Top incomes in historical and international perspective: Recent developments

Transcription

1 Top incomes in historical and international perspective: Recent developments Facundo Alvaredo EMod/Nuffield College & Conicet & Paris School of Economics Inequality in the and Europe Top Incomes, Poverty and Social Policy Amsterdam, September 26th 2013

2

3 1. Recent findings/updates 2. Some explanations a. Taxes and top shares b. Taxes and growth c. Richer models of pay determination d. Wealth and capital income e. The joint distribution of earnings and capital income Alvaredo, F., Atkinson, A. B., Piketty, T. and Saez, E. (2013). The top 1 percent in international and historical perspective, Journal of Economic Perspectives, 27(3). Atkinson (in progress), Alvaredo and Dedry (in progress), Alvaredo, Sandholt and Sharp (in progress), Piketty and Saez (2013), Piketty, Saez and Stantcheva (2013), Piketty and Zucman (2013), Mosberger (forthcoming), Atkinson et al. (forthcoming)

4 50% Top 10% Income Share 45% 40% 35% 30% Including capital gains Excluding capital gains 25% FIGURE 1 The Top Decile Income Share,

5 Share of total income accruing to each group 25% 20% 15% 10% 5% Top 1% (incomes above $394,000 in 2012) Top 5-1% (incomes between $161,000 and $394,000) Top 10-5% (incomes between $114,000 and $161,000) 0% FIGURE 2 Decomposing the Top Decile Income Share into 3 Groups,

6 Top 0.01% Income Share 6% 5% 4% 3% 2% Including capital gains Excluding capital gains 1% 0% FIGURE 3 The Top 0.01% Income Share,

7 Table 1. Real Income Growth by Groups Average Income Real Growth Top 1% Incomes Real Growth Bottom 99% Incomes Real Growth Fraction of total growth (or loss) captured by top 1% (1) (2) (3) (4) Full period % 86.1% 6.6% 68% Clinton Expansion % 98.7% 20.3% 45% 2001 Recession % -30.8% -6.5% 57% Bush Expansion % 61.8% 6.8% 65% Great Recession % -36.3% -11.6% 49% Recovery % 31.4% 0.4% 95%

8 25% 20% A. Top 1% income shares in English-speaking countries (U-shape) United States-including capital gains -including capital gains from 1972 United Kingdom-families United Kingdom-adults 15% 10% 5% 0%

9 25% 20% 15% B. Top 1% income shares in continental Europe and (L-shape) -including capital gains from including capital gains from including capital gains -update/revision 10% 5% 0%

10 6% 5% Income Share 4% 3% 2% 1% 0% Top 1-0.5% Top % Top 0.1% FIGURE 4 The top 1-0.5%, top %, and top 0.1% income share in, Sources: Alvaredo and Saez (2009, 2010, updates) and The World Top Incomes Database. Income includes realized capital gains

11 Top 0.1% income share and composition 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% K gains Capital Inc. Business Wages FIGURE 5 The top 0.1% income share and composition in,

12 Log Index 100 Stock Market Index K gains in top 1% FIGURE 6 Madrid Stock-Market Index and capital gains at the top,

13 Top 1% income share in Hungary (Mosberger forthcoming) )

14 2. Some explanations Tax policy A richer view of the labor market / richer models of pay determination Capital incomes, wealth and inheritance ( capital is back ) The little investigated correlation between earned income and capital income (the copula) Global forces

15 2.a Tax policy 100% Top Individual Income Marginal Tax Rates % 80% 70% 60% 50% 40% 30% 20% 10% 0% U.S. U.K Figure 1: Top Marginal Income Tax Rates in the,,, This figure, taken from Piketty, Saez, and Stantcheva (2011), depicts the top marginal individual income tax rate in the,,, since The tax rate includes only the top statutory individual income

16 Elasticity=.07 (.15) Top 1% Income Share (%) Top Marginal Tax Rate (%) A. Top 1% Share and Top Marginal Tax Rate in B. Top 1% Share and Top Marginal Tax Rate in

17 Elasticity= 1.90 (.43) Top 1% Income Share (%) Top Marginal Tax Rate (%) B. Top 1% Share and Top Marginal Tax Rate in Figure 2: Top Income Shares and Top Marginal Tax Rates: International Evidence The figure depicts the top 1% income shares and top income tax rates (including both central and local govern-

18 Change in Top 1% Income Share (points) Elasticity=.47 (.11) Change in Top Marginal Tax Rate (points) Figure 3: Changes in Top Income Shares and Top Marginal Tax Rates The figure depicts the change in top 1% income shares against the change in top income tax rate from to based on Figure 2 data for 18 OECD countries. The correlation between those changes is very strong. The figure reports the elasticity estimate of the OLS regression of log(top 1% share) on log(1-mtr) based

