The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes

Abstract

The debate over the extent and causes of rising inequality of American incomes and wages has now raged for at least two decades. In this paper, we will make four arguments. First, the increase in the incomes and wages of the top 1 percent over the last three decades should be interpreted as driven largely by the creation and/or redistribution of economic rents, and not simply as the outcome of well-functioning competitive markets rewarding skills or productivity based on marginal differences. This rise in rents accruing to the top 1 percent could be the result of increased opportunities for rentshifting, increased incentives for rent-shifting, or a combination of both. Second, this rise in incomes at the very top has been the primary impediment to having growth in living standards for low- and moderate-income households approach the growth rate of economy-wide productivity. Third, because this rise in top incomes is largely driven by rents, there is the potential for checking (or even reversing) this rise through policy measures with little to no adverse impact on overall economic growth. Lastly, this analysis suggests two complementary approaches for policymakers wishing to reverse the rise in the top 1 percent's share of income: dismantling the institutional sources of their increased ability to channel rents their way and/or reducing the return to this rent-seeking by significantly increasing marginal rates of taxation on high incomes.

Skills, education, and the rise of earnings inequality among the “other 99 percent”

“…In the U.S. for example, approximately two-thirds of the overall rise of earnings dispersion between 1980 and 2005 is proximately accounted for by the rising returns to schooling-primarily the growing premium to postsecondary education. (1, 2) Second, while there is as yet little consensus among economists regarding the primary causes of the rise of very top incomes, (3)(4)(5)(6) an influential literature finds that the interplay between the supply and demand for skills provides substantial insight into why the skill premium has risen and fallen over time-and, specifically, why the earnings gap between college and high school graduates has more than doubled in the U.S. over the last three decades. A third reason for focusing on the skill premium is it offers broad insight into the evolution of inequality within a market economy, highlighting the social value of inequality alongside its potential social costs and illuminating the constructive role for public policy in maximizing the benefits and minimizing the costs of inequality.…”

Optimal Taxation, Inequality and Top Incomes

“…In the UK, for example, the Mirrlees Review of the income tax system 3 argued that the top tax rate should not be raised, and indeed went further in proposing that the "normal rate of return to saving" should be tax-exempt. 4 Since wealth in forms of assets other than home ownership and pension rights (taxation of which would be essentially left unchanged under the Review's proposals) is largely held by higher income households, 5 this should also be construed as advocating a reduction in the relative tax burden on top incomes. On the other hand the contributions by Piketty and Saez (2003), Piketty, Saez and Stantcheva (2011) and Piketty (2014) come to the conclusion that top tax rates should be signi…cantly increased, to reverse, at least in part, the recent trends.…”

Winner-Take-All Politics in Europe? European Inequality in Comparative Perspective

“…There is of course a vast literature on the forces determining the distribution of income in the advanced democracies which does a good job of identifying the institutions -such as corporatist labor market institutions 12 , coordinated skills training 13 and welfare provision 14 Financial sector growth in the UK and the US has been convincingly identified as a proximate cause of rising inequality and top income growth in particular 17 . But the changing role of finance in the advanced countries raises broader questions.…”