Class Notes: Harvard legacy preferences, wealth taxation, and more

This week in Class Notes:

• • Removing preferences for athletes and legacies would reduce the proportion of white students admitted to Harvard.
  • Wealth taxation has the potential to increase productivity while simultaneously reducing consumption inequality.
  • An increase in the minimum wage has little effect on the number of low-wage jobs.
  • Our top chart shows that poorer Americans are much less likely to survive into their 70s and 80s than wealthy Americans.
  • Four economists discuss the appropriate policy response to rising wealth inequality.
  • An occasional From the Archive section features an interview I did with CNBC on legacy preferences in college admissions.
  • Finally, check out Robert Collinson and Jens Ludwig’s new piece on the Department of Housing and Urban Development’s Moving to Opportunity (MTO) program and the implications of MTO findings for public policy. (Also, be sure to watch the footage from our recent Moving to Opportunity event.)

Legacy and athlete preferences at Harvard

Using publicly released reports from the lawsuit Students for Fair Admissions v. Harvard University, Arcidiacono et al. examine the preferences Harvard gives to ALDCs: recruited athletes, legacies, applicants on the dean’s interest list, and children of faculty and staff. Among white admits, over 43% are ALDC. Among African American, Asian American, and Hispanic admits, the share is less than 16% each. The authors show that roughly three quarters of white ALDC admits would have been rejected if they had been treated as white non-ALDCs. Removing preferences for athletes and legacies would therefore significantly alter the racial distribution of admitted students, with the share of white admits falling and all other groups rising or remaining unchanged.

Use it or lose it: Efficiency gains from wealth taxation

How does wealth taxation differ from capital income taxation? That is the question addressed by Guvenen et al. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which, according to the authors, shifts the tax burden toward unproductive entrepreneurs and raises the savings rate of productive ones. Looking at optimal taxation, Guvenen et al. find that the optimal wealth tax (OWT) is positive and yields large welfare gains, while the optimal capital income tax (OCIT) is negative—a subsidy—and delivers lower welfare gains than the wealth tax. The capital income tax is also shown to increase consumption inequality, whereas the wealth tax reduces it slightly. The authors conclude by demonstrating that individuals who are alive at the time of the policy change would, on average, incur large welfare losses if the new policy is an OCIT, but would experience large welfare gains if the new policy is an OWT.

The effect of minimum wages on low-wage jobs

Using data from 138 state-level minimum wage changes between 1979 and 2016, Cengiz et al. estimate the effect of minimum wages on low-wage jobs. They find no change in the number of low-wage jobs over the five years following an increase in the minimum wage. At the same time, the direct effect of the minimum wage on earnings was amplified by modest wage increases for other jobs paying slightly above the minimum wage. The authors find no evidence of greater unemployment at higher levels of minimum wages. However, they do find some evidence of reduced employment in tradeable sectors.

Top chart 

This week’s top chart shows that poorer Americans are much less likely to survive into their 70s and 80s than wealthy Americans. Over three quarters of the wealthiest 50-somethings in 1991 were still alive in 2014. Among the poorest 20 percent of that cohort, the survival rate was less than 50 percent.

Choice opinion

Four experts were asked by the American Enterprise Institute to respond to the following question:

Some economists estimate that the wealthiest 1 percent of Americans own 40 percent of the nation’s wealth — up from 25-30 percent in the 1980s. Should policymakers react to this apparent increase in inequality, and if so, how?

“Policymakers should take dedicated steps to fight the tides of increasing income inequality. The number one policy priority should be a massive investment in education and health so that more Americans can reach their economic potential and earn higher wages. This will require increased spending on, and evidence-based reforms to, educational institutions from early childhood through higher education. It will mean maintained spending on Medicaid and health services for children in particular. Policymakers should not spend billions on universal tuition benefits, but rather offer tuition support for those who need it and spend billions equipping all educational institutions to be universally of high quality” responds Melissa Kearney, Non-Resident Senior Fellow at Brookings, advisor to the Future of the Middle Class Initiative, and Neil Moskowitz Professor of Economics at the University of Maryland.

Kearney also contributed to my series in the Guardian on “Broken Capitalism”.

From the archive 

Here is an interview I did with CNBC in 2017 on the role of legacy preferences in the college admission process and the unfairness of this hereditary principle.

Self-promotion

In 1992, the U.S. Department of Housing and Urban Development partnered with five public-housing authorities to launch Moving to Opportunity ⁠— a 10-year fair-housing experiment to help low-income families find housing in low-poverty areas. They hoped to test what many people already suspected: different neighborhoods affect opportunity in different ways. In a new paper “Neighborhoods and Opportunity in America”, Robert Collinson and Jens Ludwig present new results from the Moving to Opportunity experiment, as well as the results’ implications for public policy.

If you prefer to watch and listen, see the footage from our September 19 event, which features Ludwig, Jeffrey Kling, Nathaniel Hendren, and others discussing what we’ve learned from Moving to Opportunity.