Emmanuel Saez On Taxes And Inequality

This is more a conversation than an interview, and all the more interesting for it (excerpt; emphasis added):

Taxing Away Inequality
A Conversation with Emmanuel Saez

…DG: I’m prompted by your last point to suggest that another underappreciated feature of your work is that it delivers rather provocative hints about the causes of the increase in inequality. That is, it not only lays out the descriptive trajectory of income inequality, but also suggests what’s driving that descriptive trajectory. We participated in a Boston Review debate on one account of the sources of the recent takeoff, namely the expansion of rent, where rent is understood as sweetheart deals, corruption, backdating stock option contracts—all sorts of pay-setting practices that permit those at the top to secure more than they would in a competitive market. On the basis of your research, do you think that rent is an important source of the recent growth in income inequality?

ES: If we define rent in terms of situations where pay doesn’t correspond to what economists call ‘marginal productivity’—that is, the economic contribution a person is providing—I would say yes, because the evolution of income concentration over time and across countries has a number of features that are inconsistent with the story where pay is everywhere equal to productivity. The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes…

It’s a fairly long interview/conversation but basically looks at the pros and cons of using tax policy to address income inequality, specifically highly progressive income taxes.

At one stage, the top marginal income tax rate in the United States stood at 91%, and was above 70% from the end of WWII to the beginning of the Reagan era, when tax rates began a downward trajectory. The current top marginal income tax rate is a less mind-boggling 39.6%. Not surprisingly, income inequality was negatively correlated with the marginal income tax rate over the same periods.

I don’t know if we ever want to be that punitive, but low income tax rates definitely do have an impact in increasing income inequality, and by extension wealth inequality.

But do have a read – the interviewer’s a sociologist not a journalist, and it shows in the thoughtfulness of the questions and makes for an insightful (and very accessible) look at the issue.

(H/T: Mark Thoma)