International Differences in the Distribution of Income

TLDR: In this paper, the distribution of before-tax income among consumer units in ten other countries is compared with that of the United States, and an attempt is made to explain the differences that are observed.

Abstract: N this paper the distribution of before-tax income among consumer units in ten other countries is compared with that of the United States, and an attempt is made to explain the differences that are observed. The comparisons are made by selecting, from the relative wealth of American data, distributions that match those for other countries as closely as possible with respect to the strata of society covered, the concept of the incomereceiving unit, the definition of income, and general technique (e.g., whether tax returns or sample surveys or both were the basic source of information). The results are presented in a highly summarized form in Table i. The measures of inequality, the source materials, the way in which different bodies of data were matched, and the biases affecting particular comparisons are discussed in detail elsewhere.' Although we shall summarize some of the general sources of bias affecting the comparisons, our main attention in this paper will be devoted to the explanation of international differences in equality. While the comparisons in Table I still contain unknown margins of error, it seems likely that Denmark, Israel (Jewish population only), and the Netherlands have less inequality than the United States (with more certainty about Denmark than the others); Great Britain, Japan, and Canada about the same degree of inequality (with the first probably having a little less and the last a little more inequality than the United States); and Italy, Puerto Rico, Ceylon, and El Salvador more inequality than the United States (in most probable order of increasing inequality). The position of the last four countries tends to confirm the results of earlier comparisons indicating greater inequality in underdeveloped countries than in developed ones.2 Indeed, the remaining biases in the comparisons probably work in the direction of understating the relative equality in the distribution of income in the United States vis-a-vis the other countries, and, more generally, in the developed vis-a-vis the underdeveloped countries. Among the factors that tend to bias the comparisons so as to underestimate the extent to which the underdeveloped countries have less equality are (i) the frequent inclusion of non-money incomes in the data of developed countries and their exclusion in many distributions of the undeveloped countries, (2) the possibility that the lengthening of the accounting period beyond one year might reduce inequality more in the developed than in the underdeveloped countries, (3) the effect of old age pensions prevalent in the rich but not in the poor countries -in splitting off older individuals from units containing economically active persons and thus increasing the relative number of lowincome units in the rich countries, and (4) the likelihood that high incomes tend to escape measurement to a greater degree in underdeveloped countries which tend to have less efficient tax administration. The major factors working in the opposite direction are (i) the omission of incomes accruing mainly to high income units in the form of capital gains, expense accounts, and other tax-free forms, and (2) the existence of international differences in price structure of such a character that interclass differences in prices reduce the observed inequality in the distribution of money incomes more in poor than in rich countries. Considering the varied aspects of inequality measured by our five indexes, the results ' See Chapter VII of the author's Structure of Income, a forthcoming volume in the monograph series of the University of Pennsylvania's Wharton School Study of Consumer Expenditures, Incomes and Savings. The Study has been supported by a grant from the Ford Foundation. The author wishes to acknowledge helpful comments on an earlier version of this paper made by R. A. Easterlin, I. Friend, L. R. Klein, and S. Kuznets. Mr. Manoranjin Dutta did the statistical work. 2T. Morgan, "Distribution of Income in Ceylon, Puerto Rico, the United States and the United Kingdom," Economic Journal, LXIII (December I953), 82I-34; and S. Kuznets, "Regional Economic Trends and Levels of Living," F. M. Hauser, ed., Population and World Politics (Glencoe, Ill., I958), 79-II7.