There’s been any amount of attention been given to income inequality recently. The Economist‘s Free Exchange column last week had an article (based on IMF working papers) on ‘Inequality v growth’ that has got a lot of coverage, partly because of its conclusion that “Up to a point, redistributing income to fight inequality can lift growth”. It’s been picked up locally: Brian Fallow at the Herald can always be relied on to be up with the play, and has been again with his article today, ‘Playing politics with poverty hides truth’, with the (characteristically) evenhanded assessment that “Both the Left and Right are too quick to push ideas about inequality that don’t stand up to scrutiny”. And various local bloggers have also been on the case, including Anti-Dismal, Groping towards Bethlehem, and The Visible Hand in Economics.
I have to admit that income inequality in New Zealand is not anything I’ve looked at closely before, and I’d never consulted the Standardised World Income Inequality Database, or SWIID, created by Professor Frederick Solt at the University of Iowa, which has provided the basis of much of the recent analysis of links between inequality and other economic outcomes. You probably haven’t either, so I thought it might be useful to lay out the bare facts of what the data show. People can argue about causes and consequences afterwards.
Here’s just over 50 years (1960-2012) of income inequality in New Zealand, as summarised by the Gini coefficient, in two flavours – one based on market incomes, and one (arguably the more important one) based on net incomes after the impact of tax and transfers. As you’d expect, the post-tax, post-transfer level of inequality (green line) is less than the pre-tax pre-transfer level (red line) because of the progressive nature of the combined tax and transfer system.
You can see the trends for yourself. Eyeballing the thing, the only vaguely analytical comment I’d make is that the tax/transfer system didn’t seem to be very strongly redistributive up to the mid 1980s, though my memory of it was of very high marginal tax rates back then, but it obviously had a much larger redistributive impact in the 1990s. The SWIID database includes an estimated percentage reduction in market income inequality due to taxes and transfers: in the mid 1970s it was about 7-8% of the pre-tax inequality, but in the mid 1990s it was more like 18-20%.
Out of idle curiosity I wondered what had happened across the ditch, so here are the same two Kiwi Gini coefficients (still red and green), plus their Aussie equivalents (darker and lighter blue).