Wednesday, August 14, 2013

Income shares and top tax rates since 1960: the strong correlation

This graph speaks a thousand words:

The trend evident here is probably no great surprise, and we've noted it before - but hard data is always worth remarking on.

Where is it from? Via @MilesCorak (via @alexcobham) we see this 2013 paper from the renowned group of Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez. The full paper is here. The authors conclude:
The rise in top income shares in the United States has been dramatic. In seeking explanations, however, it would be misleading to focus just on the doubling of the share of income going to the top 1 percent of the US distribution over the past 40 years. We also have to account for the fact that a number of high-income coun- tries have seen more modest or little increase in top shares. Hence, the explanation cannot rely solely on forces common to advanced countries, like the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twen- tieth century that characterize the countries discussed here.
And they cite four factors explaining the rise in top income shares:
  • tax policy: top tax rates have moved in the opposite direction from top pre-tax income shares
  • a richer view of the labor market, considering changes to bargaining power and greater individualisation of pay. "Tax cuts may have led managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment."
  • capital income. In Europe—but less so in the United States—private wealth (relative to national income) has followed a spectacular U-shaped path over time, and inherited wealth may be making a return, implying that "inheritance and capital income taxation will become again central policy tools for curbing inequality." TJN would support such moves, of course, and tax competition will be fighting hard, if more impersonally, in the opposite, wrong, direction.
  • a rising correlation between earned income and capital income, particularly in the United States.


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