Comparing income trends across countries | Macroeconomics | Khan Academy

The goal of this video is to understand how median per capita income after taxes has trended in the United States in comparison to some other countries over a 30-year period, and the 30-year period for this chart is from 1980 to 2010.

So, for example, in this first comparison, the United States is compared against Canada. You can see at the beginning of this time period the median per capita income after taxes in the United States was higher than that of Canada. But then, over the course of this 30-year period, it looks like they've gotten pretty close to each other. You could say that the rate of increase in Canada over that period has been higher for this group, and so that's what got them to parity.

In Norway, we're looking over that same time period again from 1980 to 2010, and we're seeing a similar story. There was actually a fairly large gap between the median per capita incomes after taxes between the two countries in 1980, and that gap has closed.

Now, on one level, you might say, "Hey, the rate of increase of median per capita income after taxes in Norway is greater," but on another level, you could say, "Well, even at the end point, someone making that median per capita income after taxes in the United States will still be better off." Even at the end of our time period, at 2010, we see that generally true for all of these countries. They all have steeper curves, so a higher rate of change, but the United States, on an absolute level, has stayed higher, although the gap has gotten smaller for most of these.

So you can interpret it either way, but it's probably leading to other questions. You might say, "All right, this is just for those folks in that 50th percentile, the people in the middle, the median per capita income. What about people at other points in the distribution?" What we just saw is for the median here, and you can see the U.S. curve in this burgundy type color.

Instead of showing the median over and over again over that time period, it just plots the other countries right over here. You can see that trend in Canada; at the beginning of the period, the median per capita income after taxes was lower than that in the United States, and then it closes the gaps. Then we can see the other countries: Norway, Netherlands, Britain, Sweden, so on and so forth.

This is useful because you can see even though the rate of improvement is deeper for these other countries, at least for the median, you’re still better off being in the United States. But the picture does change a little bit depending on which countries you look at and which extreme you look at. You can see that for that fifth percentile, there are countries like Germany where if you're in that fifth percentile, you were better off in 1980 and in 2010 relative to the United States. But the rate of improvement is actually similar, and I'm speaking in very rough terms to that of the United States.

Then you have countries like Ireland, where at the beginning of the period you would have been worse off if you were in the fifth percentile being in Ireland, and at the end of the period, it looks like you are slightly better off. Then we can see that trend for the 10th percentile, 20th percentile, so on and so forth, and the benefit of being in the United States over that time period and the improvement in inflation-adjusted after-tax income over time seems to be more dramatic in the United States as you get to the higher percentiles.

When you see this 95th percentile, the United States was already better off than everyone else in 1980, and the gap between those 95th percentiles has only increased. Now, there are several takeaways that you could have from this. One is that the rate of improvement in some of these other countries is steeper, but on the other hand, for example, if we look at Ireland or Spain, the rate of improvement is steeper, especially for some of the lower percentiles, but folks still have finished up at an absolute lower level. So, even in 2010, you'd be better off being in the United States.

Another question that some of you might be asking is why do you see this phenomenon in the United States, that the rate of growth in inflation-adjusted after-tax income over time seems to be highest for the upper-income folks in the United States? It could be because of tax policy. The U.S. does have, relative to many of these countries, a lower effective highest marginal tax rate.

So, for the people of the highest incomes, they're paying a lower percentage of their taxes than people in other countries, even though many of them might be paying a higher percentage relative to some of the other income brackets. You could also say that it might not be a fair comparison; the United States is a much larger economy than most of these countries. The only ones that come even close to the United States out of these would be Germany, but their economies are still less than one-fourth the size of the United States.

Now, there could be other dynamics at play that we talk about in other videos, but it's at least interesting to know what the data tells us.