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"INCOME EFFECT"
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Socio-Economic Inequality of Wellbeing: A Comparison of Switzerland and South Africa
The study seeks answers to the broader question on the income-wellbeing nexus through a seldom utilised technique of concentration index to measure income related wellbeing inequality. The analysis is undertaken in the vastly differing income and income inequality contexts of Switzerland and South Africa to contrast the relationships in different scenarios over a 10-year period. The study brings forth the findings that wellbeing is concentrated among the higher end of the income distribution in both countries but that the level of wellbeing concentration is lower in Switzerland as compared to South Africa. The Oaxaca–Blinder decomposition of the Erreygers-corrected concentration index indicates that the differences in the wellbeing concentration levels of the two countries are due to both the difference in the levels of income as well as the differences in the marginal utility of income in the two countries. Results indicate that South Africa’s pro-rich concentration of wellbeing would decrease substantially with Swiss endowments. On the other hand, income based concentration of wellbeing would increase in South Africa with Swiss coefficients. The differences in the coefficients of absolute and relative income, contribute more to the differences in wellbeing concentration in the two countries than the levels of these variables. This indicates that the level of income and relative income is important in understanding the impact of these variables on wellbeing inequality. Further, the decomposition analysis of the concentration index for each country to understand the relative importance of variables indicates that while relative income is a significant driver of wellbeing inequality in South Africa and Switzerland, its importance is lower than absolute income in determining the concentration of wellbeing.
Journal Article
Income-Induced Expenditure Switching
This paper shows that an income effect can drive expenditure switching between domestic and imported goods. We use a unique Latvian scanner-level dataset, covering the 2008–2009 crisis, to document several empirical findings. First, expenditure switching accounted for one-third of the fall in imports, and took place within narrowly defined product groups. Second, there was no corresponding within-group change in relative prices. Third, consumers substituted from expensive imports to cheaper domestic alternatives. These findings motivate us to estimate a model of nonhomothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices.
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The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit
Using an instrumental variables strategy, we estimate the causal effect of income on children's math and reading achievement. Our identification derives from the large, nonlinear changes in the Earned Income Tax Credit. The largest of these changes increased family income by as much as 20 percent, or approximately $2,100, between 1993 and 1997. Our baseline estimates imply that a $1,000 increase in income raises combined math and reading test scores by 6 percent of a standard deviation in the short run. Test gains are larger for children from disadvantaged families and robust to a variety of alternative specifications.
Journal Article
STRUCTURAL CHANGE AND THE KALDOR FACTS IN A GROWTH MODEL WITH RELATIVE PRICE EFFECTS AND NON-GORMAN PREFERENCES
U.S. data reveal three facts: (1) the share of goods in total expenditure declines at a constant rate over time, (2) the price of goods relative to services declines at a constant rate over time, and (3) poor households spend a larger fraction of their budget on goods than do rich households. I provide a macroeconomic model with non-Gorman preferences that rationalizes these facts, along with the aggregate Kaldor facts. The model is parsimonious and admits an analytical solution. Its functional form allows a decomposition of U.S. structural change into an income and substitution effect. Estimates from micro data show each of these effects to be of roughly equal importance.
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The underground economy in the U.S.A.: preliminary new evidence on the impact of income tax rates (and other factors) on aggregate tax evasion 1975-2008
This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of aggregate federal personal income tax evasion over the period 1975-2008, with a specific focus upon the impact of higher federal income tax rates on tax evasion. In this study, we use the most recent data available on aggregate personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI to reported AGI. Most other studies of federal income tax evasion for the U.S. do not use data this current. It is found that the impact of increases in the federal income tax rate on aggregate personal income tax evasion may, on balance, be ambiguous, possibly suggesting that the income effect is negative and outweighs the positive substitution effect for the representative taxpayer. It is also found that the degree of aggregate personal income tax evasion may be an increasing function of the percentage of federal personal income tax returns characterized by itemized deductions and a decreasing function of the Tax Reform Act of 1986 (during the first two years of implementation), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes, and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel. Finally, unpopular wars may provide a secondary benefit for and therefore act as an inducement for greater tax evasion.
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Evaluation of China’s Targeted Poverty Alleviation Policies: A Decomposition Analysis Based on the Poverty Reduction Effects
To achieve comprehensive poverty alleviation and the establishment of a “moderately prosperous society” in China, it is crucial to evaluate the targeted poverty alleviation (TPA) policies. In this study, China’s poverty alleviation statistics and the Foster-Greene-Thorbecke (FGT) indices are used to measure the poverty reduction effects of the TPA policies. A panel regression model is applied to analyze the poverty reduction mechanism while the Shapley index decomposition method is used to analyze poverty reduction effects in terms of income growth and the income gap adjustment. The paper concludes that the poverty breadth index (H index), poverty depth index (PG index), and poverty intensity index (SPG index) from 2013 to 2019 show a significant decline overall. This indicates that the poverty reduction effect of the TPA policies is significant. In addition, the regression analysis shows that the implementation of TPA policies can significantly increase the income level of residents and narrow the income gap among residents in rural areas. Results of the Shapley index decomposition analysis revealed that the income growth effect and income gap adjustment effect accounted for 92.78% and 7.22% of the poverty reduction effects, respectively. So the focus of future poverty alleviation work is to combine the rural revitalization strategy and to continue increasing the income level and the income growth rate of poor groups, which will enhance the ability of impoverished residents to increase their income, further contributing to the alleviation of poverty.
Journal Article
Income and Democracy
Existing studies establish a strong cross-country correlation between income and democracy but do not control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present instrumental-variables estimates that also show no causal effect of income on democracy. The cross-country correlation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years. This pattern is consistent with the idea that societies embarked on divergent political-economic development paths at certain critical junctures.
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Income, Democracy, and Leader Turnover
While some believe that economic development prompts democratization, others contend that both result from distant historical causes. Using the most comprehensive estimates of national income available, I show that development is associated with more democratic government—but mostly in the medium run (10 to 20 years). This is because higher income tends to induce breakthroughs to more democratic politics only after an incumbent dictator leaves office. And in the short run, faster economic growth increases the ruler's survival odds. Leader turnover appears to matter because of selection: In authoritarian states, reformist leaders tend to either democratize or lose power relatively quickly, so long-serving leaders are rarely reformers. Autocrats also become less activist after their first year in office. This logic helps explain why dictators, concerned only to prolong their rule, often inadvertently prepare their countries for jumps to democracy after they leave the scene.
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Money and Happiness: Rank of Income, Not Income, Affects Life Satisfaction
Does money buy happiness, or does happiness come indirectly from the higher rank in society that money brings? We tested a rank-income hypothesis, according to which people gain utility from the ranked position of their income within a comparison group. The rank hypothesis contrasts with traditional reference-income hypotheses, which suggest that utility from income depends on comparison to a social reference-group norm. We found that the ranked position of an individual's income predicts general life satisfaction, whereas absolute income and reference income have no effect. Furthermore, individuals weight upward comparisons more heavily than downward comparisons. According to the rank hypothesis, income and utility are not directly linked: Increasing an individual's income will increase his or her utility only if ranked position also increases and will necessarily reduce the utility of others who will lose rank.
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