What Makes The 1%

From last week’s round of NBER papers (abstract):

The Top 1 Percent in International and Historical Perspective
Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez

The top 1 percent income share has more than doubled in the United States over the last thirty years, drawing much public attention in recent years. While other English speaking countries have also experienced sharp increases in the top 1 percent income share, many high-income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as 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 twentieth century experienced in virtually all high-income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is indeed a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.

For me, this paper just confirms some of the stylised facts about income inequality – marginal tax rates are an important tool against income inequality; lower tax rates lead to a higher incentive to supress wage incomes (costs) in corporations; inherited wealth makes a mockery of “equal opportunity”; and the ability to invest in riskier but better returning assets increases wealth disparity.

I hardly need to add more to that.

Technical Notes:

Alvaredo, Facundo and Anthony B. Atkinson, Thomas Piketty & Emmanuel Saez, "The Top 1 Percent in International and Historical Perspective", NBER Working Paper No. 19075, May 2013