Saturday, January 5, 2013

Gatsby Curve

Chris Hayes on the news this morning was talking about the Gatsby Curve and the relationship between income equality and social mobility and how that relates to a progressive tax system. He then went on tho say,

"If you look at the countries that are the most equal, the thing that makes them have reduced inequality isn't the progressivity of their tax system. What it is is taxes as a share of GDP. You line up the OECD countries on one side and you rank them by how equal they are. You line them up on the other side and you rank them by what share of GDP in taxes they pay. And what you see is if everyone is paying taxes, and everyone is sharing in universal benefits, you have more equality."

Well, I was curious about how this relates to GDP per capita. Is income equality correlated with GDP per capita? If more taxes go in as a percentage of GDP, and more taxes go out to the mutual and equal benefit of everyone, then everyone will get the benefits of more income equality, but will they also get the benefit of a higher income overall per capita?

This data seems to suggest, ... kind of.

http://visualizingeconomics.com/blog/2006/01/04/gdp-per-capital-vs-gini-index

The L-shape of the data seems to put countries into 2 groups -  Countries with Gini indices below 40 and countries with Gini indices above 40. The lower group (more income equality) have GDPs per capita that span the whole range. The upper group (less income equality) tend to have only low GDPs per capita.

The US seems to be an outlier in this, with less equality, but one of the highest GDPs per capita.

What's causing this?

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