Capitalists in the twenty-first century

Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using income tax data linking 11 million firms to their owners, this paper finds that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income|most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century

Optimal Taxation in Theory and Practice

We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.

Optimal Taxation in Theory and Practice

The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual policy.Economic

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR

In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to classrooms within their schools from kindergarten to third grade. This paper evaluates the long-term impacts of STAR by linking the experimental data to administrative records. We first demonstrate that kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. We then document four sets of experimental impacts. First, students in small classes are significantly more likely to attend college and exhibit improvements on other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Second, students who had a more experienced teacher in kindergarten have higher earnings. Third, an analysis of variance reveals significant classroom effects on earnings. Students who were randomly assigned to higher quality classrooms in grades K-3 – as measured by classmates' end-of-class test scores – have higher earnings, college attendance rates, and other outcomes. Finally, the effects of class quality fade out on test scores in later grades but gains in non-cognitive measures persist.

Is the Great Recession Really Over?

Many have argued that the Great Recession is over and that the U.S. labor market is back to where it would have been in the absence of the recession and the shocks that gave rise to it. By the end of 2015, the U.S. unemployment rate had returned to its 2007 level, below 5 percent. Yet the U. S. labor force participation rate and thus the U.S. employment rate (employment-population ratio) remained three percentage points below their 2007 levels. Only half or less of the decline is explained by demographic change. What caused the remaining decline in labor force participation? I attempt to address this question in a recent paper, “Is the Great Recession Really Over? Longitudinal Evidence of Enduring Employment Impacts”. Using micro-data on two million retail workers, I show that local variation in the employment impact of the Great Recession had enduring effects across local areas. Workers in areas that were severely hit in 2007-09 were less likely to be employed in 2014 than similar workers from less affected areas, regardless of where they lived in 2014. This enduring employment impact of a worker’s location at the onset of the Recession cannot be fully explained by nationwide skill-biased technical or trade changes

The Enduring Employment Impact of Your Great Recession Location

This paper asks whether Americans were jobless in 2014 because of where they were living in 2007. In the cross section, employment rates diverged across U.S. local areas 2007-2009 and—in contrast to history—have barely converged. This “great divergence” could reflect spatial differences in human capital, rather than causal location effects. I therefore use administrative data to compare two million workers with very similar pre2007 human capital: those who in 2006 earned the same amount from the same retail firm, at establishments located in different local areas. I find that conditional on 2006 firm-x-wages fixed effects, living in 2007 in a below-median 2007-2009-fluctuation area caused those workers to have a 1.3%-lower 2014 employment rate. Hence, U.S. local labor markets are limitedly integrated: location has caused long-term joblessness and exacerbated within-skill inequality. The enduring impact is not explained by enduringly high unemployment, more layoffs, more disability enrollment, or reduced migration. Instead, the employment outcomes of cross-area movers are consistent with severe fluctuation areas continuing to depress residents’ labor force participation. Impacts are correlated with housing busts but not manufacturing busts, possibly reconciling current experience with history. If recent trends continue, employment rates are estimated to remain diverged into the 2020s—adding up to over a relative lost decade for half the country. Employment models should allow market-wide shocks to cause persistent labor force exit, leaving employment depressed even after unemployment recovers