Extent of Inequality Significantly Overestimated // ZEW Study: Well-Known Estimate of Inequality after Taxes and Transfers in the US Relies on Questionable Assumption

ZEW Study: Well-Known Estimate of Inequality after Taxes and Transfers in the US Relies on Questionable Assumption

The extent of inequality is a frequent topic of academic and political debate. A recent ZEW Mannheim study shows that recently inequality after taxes and transfers in the US was overestimated.

The extent of inequality is a frequent topic of academic and political debate. A recent ZEW Mannheim study shows that a well-known study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman significantly overestimates inequality after taxes and transfers in the US. The three authors assume that many government transfers are distributed as unequally as monetary income. This assumption is not very plausible and, as the current ZEW study shows, is clearly refuted, at least for public spending on education.

In a cross-sectional perspective, public spending on education is roughly equal across income levels. If such an equal distribution is assumed for all government spending that cannot be directly allocated to individuals, then inequality after taxes and transfers is much lower than under the assumption of the Piketty study. For their study, the Mannheim researchers analysed data on more than three million US citizens.