Asset bubbles in explaining top income shares

This paper considers the role of asset price bubbles (crashes) as an important determinant in seeking a further explanation for top income shares. The asset price bubbles caused at least in part by monetary policies, along with other determinants such as top tax rates and innovativeness are the important drivers to explain the surge in top income shares. The empirical results show that correlation between asset bubbles and top inequality is positive and significant. The regression coefficient of stock and housing market bubbles have a positive effect on top income shares, while the stock and housing market crashes fail to reduce the surge in top income shares. In sum, as the asset markets grow, the share of income going to those at the very top increases and the accumulation of income accelerates if the duration of bubbles expands. Concentration of income at the very top is much more important when capital gains are counted as income.

On the long-run dynamics of income and wealth inequality

We analyse top income and wealth shares data, by conducting a robust estimation of trends, tests for structural breaks, and tests for determining persistence. We include Anglo-Saxon countries, continental Europe and Asian countries, grouped under different percentiles and deciles, spanning a period that is at least close to a century. We find that the top income shares for almost all countries are characterised by broken trends, or level shifts. The preponderance of trend breaks appears in the 1970s and 1980s where after a negative trend changes in magnitude or direction. Finally, shocks to the top income share data are not transitory, which have consequences for policy such as advocating redistributive measures.

Top Income Shares and the Difficulties of Using Tax Data

This chapter reconsiders income methods of estimating of inequality using US tax data. It presents a new approach that accounts for the effects of important social changes, tax reforms, technical tax issues, and the 40 percent of income missing from tax returns. Results suggest much smaller increases in top 1 percent shares of pre-tax income. After accounting for taxes and transfers, top 1 percent shares changed little since 1962. This resulted from substantial increases in transfers and increased overall progressivity of the tax system. While effective tax rates for the top 1 percent show little trend, they declined for the bottom 50 percent. Rather than stagnating, per capita real incomes of the bottom half of the population increased over time. Rather than increasing and capturing most economic growth, incomes of those starting at the top decreased while those starting with low incomes received most of the growth.