A key aspect of the rise in income inequality in the United States since the 1970s is the soaring incomes of the top 1%. Is this development unique to the U.S.?
Tony Atkinson, Andrew Leigh, Thomas Piketty, Emmanuel Saez, and others have used tax records to estimate the top 1%’s share of total income in a number of countries. Leigh has made a few adjustments to enhance comparability across the countries and posted the data on his website. He has a nice paper on the issue, which includes a version of the two charts shown below. (For more data and analysis see here, here, here, here, and here.) The data are for pretax incomes excluding capital gains.
It turns out that other English-speaking countries have experienced a similar trend:
Is this, then, simply the norm? No. In other affluent nations, the top 1%’s income share has increased only slightly or not at all during this period:
What accounts for these differing developments? We don’t know. Hypotheses abound, including differences in market competition, norms, labor power, government partisanship, tax systems, corporate governance practices, and demand for entertainment, athletic, and English-speaking executive talent. Because the data are relatively new, however, there has been limited systematic analysis as of yet.
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Simple explanation, the necessity of global institutional processes to accommodate increasing global integration. It is English that is the language of global institutions.
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.
Why did the top 1%’s share of total income fall in the US and the other English speaking (AS) countries during the 30s and 40s, stabilize in the 50s, 60s and 70s, and increase during the 80s and 90s? Why don’t we see the same peaks and valleys in other rich countries?
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?