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Swimming in Money

Income inequality matters less than wealth inequality, so why is everyone still talking about taxing your salary?

For the first time in decades, economies around the world are having serious debates about inequality. The recent wave of opportunity created by globalization and technological change has reduced inequality between countries, but it has also increased inequality within many of them. This can have serious costs for society, so it's a shame that most of the debate is focused on the wrong kind of disparity.

Here's a little game. When I say the word "inequality," what sort of inequality do you think of? If you said "income inequality," you're like most people. Now ask yourself why you said that.

Income alone says very little about economic opportunities. Someone with a low income but enormous wealth may be much more powerful than someone with a high income who's heavily in debt. Consider, for example, a community of retired executives who live off their lifetime earnings while taking huge tax deductions. And then consider young lawyers and doctors receiving their first big paychecks after taking on years of student debt.

Income measures a flow, like the rate at which water goes through a faucet and into a bathtub. Filling the tub up quickly is great, of course, but anyone who has taken a bath knows that what matters is the water level. That's what economists call a stock. If income is the flow of money, then wealth is its stock.

The stock is what matters, because the flow is ephemeral. You never really hold on to income. Every dollar you earn instantly becomes part of your wealth, just like every drop of water that goes through the faucet adds to the water level in the bath. When you spend money, you decrease your wealth, just like letting water out through the drain. You drain your wealth by buying things and paying taxes; the rest is saving. Your income is just the change in your wealth before you decide what to do with it. (Debt is like having to fill someone else's bathtub instead of your own.)

If inequality is a problem, then it's probably because of the things people can do with their money rather than simple envy at the rate they are earning it. In fact, people who complain about inequality are almost certainly complaining about the differences in wealth that result from variation in incomes. They might not care about incomes at all if wealth inequality were somehow constrained.

But clearly, the stock and the flow are linked. So, in purely practical terms, which one should be the target for policy?

To answer this question, imagine two people using income to add to their wealth. One has $100,000 in wealth -- all the assets in their bathtub, from bank accounts to baseball-card collections -- earns $50,000 a year, and saves $10,000. The other has $1 million in wealth, earns $500,000 a year, and saves $100,000. The gaps in income and wealth are both a factor of 10.

Let's say the government is worried about inequality and decides to tax the second person's income at 50 percent. Putting behavioral effects aside, the gap in after-tax income has now been cut in half, accomplishing the government's goal. The second person will only save $50,000 each year instead of $100,000. But how much will this change the gap in wealth?

Without the tax, the second person will still have 10 times as much wealth as the first person at every point in time. With the tax, it will take a decade for this multiple to narrow from 10 to 7.5. In other words, even after 10 years, the tax will have only half as big an effect on the distribution of wealth as it had overnight on the distribution of income. Wealth responds less quickly than income because the stock, at least for the second person, is much bigger than the flow affecting it. In bathtub terms, there's so much more water in the second person's tub that even turning the tap way down makes little difference to the relative water levels between the two tubs.

What about further into the future? The gap in wealth will continue to close, but it will never be halved like the gap in incomes. This is just math; the gap for wealth always approaches a factor of 5 but never reaches it.

The point is that a huge change in the income-tax system -- and the distribution of income -- can take ages to affect the distribution of wealth to the same degree. By going after the flow, you make much smaller dents in the stock.

So why is everyone obsessed with the flow? I think there are three reasons that income inequality has stolen the spotlight from wealth inequality:

1. It's easier to get data on income. Most governments in advanced economies collect huge amounts of information on income: how much, what kind, and from where. Because income is usually paid out in cash, often through channels that can be traced electronically, it's fairly straightforward to track. Wealth is much more difficult to measure. For instance, you can't know exactly how much your house is worth until you sell it, and the value of your house is changing every day. Moreover, where income is objectively measurable in most cases, wealth can be a subjective assessment. But it's not an impossible one, as economist Thomas Piketty and others have shown. Governments charge property taxes based on notional values, and some (as in the United States) periodically collect data on financial assets as well. For securities traded in markets, like stocks and bonds, measurement is a snap. Income still wins among most economists, however, because it has been measured more consistently and for longer. Economists love long time series.

2. Income is easier to tax. What would happen if the government wanted to tax wealth? In some countries, it might be against the constitution. Even if it were legal, taxing wealth might be much harder in practice than taxing income. People's sources of income are usually fixed in place, so the government always knows where to find them; most folks can't force their employers or the companies they invest in to move overseas just to reduce their own personal income taxes. Wealth is another story. Faced with a new tax, the wealthiest people might simply pull up stakes and move their domiciles to lower-tax countries or try to put their savings in secret accounts abroad (though this is supposed to get harder eventually). Many would still be able to get their income from the same sources, but their wealth would have disappeared from the tax base.

3. Income is a less sensitive topic. People are used to seeing their income taxed. Income taxes in advanced economies go up and down with regularity, depending on deficits and the political wind. But wealth is something people take more personally; it's their retirement savings, or the inheritance they're going to leave to their children, or just the sum total of a lifetime of hard work. Asking how much wealth someone has can be a touchy subject, so much so that even members of Congress don't have to report exact figures. In addition, making the transition to a tax on wealth might feel unfair, since most wealth was already taxed when it was just a flow called income. And there's no label for the income tax with quite the same resonance as "the death tax" -- opponents' nickname for the estate and gift levy.

