How Progressive is the U.S. Federal Tax System? A Historical and International Perspective

This paper provides estimates of federal tax rates by income groups in the United States since 1960, with special emphasis on very top income groups. We include individual and corporate income taxes, payroll taxes, and estate and gift taxes. The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. This dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income. The sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity. International comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity, both for time trends and for cross-country comparisons. The pattern for the United Kingdom is similar to the US pattern. France had less progressive taxes than the US or UK in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the US or the UK.

The Evolution of Top Incomes: A Historical and International Perspective

This paper summarizes the main findings of the recent studies that have constructed top income and wealth shares series over the century for a number of countries using tax statistics. Most countries experience a dramatic drop in top income shares in the first part of the century due to a precipitous drop in large wealth holdings during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries but not at all in continental Europe countries or Japan. This increase is due to an unprecedented surge in top wage incomes starting in the 1970s and accelerating in the 1990s. As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries. We discuss the proposed explanations and the main questions that remain open.

Income Inequality in the United States, 1913-1998 (series updated to 2000 available)

This paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the US using individual tax returns data. Top income and wages shares display a U-shaped pattern over the century. Our series suggest that the 'technical change' view of inequality dynamics cannot fully account for the observed facts. The large shocks that capital owners experienced during the Great Depression and World War II seem to have had a permanent effect: top capital incomes are still lower in the late 1990s than before World War I. A plausible explanation is that steep progressive taxation, by reducing drastically the rate of wealth accumulation at the top of the distribution, has prevented large fortunes to recover fully yet from these shocks. The evidence on wage inequality shows that top wage shares were flat before WWII and dropped precipitously during the war. Top wage shares have started recovering from this shock since the 1960s-1970s and are now higher than before WWII. We emphasize the role of social norms as a potential explanation for the pattern of wage shares. All the tables and figures have been updated to the year 2000, the are available in excel format in the data appendix of the paper.

Les métamorphoses du capital:Réflexions autour du Capital au XXIe siècle

Je voudrais tout d’abord résumer brièvement ce que j’ai essayé de faire dans ce travail. Il s’agit avant tout d’un livre sur l’histoire du capital et de la répartition des richesses, et des conflits suscités par cette inégale répartition. Mon principal objectif a été de rassembler, grâce au travail combiné d’une trentaine de chercheurs (notamment Anthony Atkinson, Emmanuel Saez, Gilles Postel-Vinay, Jean-Laurent Rosenthal, Facundo Alvaredo et Gabriel Zucman), des sources historiques portant sur l’évolution des patrimoines et des revenus dans plus de vingt pays depuis le 18e siècle. La première ambition de ce livre est de présenter ces matériaux historiques de façon cohérente (...)

A global progressive tax on individual net worth would offer the best solution to the world’s spiralling levels of inequality

The issue of inequality is one of the most salient in global politics. Thomas Piketty writes on the economic forces which have impacted upon inequality since the end of the First World War. He argues that with disparities in income and wealth rising substantially over recent decades, a global progressive tax on individual net worth would offer the best option for keeping inequality under control. He writes that although implementing such a tax would be a major challenge politically, it would be feasible if the EU and the United States, each accounting for around a quarter of world output, put their combined weight behind it

Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities

This paper presents a model of optimal labor income taxation where top incomes respond to marginal tax rates through three channels: (1) standard labor supply, (2) tax avoidance, (3) compensation bargaining. We derive the optimal top tax rate formula as a function of the three corresponding behavioral elasticities. The first elasticity (labor supply) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality across income forms. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate. We provide evidence using cross-country times series macro-evidence and CEO pay micro-evidence. The macro-evidence from 18 OECD countries shows that there is a strong negative correlation between top tax rates and top 1% income shares since 1960, implying that the overall elasticity is large. However, top income share increases have not translated into higher economic growth. US CEO pay evidence shows that pay for luck is quantitatively more important when top tax rates are low. International CEO pay evidence shows that CEO pay is strongly negatively correlated with top tax rates even controlling for rm characteristics and performance, and this correlation is stronger in firms with poor governance. These results are consistent with bargaining effects playing a role in the link between top incomes and top tax rates. If bargaining effects in fact exist, optimal tax rates should be higher than commonly assumed.

Imperfect Capital Markets and Persistence of Initial Wealth Inequalities

We consider an infinite-horizon inter-generational economy with identical agents differing only in their inherited wealth and with a constant-returns-to-scale technology using capital and labour (called "effort") and displaying a purely idiosyncratic risk. If effort is contractible, full insurance contracts make the production deterministic and initial wealth inequalities cannot persist (just as in a neoclassical growth model). But if effort is not contractible the ability to commit is an increasing function of initial wealth so that in equilibrium poorer agents face tougher credit rationing and take smaller projects (i.e. use less capital); although there is no poverty trap, the initial distribution may have long-run effects: there can be multiple long-run stationary distributions, and all are continuous and ergodic on the same interval, but have different equilibrium interest rates (and therefore different degrees of intergenerational mobility). This provides an explanation for wealth differentials within a country as well as between countries, and a basis for redistributive policies with long-run effects.Wealth distribution, credit rationing, multiplicity.

On the long-run evolution of inheritance: France 1820-2050

This paper attempts to document and account for the long run evolution of inheritance. We find that in a country like France the annual flow of inheritance was about 20%-25% of national income between 1820 and 1910, down to less than 5% in 1950, and back up to about 15% by 2010. A simple theoretical model of wealth accumulation, growth and inheritance can fully account for the observed U-shaped pattern and levels. Using this model, we find that under plausible assumptions the annual bequest flow might reach about 20%-25% of national income by 2050. This corresponds to a capitalized bequest share in total wealth accumulation well above 100%. Our findings illustrate the fact that when the growth rate g is small, and when the rate of return to private wealth r is permanently and substantially larger than the growth rate (say, r=4%-5% vs. g=1%-2%), which was the case in the 19th century and early 20th century and is likely to happen again in the 21st century, then past wealth and inheritance are bound to play a key role for aggregate wealth accumulation and the structure of lifetime inequality. Contrarily to a widely spread view, modern economic growth did not kill inheritance.inheritance ; bequest ; wealth ; capital

Inherited vs Self-Made Wealth: Theory and Evidence from a Rentier Society (Paris 1872-1937)

This paper divides the population into two groups: the "inheritors" or "rentiers" (whose wealth is smaller than the capitalized value of their inherited wealth, i.e. who consumed more than their labor income during their lifetime); and the "savers" or "self-made men" (whose wealth is larger than the capitalized value of their inherited wealth, i.e. who consumed less than their labor income). Applying this simple theoretical model to a unique micro data set on inheritance and matrimonial property regimes, we find that Paris in 1872-1937 looks like a prototype "rentier society". Rentiers made about 10% of the population of Parisians but owned 70% of aggregate wealth. Rentier societies thrive when the rate of return on private wealth ris permanently and substantially larger than the growth rate g (say, r=4%-5% vs g=1%-2%). This was the case in the 19th century and early 20th century and is likely to happen again in the 21st century. In such cases top successors, by consuming part of the return to their inherited wealth, can sustain living standards far beyond what labor income alone would permit.rentier society ;

Dualism and Macroeconomic Volatility

This paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent fluctuations in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Moreover, countercyclical fiscal policies have a role to play: in our model savings are underutilized in slumps because of the limited debt capacity of potential investors. Therefore, the government should issue public debt during recessions in order to absorb those idle savings and finance investment subsidies or tax cuts for investors.Economic