Tuesday, December 21, 2010

Income taxes and the super rich

Here is an important new paper I will be reading carefully along with my winter term tax policy students (AFTER they have finished studying for the IRS VITA certification exam I give the first day!):

Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from US Tax Return Data by Professor Jon Bakija (Williams College), Adam Cole (US Treasury Dept Office of Tax Policy), and Professor Bradley Heim (Indiana University.)

Lots of interesting information about where the big earners have been earning most of their money in recent decades--short answer: the financial industry. It's important to note that this was not always true. The financial industry was not very lucrative (or all that respectable, for that matter) in the 1970s. Also some interesting information about behavioral elasticities of the super-rich.

Check out the colorful commentary from George Mason University economist Tyler Cowen here:

Here is a summary of their broader results:

Our findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005. We also demonstrate significant heterogeneity in income growth across and within occupations among people in the top percentile of the income distribution, suggesting that factors that changed in the same way over time for all high income people are probably not the main cause of increasing inequality at the top. The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1 percent of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence suggests that financial market asset prices, corporate governance, entrepreneurship, and income shifting across corporate and personal tax bases may be especially important in explaining the dramatic rise in top income shares.

I would reword this as a) "it's complicated," and b) "a lot of them made the money in capital markets." It does remain the case that top incomes in finance rose by far most rapidly.

In this very careful and rigorous paper, here is a "scream it from the rooftops" result:

...we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent...

Check out as well the response to Professor Cowen's commentary by journalist Kevin Drum in Deadweight Losses of the SuperRich.

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