Germany 1984 0.395 Canada 1987 0.305 Finland 1987 0.379 Japan 1985 0.298 Canada 1987 0.374 Sweden 1987 0.281 Italy 1986 0.361 Germany 1984 0.277 Netherlands 1987 0.348 Netherlands 1987 0.266 Japan 1989 0.317 Belgium 1988 0.260 Belgium 1988 0.273 Finland 1987 0.255 Source: Nishizaki et al. (1998) Source: Kokumin Seikatsukyoku (1999), Chapter 3; Atkinson et al. (1996), Table 4-10. 4 Income Inequality in Japan, 1955-2005 0.55 EES/FIES PLCS1 0.50 PLCS2 IRS 0.45 Gini Coefficient HHS 0.40 0.35 0.30 0.25 0.20 1956 1962 1968 1974 1980 1986 1992 1998 2002 5 Income Inequality in Japan, 1890-2005 0.70 0.65 0.60 Gini Coefficient 0.55 EES/FIES PLCS1 PLCS2 HHS IRS WD/NIT 0.50 0.45 LESJ NIT/LIT 0.40 0.35 0.30 0.25 0.20 1890 1900 1910 1920 1925 1935 1940 1950 1959 1966 1971 1977 1983 1989 1995 2001 2003 6 Income Inequality in Japan, 1890-2005 0.70 0.65 0.60 Gini Coefficient 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 1890 1900 1910 1920 1925 1935 1940 1950 1959 1966 1971 1977 1983 1989 1995 2001 2003 7 What We Don't Know ♦ No data between 1940 and 1955. ♦ Pre-1940 data only for selected years. ♦ Can not compare the levels of pre-1940 series and post-1955 series due to data discontinuity. ♦ Japan became an "equal society" by 1970 — but how? ♦ Little knowledge on high income groups. 8 High Income Studies using Income Tax Statistics ♦ Pioneered by Piketty (2003) and Piketty & Saez (2003). ♦ Construct long-run, homogenous, and continuous top income shares series using income tax statistics. ♦ Precise data on the level and composition of the high-end of income distribution (not available in household surveys). ♦ Document the evolution of income concentration over many decades. ♦ Facilitate international comparison of the experience of major economies — France, U.K., U.S., Netherlands, Sweden, etc. 9 Studying Japan ♦ Comprehensive income tax system introduced in 1887. Cf: U.K. in 1908, France in 1910, U.S. in 1913. ♦ Income tax statistics published every year since 1887 to date. ♦ Because Japan's modern economic growth started circa 1886, the data span the entire process of industrialization. ♦ Investigate the relationships between economic growth and income inequality. 10 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 1895 1890 1885 Income in 2002 thousands of Yen 10,000 Real Income per Capita CPI 2002 10.00 1,000 1.00 0.10 100 Consumer Price Index (base 100 in 2002) Real Income per Capita in Japan, 1885-2002 100.00 0.01 11 Methodology ♦ Income before tax (wages & bonuses; business, farm & self-employed incomes; interest, dividends & rents, but exclude capital gains). ♦ Top income groups (10%, 1%, 0.1%, 0.01%) defined relative to total number of adults. ♦ Top 1% income share = incomes accrued to top 1% income earners / total personal income. Due to high level of income tax exemption before 1940, less than 5% of adults filed income tax returns in Japan. "Reported income" subject to tax evasion & avoidance. Due to numerous tax reforms and revisions, need careful adjustments to create homogenous series. 12 2002 1998 1994 Top 5-1% 1990 18% 1986 Top 1% 1982 20% 1978 1974 1970 1966 1962 1958 1954 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 1902 1898 1894 1890 1886 Income share Top 1% and Next 4% Income Shares in Japan, 1886-2002 22% 16% 14% 12% 10% 8% 6% 4% 13 2002 Bottom 0.5% 1998 7% 1994 Next 0.4% 1990 8% 1986 1982 1978 1974 9% 1970 1966 1962 1958 1954 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 1902 1898 1894 1890 1886 Income share Decomposition of Top 1% Income Share in Japan, 1886-2002 10% Top 0.1% 6% 5% 4% 3% 2% 1% 0% 14 2002 1998 1994 1990 1986 1982 8% 1978 9% 1974 1970 1966 1962 1958 1954 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 1902 1898 1894 1890 1886 Income share Top 0.1% Income Share with Capital Gains in Japan 10% Without Capital Gains With Capital Gains 7% 6% 5% 4% 3% 2% 1% 0% 15 2002 1998 1994 1990 1986 12% 1982 14% 1978 16% 1974 18% 1970 1966 1962 1958 1954 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 1902 1898 1894 1890 1886 Income Share Composition of Top 1% Income in Japan, 1886-2002 20% Employment Business Rents Interest Dividends 10% 8% 6% 4% 2% 0% 16 Top 0.01% vs. Top 1-0.5% Estate Sizes in Japan, 1905-2002 Top 0.01% estate Top 1-0.5% estate 10,000,000 100,000 1,000,000 10,000 100,000 1,000 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 100 1910 10,000 Top 1-0.5% Estate (in 2002 thousand yen) 1,000,000 1905 Top 0.01% Estate (in 2002 thousand yen) 100,000,000 17 Top Estate Compositions in Japan: 1935, 1950, and 1987 Estate Composition Year Agricultural Land Residential Land Houses & Structures Business Assets Stocks Fixed Claim Assets Other Assets 1935 1950 1987 22.5% 11.8% 20.6% 13.8% 15.1% 43.6% 8.4% 37.3% 3.7% 3.9% 13.5% 0.8% 25.9% 4.8% 10.2% 22.6% 12.1% 11.7% 2.9% 19.7% 9.5% 18 Historical Explanations (1): High Income Concentration in 1886-1938 ♦ Top 1% income group receiving 18% of total income in 1900-38. ♦ Top 0.1% income group receiving 8% of total income in 1900-38. ♦ Capital income component roughly 40% of top 1% income before 1938. Reasons (Yazawa 1992; Okazaki 2000): 1) Concentration of land ownership to “absentee landlords.” 