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Incomes & the very rich

This excellent video presented by Prof. Emmanuel Saez on US and other developed country income distribution trends for top incomes post-1913 is very worthwhile.  Nothing exceptionally new is provided but it is very objective and well presented.

 HT Greg Mankiw

 The talk runs for 40 minutes.  The article from which much of the presentation is based is Thomas Piketty & Emmanuel Saez (2003).  The website referred to is the World Top Income Database – it includes Australia and is worth poking around in.

The surge in top income shares experienced in the US and UK over recent years is not universal  – institutions have moderated such trends in France, Japan and Sweden.

Although the “working rich” have become an important component of the super rich (the group that earn huge salaries rather than capital income) increasing taxes on them will not force tax evasion efforts that will undo the significant revenue gains that can be enjoyed by governments.  There is some direct evidence that when taxes on the rich are very low they bid up their super-sized salaries.

Of course these income distribution findings are very significant for the work I am currently doing on happiness given that relative incomes matter so much. Not only does the distribution of income become less egalitarian given recent trends because of direct net happiness losses given the declining marginal utility of income but the mass of people who see their relative impoverishment increasing experience direct utility losses on this account alone.

1 comment to Incomes & the very rich

  • Jim Rose

    If the elasticity of taxable income reaches .92, the current US top rate is optimal under the Saez & Diamond’s JEP analysis. if the elasticity numbers move by not a lot, they have to advocate lower taxes for the super-rich. numbers always came back to bite you. never be specific.

    Keane’s JEL survey explains why elasticities of labour supply increases ten-fold if on-the-job human capital accumulation is accounted for properly.

    Diamond and Saez pass-over the optimal taxation of capital income being perhaps zero, or at least low, by referring to administrative issues at the capital-income boundary.

    Rawls was awake to the power of incentives and advocated progressive consumption taxes because these taxes taxed what people take out of the common store of goods rather than what he or she contributes. Also not addressed by Diamond and Saez.

    One criterion that Diamond and Saez put forward is a tax policy prescription needs to be implementable. To quote:

    “the tax policy needs to be socially acceptable and not too complex relative to the modelling of tax administration and individual responses to tax law.

    By socially acceptable, we do not mean to limit the choice to currently politically plausible policy options.

    Rather, we mean there should not be very strongly held normative views that make such policies seem implausible and inappropriate at pretty much all times.”

    Diamond and Saez misses Joe the plumber, the Reagan revolution, the politics of the modern Republican party, blue dog democrats and Clinton democrats too.

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