That we see this pattern clearly only when we use tax records to estimate the top 1%’s share of total income, and not when we look at consumption, or even changes in the distribution of total wealth, suggests a possibility that deserves a closer look: high marginal taxes greatly reduce reported incomes; the effect goes away when marginal tax rates are dramatically reduced (as they have been in the AS countries since 1980). That is, high marginal tax rates cause people with very high incomes to find ways to under “report” incomes to avoid or evade tax liabilities; they may even cause some people to earn less (Laffer effect). In other words, we are talking about reporting, not necessarily reality.

High marginal tax rates also discourage risky investments. So financial sweepstakes markets tend to gravitate to places with low marginal tax rates, as does participation in those sweepstakes markets. The upshot is that those markets come to play a much bigger role in economies with low marginal tax rates than with high ones. (One could test this hunch by looking at the covariance between GDP, government revenue, and relevant market indices – since this would be easy to do, I assume someone already has). In any case, I still find Tim Worstall’s explanation for fluctuations in the income shares of the top 1 percent in the Piketty-Saez calculations for the US plausible. Those guys are the lucky winners in the financial market sweepstakes (where the top 25 hedge fund managers report more income than the top 500 executives). If one scales the DJA by an index of nominal GDP, it tracks the peaks and valleys before the 1940s and after the 1970s very, very well, although not the 30-year period in the middle when marginal income tax rates were high in the US (>70%).

The bottom line is that these effects (top 1%) are largely driven by differences in tax systems. The corollary is that they may not matter very much. There is also the question of whether having financial sweepstakes markets play a major role in the economy is a good thing or not?

All mammals equilibriate toward a a smooth, Gaussian distribution of wealth, and humans are no different. As we globalize the herd, there is a completion theorem that implies the establishment of wealthy global institutions.

Under globalization, the wealth distribution should widen and flatten, pushing some institutions out to the right.