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Friday, December 9, 2016

A revealing new examination of the top 1 percent in a variety of countries brings into focus how the American government’s tax, union bargaining, inheritance and other rules widen the growing divide between those at the top and everyone else.

Four economists found that such wealthy and technologically advanced countries as Japan, France and Germany have seen growth at the top, but not the chasm of inequality created in recent decades in the U.S. and Britain.

That is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy.

The paper’s authors include Emmanuel Saez, the UC Berkeley economist who has won renown for his work examining more than a century of global data on top incomes. The lead author is Facundo Alvaredo of the Paris School of Economics.

The four authors looked at four big issues to see how they drive growing inequality:

—Do lower taxes on the already wealthy, which allow them to save more, make their fortunes snowball?

—Do current rules redistribute more wealth to executives and managers, perhaps at the expense of the companies they run?

—Does inherited wealth, which is on the rise in Europe as well as the United States because of tax rules that make it easier to pass fortunes to heirs, reinforce inequality?

—Does having income from work juice the growth of fortunes, because the savings can be reinvested rather than spent?

Cutting tax rates has become the signature issue for Republicans in Washington. Whatever economic issue arises, their answer is to lower tax rates, which they say will spur the economy.

What the authors find should raise questions about that mantra. They looked at tax rates and economic growth in advanced countries around the world:

If we look at the aggregate outcomes, we find no apparent correlation between cuts in top tax rates and growth rates in real per capita GDP. Countries that made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark.

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The authors begin with a point I have been making since before my book Perfectly Legal in 2003: Under current government rules, an ever-greater share of economic resources must flow to the top over time because those rules subtly redistribute upwards. As the authors put it in their paper:

There was a fall in the top 1 percent share in 2008‐2009, but a rebound in 2010. This would be consistent with the experience of the previous economic downturn: Top income shares fell in 2001‐2002, but quickly recovered and returned to the previous trend in 2003‐2007.

This trend is also seen in Britain, but not so much in countries that have higher tax rates on top incomes, rules that allow workers to bargain through unions, and other policies that America had in the New Deal era that ended with Reagan. As the authors write:

To us, the fact that high‐income countries with similar technological and productivity developments have gone through different patterns of income inequality at the very top supports the view that institutional and policy differences play a key role in these transformations. Purely technological stories based solely upon supply and demand of skills can hardly explain such diverging patterns.

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