Tuesday, July 30, 2013

The top 1 percent

Much has been written lately about the rise of the top one percent earners in the United States, yet it very little about why this rise has happened. Indeed, this rise in only partially visible elsewhere in the world, which may hint that factors that are not universal may play an important role, and thus there is potential for policy if you want to revert this rise.

Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez notice that the rise seems to be most pronounced in English-speaking countries, and they try to identify which factors could lead to such differences in the income share of the top one percent over time and space. They come to the conclusion that there are four factors in play: 1) Tax policy, and especially tax rates for top incomes. There is simply more left after taxes for top earners, but as the other factors show, the impact is larger than that. 2) Lower top tax rates lead to incentives that make it more worthwhile for the top earners to get a larger share of the surplus. This redistribution of the surplus would be consistent with the reduction in the labor income share and the stagnation of wages for large parts of the wage distribution. 3) Capital income is becoming independently more important, especially in Europe where inherited wealth makes a comeback. 4) The correlation between earned income (from labor) and capital income has increased a lot in the United States, widening the distribution of total income. Given all this, I find it difficult to imagine a model of optimal taxation that would not involve an increase in top marginal tax rates.

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