2) Large shareholders receiving high dividends. 3) Large year-end bonuses paid to CEOs. 4) Primogeniture with low estate tax rates. 5) Low marginal income tax rates. 19 Historical Explanations (2): Income De-concentration during WWII ♦ Top 1% income share fell from 20% to 7% in 1938-45. ♦ Top 0.1% income share fell from 9% to 2% in 1938-45. ♦ Collapse of capital income component in top 1% income in 1938-45. ♦ Top 1% wage income share fell from 8% to 3% in 1935-44. Reasons (Nishida 2003; Okazaki 2000; Yazawa & Minami 1993) : – 1938 General Mobilization Act (regulation on land rents, dividends, wages and bonuses in 1939-45) – Increases in income tax rates in 1938-45. – Wartime inflation in 1938-45. – War destruction in 1944-45. 20 Historical Explanations (3): Impact of U.S. Occupational Reforms (1947-52) Reconsidered ♦ Occupational policies: Land reform in 1947-50, Zaibatsu dissolution in 1946-48, Property tax in 1946-51. with Hyperinflation in 1944-48. Considered to be major causes of income equalization (Minami 1995). Then why no impact on top income shares? Explanations: – Discontinuity in data? Tax reforms in 1940, 1947, 1950, but unlikely to produce large enough bias. – Occupational reforms largely continuation of wartime policies (Dore 1985; Gordon 1985; Okazaki 2000; Moriguchi 2000). – Played big role in (not income but) wealth redistribution. 21 Historical Explanations (4): Why Did Not Top Income Shares Recover after WWII? ♦ Top 1% income share remains stable at 8% in 1950-2002. ♦ Top 0.1% income shares remains at 2% in 1950-2002. ♦ Top 1% "wage income" share remains at 7% in 1970-2002. Reasons: Changes in institutional infrastructure after WWII: – Primogeniture abolished in 1947, – Progressive estate tax since 1950, – Progressive individual & corporate income tax since 1950, – Restrictive land and house lease laws since 1941, – Tax-exempted savings for the middle class since 1963, – Change in corporate governance (bank finance, cross shareholding), – Change in human resource management (enterprise unions, internal promotion, joint consultation). 22 2002 1998 1994 1990 1986 1982 1978 1974 1970 1966 1962 1958 1954 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 80% 1902 1898 1894 1890 1886 Marginal Tax Rate Marginal Income Tax Rates in Japan, 1886-2002 90% Highest Statutory MTR 70% Top 0.01% MTR Top 0.1% MTR 60% 50% 40% 30% 20% 10% 0% 23 Japan's Experience in Comparative Perspectives ♦ Top income shares series constructed by the similar methods: • France (Piketty 2003) • U.S. (Piketty and Saez 2003) • Canada (Saez and Veall 2005) • U.K. and Australia (Atkinson and Leigh 2004) • Netherlands (Atkinson and Salverda 2005) • Switzerland (Dell, Piketty, and Saez 2006) • Sweden (Roine and Waldenstrom 2006) • Japan (Moriguchi and Saez 2006) 24 2005 2000 1995 8% 1990 10% 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 Top 0.1% Income Share Top 0.1% Income Shares in France, U.K., and U.S., 1900-2005 12% Japan France UK US 6% 4% 2% 0% 25 2005 2000 1995 1990 1985 8% 1980 10% 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 Top 0.1% Income Share Top 0.1% Income Shares in Anglo-Saxon Countries, 1900-2005 12% Japan U.S. U.K. Canada Australia 6% 4% 2% 0% 26 Top 0.1% Income Shares in Netherlands, Sweden, and Switzerland, 1900-2005 12% Japan Netherlands Sweden 8% Switzerland 6% 4% 2% 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 0% 1900 Top 0.1% Income Share 10% 27 Is Japan's Experience Unique? ♦ In most OECD countries, income concentration was once extremely high, and then fell dramatically during 1910-1945. ♦ Decline in top income shares during WWII seen in all participating countries (including winners), but was most dramatic in Japan. ♦ Top income shares have increased sharply since 1980 in Anglo-Saxon countries (but remained low elsewhere). Rise in executive compensation in the U.S. considered to be major driving force. 28 Main Results & Conclusions ♦ Income concentration in Japan was high throughout the 1885-1938 period, then declined dramatically during WWII. ♦ Collapse of top capital income during WWII was the primary reason for the income de-concentration. Wage income concentration also fell sharply during WWII. ♦ Postwar institutional reforms made the one-time income de-concentration irreversible. Both capital income and wage income became much more equally distributed after WWII. ♦ Japan achieved two "economic miracles" under very different social, legal, and institutional settings. No clear relationships between income inequality and economic growth. ♦ The process of income de-concentration driven mainly by large historical shocks (wars, depressions) that destroyed wealth or triggered government intervention. Important policy implications for developing countries. 29
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