19 2.b Top tax rates and growth Countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as or GDP per capita real annual growth (%) Change in Top Marginal Tax Rate (points) A. Growth and Change in Top Marginal Tax Rate 4 B. Growth (adjusted for initial 1960 GDP)

20 Standard optimal top tax rate formula that maximizes revenue from taxpayers: τ = 1/(1+a e) e = elasticity of pre tax income wrt net-of-tax rate, a = Pareto coefficient τ as elasticity e : don t tax elastic tax base τ as inequality, i.e. as Pareto coefficient a With e=0.5 and a=1.5 (the current Pareto parameter of the income distribution), τ =1/( )=57 percent

21 2.c A richer view of the labor market / richer models of pay determination The optimal tax literature has remained rooted in an oversimplified model of pay determination. Changes in the pay of a worker are assumed to have no impact on either the other side of the labor market or on other workers. Models of job-matching: A match creates a positive surplus, and there is Nash bargaining; β going to the worker and (1 β ) to the employer. It is possible that what we have observed, at least at the top, is an increase in β: aggressive bargaining increases compensation of CEO at the expense of the bottom 99%.

22 Augmented formula: τ = (1+s a e)/(1+a e) e = elasticity of pre tax income wrt net-of-tax rate a = Pareto coefficient s = the fraction of the elasticity due to bargaining power Key point: τ as s With e=0.5 and a=1.5 (the current Pareto parameter of the income distribution), s=3/5, τ = 83 percent But cut top tax rates with no surge in shares

23 2.d Capital income, wealth, inheritance (Piketty and Zucman, 2013) Private wealth / national income ratios, (incl. ) 800% 700% A 600% 500% 400% 300% 200% 100% Authors' computations using country national accounts. Private wealth = non-financial assets + financial assets - financial liabilities (household & non-profit sectors)

24 Result 1: a gradual rise of wealth-income ratios over , from about % in 1970 to % in 2010 Result 2: today s ratios seem to be returning towards the high values observed in XIXth c. Europe ( %) - Economics: slowdown of productivity and pop growth Harrod-Domar-Solow: wealth-income ratio β = s/g If saving rate s=10% & growth rate g=3%, then β 300% But if s=10% & g=1.5%, then β 600% Explains long run change & level diff Europe vs Countries with low g and high s naturally have high β; high β is not bad per se (capital is useful); but high β raises new issues about capital regulation and taxation (net foreign positions, bubbles)

25 Figure 5 Annual Inheritance Flow as a Fraction of Disposable Income, % 36% 32% Economic flow (computed from national wealth mortality tables and observed age-wealth profiles) Fiscal flow (computed from observed bequest and gift tax data, including tax exempt assets) estimates, % 24% 20% 16% 12% 8% 4% 0% Source: Piketty (2011). Notes: The annual inheritance flow is defined as the total market value of all assets (tangible and financial assets, net of financial liabilities) transmitted at death or through inter vivos gifts. Disposable income was as high as percent of national income during the 19th century and early 20th century (when taxes and transfers were almost nonexistent), while it is now about 70 percent of national income.

26 2.e The little investigated correlation between earned income and capital income (the joint distribution) Decomposition of total personal income into two components: earned (labor) income and investment (capital) income. The personal distribution of total income depends on four elements: a) The shares of earned and investment income b) The marginal distribution of earned incomes; c) The marginal distribution of capital incomes; d) The correlation between earned and capital incomes. Mechanism (d) has received very little attention. Yet this is potentially important. There may no longer be a sharp distinction between workers and rentiers (capitalists). In the pure class model, the correlation between labor and capital income is minus 1. What is the current situation? (Based on ongoing work by Aaberge, Atkinson, Königs and Lakner)

27 Table 1 Relation between Top Labor Incomes and Top Capital Incomes in the United States Year A: Percent of top 1% capital incomes in various top labor income groups Labor income groups: Top 1% 17% 27% Top 5% 27% 45% Top 10% 32% 52% Top 20% 38% 61% B: Percent of top 1% labor incomes in various top capital income groups Capital income groups: Top 1% 17% 27% Top 5% 36% 50% Top 10% 47% 63% Top 20% 68% 80% 1) The joint distribution is asymmetric: those at the top of L distribution are more likely to be at the top of K distribution 2) There is a strong degree of association 3) The numbers are smaller in 1980: the degree of association has been increasing > The accumulation of wealth out of earned income: the opportunities may have changed in Anglosaxon countries < The effect of wealthy families on earnings It is necessary to investigate the cross-generation of all income, not just earnings.

28 2.f Global forces 140% 120% 100% 80% 60% 40% 20% 0% share of top 1% indexed at 1921=100 New Zealand South Africa FIGURE 9 Timepath of share of top 1% in,, New Zealand and South Africa indexed at 1921

29 Thank you