In an excellent new paper posted on the National Bureau of Economic Research website today, Facundo Alvaredo, Anthony Atkinson, Thomas Piketty and Emmanuel Saez break down what it really means to be part of the top 1% of the income distribution.
The paper diagnoses the resurgence of the economic domination of the top 1% in certain parts of the industrialized world as the result of four different causes:
- The impact of tax policy, specifically cuts to the top rate.
- A "richer" view of the labor market, where cuts to the top tax rates lead management to increase their own compensation rather than growing enterprise employment.
- Inherited wealth making a comeback.
- The correlation between earned income and capital income.
The paper has a wealth of great charts that point out why some industrialized nations have a top 1% that dominates their economy and others don't. The share of income held by the 1% in the United States has a U-Shaped pattern, growing since its last peak in the late 1920s
This U-shaped pattern has held profoundly well in industrialized English-speaking nations as a whole:
This pattern has not held in continental Europe and Japan, though, as income share held by the top 1% has declined gradually:
One major force involved in this is the role of top-income tier taxation, which has an inverse-U pattern in nations with growing income disparity.
Most interesting of all is the correlation between the top marginal tax rate and the top 1% share of income. Countries that lower their top tax rates have a 1% that holds an increasing share of income:
Bottom line: Tax policy as it effects the rich is a very powerful force in determining how significant the 1% becomes in a given country.
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