These are all legitimate concerns, but they also serve to distract attention from the main issue of wealth inequality. Income alone has no power. Only wealth opens the door to economic opportunity, and wealth inequality is even more acute. Until the inequality debate shifts from income to wealth, the underlying costs to society are unlikely to change.

The way to change the debate is through measurement and awareness. The U.S. Federal Reserve already collects some data on wealth through its Survey of Consumer Finances, which is being compiled this year. Municipalities have information on property values. Tracking wealth comprehensively would be a first step toward understanding how broad wealth inequality really is and bringing it further into the public eye. YouTube videos and commentaries have already started to do this, but a shift among the researchers and politicians who shape the debate is long overdue.

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COLUMN

No Difference a Year Makes

One year on from the NSA surveillance revelations, guess what: the world shrugged. People still, more or less, like America.

A country's brand is a valued commodity, especially when that nation is the world's largest economic and strategic power. And, despite the declinists, America's image remains strong in much of the world, according to a new Pew Research Center survey. Despite anger with Washington over U.S. spying on foreign leaders and foreign nationals, widespread opposition to U.S. drone strikes, disagreements about what to do in the Middle East, and other recurring tensions, majorities in 30 of 43 countries express a favorable opinion of the United States. And, 0verall, attitudes toward the United States are largely unchanged from 2013. This suggests that despite a perception at home that U.S. influence abroad is waning, there is little evidence of that erosion overseas.

For nearly a decade and a half, the U.S. global image has been on a roller-coaster ride. At the beginning of the century, America was seen favorably by majorities in most of the countries where comparable public opinion data are available. Over the next few years, however, the bottom fell out of U.S. approval numbers, thanks in part to opposition to the American invasion of Iraq. It rallied in some nations, even soaring by the end of the decade (thanks to the election of Barack Obama), at least in Europe and parts of Asia and Latin America. But after slipping a little bit again, Brand America has stabilized in 2014.

There is no evidence of any rise in anti-Americanism in most of Western Europe, which was home to great animosity toward Washington in the middle of the last decade. Half or more of the publics in six of seven European nations, including 78 percent of Italians, 75 percent of the French, and 73 percent of Poles, voice positive views of Uncle Sam.

Only in Germany, where U.S. favorability is down 13 points since 2009, has the image of the United States slipped significantly in Europe, likely the result of the U.S. National Security Agency's eavesdropping on German communications, including those of Chancellor Angela Merkel. Nevertheless, roughly half of Germans (51 percent) still see America in a sympathetic light.

Further to the east there's more love lost: Roughly seven in 10 (71 percent) Russians hold an unfavorable opinion of the United States. About half (51 percent) the Russian public expressed a positive view of Washington in 2013. Today, only 23 percent hold a favorable opinion, a drop of 28 percentage points. Russians' sentiments toward the United States have been up and down in the last few years (57 percent positive as recently as 2010), but the current numbers are not surprising given the growing Moscow-Washington tension over Crimea, Ukraine, and U.S. economic sanctions against some leading Russians.

Southern Europe also sees pockets of anti-American sentiment. More than six in 10 Greeks express a negative view of the United States (63 percent unfavorable versus 34 percent favorable). Greeks have been quite down on America the last three years, at a time of growing frustration over their economic situation.

In Asia, things are rosier; majorities in eight of 11 nations express a positive opinion of the United States. This includes roughly nine in 10 Filipinos (92 percent), eight in 10 South Koreans (82 percent), and three quarters of Bangladeshis (76 percent) and Vietnamese (76 percent). Even half of the Chinese surveyed give America a thumbs-up. Despite billions of dollars in foreign aid from Washington, the Pakistanis are strongly anti-American, with just 14 percent expressing a favorable assessment of the United States, compared with 59 percent unfavorable.

In eight of nine Latin American countries, majorities see the United States in a favorable light. Salvadorans (80 percent) are particularly positive in their assessment, as are Chileans (72 percent) and Nicaraguans (71 percent). Notably, despite all the tensions between Washington and Caracas in recent years, 62 percent of Venezuelans still have a favorable opinion of the United States.

But less than four in 10 Argentines (36 percent) are positively disposed toward Washington. This animosity is long-standing. In the seven surveys that the Pew Research Center has conducted in Argentina since 2002, never more than about four in 10 Argentines have expressed favorable sentiment toward the United States.

Africans voice particularly positive views about America. Strong majorities in all seven nations surveyed back the United States, including roughly three-quarters or more of Kenyans (80 percent), Ghanaians (77 percent), Tanzanians (75 percent), and Senegalese (74 percent).

The Middle East is the sole region where anti-Americanism is both deep and widespread. Eighty-five percent of Egyptians and Jordanians and 73 percent of Turks voice a negative opinion of the United States. Only 10 percent of Egyptians, 12 percent of Jordanians, and 19 percent of Turks have a favorable view. The Tunisians are divided: 42 percent positive, 47 percent negative. Israelis (84 percent) comprise the only public in the region that holds a favorable opinion of America.

Overall, the global public's view of the United States is largely unchanged from 2013. The median favorable assessment in 2014 is 62 percent, compared with 63 percent in 2013, in the 35 countries surveyed in both years.

Anti-Americanism is still alive and well in the Middle East and Russia. And German disappointment toward Washington is rising. But, for the most part, America's image abroad remains strong. Americans may think that the United States has less power and influence overseas than it did a decade ago, but most foreign publics don't agree.

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