The paper is by Bakija, Cole, and Heim, find it here.
There is much to say about this paper, but first of all the Kaplan and Rauh work, which I have cited several times, seems to offer incorrect estimates of the professions of the higher earners. Here is the authors' corrective chart:
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…
Better stock up on those cough drops.
For the pointer I thank Adam Looney.
shouldn't you have bolded this bit:
However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent…
Scream it from the rooftops? Really?
It's just the latest of 110 contradictory results about the income elasticity of top earners. Better data perhaps, but no particluar method of identification, no control for the possibility of shifting.
Don't scream it from the rooftops. Just file it next to the other 109.
If income at the top is so stock market dependent, how has it been so good in the past decade when the stock market has been flat? It's been up and down obviously, but it's not as high now as it was a decade ago.
If income in the top 1% contains a substantial amount of capital gains, and assuming that stocks across the market all go up, then I don't know how you can make any statement about the sensitivity of effort and income with any basis.
Furthermore, income, if it includes capital gains, may also be a lagged variable, in that the gains on sale of a stock are based on the acquisition of stock in prior years (and consequently effort in prior years), income is recognized in the year of sale, not the year of stock acquisition (the year of effort, not sale).
Um, doesn't "deadweight loss" imply that they are socially useful in the first place?
Since executive pay comes out of corporate profits any reduction in their incomes would increase profits and the loss to the government in income tax revenue would be balance by the increase in revenue from corporate taxes.
The increase in the pay for corporate executives from 5% to 10% of profits over the last few decades has had the same effect on share holder value as an increase in the corporate tax rate, so how can one be good for the economy and the other be bad.
Another point to be made on the income elasticity with respect to tax rates is that people sell their stock at the peak, or sell it when, say, capital gains rates were lowered. Stock received from prior years effort would be recorded as income in the year the stock was sold, which would probably be the years when capital gains rates were reduced.
Noah: Usually what they mean are that the effects of wealth redistribution disproportionately go towards the top of the income scale. IOW: It is no longer the case that an increase in the profit of your average corp means a commensurable increase in the wealth of the workers while at the same time, it virtually guarantees a commensurable increase in the wealth of the people placed higher in the company. It's a shorthand for a very deep critique of some of the problems inherent in a 'free market' system.
"…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]…."
Could it not equally imply that at higher rates of tax, the rich are more likely to disguise the income that they actually earn ?
You know what is also wrong with this post.
The top .1% have a higher composition of income from capital gains than those below it. Therefore, their marginal tax rate is lower than the rate of those below it because their compostion of income is different. Capital gains is taxed at a 15% rate.
And let me ask you another question, 20 years ago the top 0.1% made a fraction per hour what they make today; were they working far less hours? Were they working any less hours? I was at a top MBA school in the 90s, and there were stories of investment bankers, CEOs, and consultants typically working at virtually the human limit of endurance for those paltry wages they got then, so why do you think the vastly higher wages of today would make them work even a lot harder? It's virtually physically impossible for them to work any harder. And as it's well evidenced that at some point harder work is so debilitating and harsh it lowers quality of work, they might be producing less value anyway.
Of course, not that any of this matters if you don't care how much loss and suffering there is if it prevents even a micron less of economic freedom that hardly anyone would even notice. Yea, extreme libertarianism!
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If income at the top is so stock market dependent, how has it been so good in the past decade when the stock market has been flat? It's been up and down obviously, but it's not as high now as it was a decade ago.
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Perhaps the top .1% actively manage their accounts and outperform the simple 'buy and hold' scenario you assume.
And if they don't outperform, it might be difficult justifying their outsized compensation.
And maybe this nytimes headline exposes another avenue for income enhancement not available to the lower 99.9%:
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SEC Charges Kids' Apparel Exec With Cooking Books
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http://www.nytimes.com/aponline/2010/12/20/busine…
The recent income inequality is the result of wrong policy making. Our govt. need to make some amendments in them before putting them into practice.
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