Organisation for Economic Co-operation and Development
Trends in Top Incomes &
Inequality, and their implications
for tax policy
LAC TAX POLICY FORUM
Panama City
17, 18, September 2010
Alan Carter, OECD
Centre for Tax Policy and Administration
Today’s presentation
 “Growing Unequal?”(2008) and ongoing OECD
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work underway on tax and inequality
What has happened to top incomes?
What has happened to inequality?
Explanations of trends in top incomes
The effects of top income taxes.
Other possible tax policy responses.
OECD’s Growing Unequal Study:
Income Distribution and Poverty in OECD
Countries
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Distribution of income over time and across countries
Measurement issues and impact of demographic and
household formation
Redistribution and cash transfers (Robin Hood vs the
Piggy Bank motive)
Measuring poverty and inflows and outflows
Intergenerational Mobility (e.g. via impact of assortative
mating)
Effect of publicly provided services (housing, health and
education)
Work underway in WP2 on tax and
inequality
A preliminary version of a paper has been prepared
that aims to:
 Provide the empirical background of changes in
high income shares and inequality.
 Examine explanations of these changes.
 Summarise the available evidence of the effects of
income taxes on reported incomes and revenue.
 Encourage delegates to provide further data and
national analysis
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How the analysis may be developed
 Examine possible tax policy responses in
more detail, such as:
• Taxation of capital gains, including ‘carried
interest’,
• Taxation of wealth, estates and inheritances,
• Further analysis of income tax changes.
 Provide more data analysis:
• More countries and years,
• The role of top incomes in overall inequality.
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What has happened to top incomes?
 Results are mainly based on tax data, excluding
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capital gains.
Results relate to pre-tax (market) incomes.
All countries for which data are available
experienced marked reductions in top 1% shares
in the first half of the last century.
Most have shown an increase in the top 1%
shares in the past 30 years, but the extent of
increase has varied widely.
Some more detail on recent changes
 Australia, Canada, Ireland, New Zealand, UK and
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US show the largest increases.
Denmark, Finland, France, Italy, Japan, Norway,
Portugal, Spain and Sweden show smaller
increases.
Germany shows no trend.
The Netherlands and Switzerland show a slight
continuing decline.
What about other shares?
For most countries, income concentration within the
high income groups has increased:
 Shares of the top 0.5%, 0.1%, 0.05% and 0.01%
increase by a greater proportion than the share of
the top 1%.
 Shares of the top 5% and 10%, increased by a
smaller proportion than the share of the top 1%.
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What categories of income increased the top
shares?
 For countries with available data, inclusion of
capital gains increased the share of top
incomes.
 For Canada, France, Italy, Japan, Spain and
US earnings were more important than
capital income.
 However, the reverse appears to be true in
Australia, Finland and Sweden.
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What has happened to inequality?
 Most countries with available data have
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experienced an increased in inequality of market
income in recent years.
But, the Netherlands had no overall trend,
Germany and Japan did experience an increase
despite no increase in the top earners share of
income
France experienced an overall reduction of
inequality in market income.
UK Data: Financial intermediation and high
incomes
Survey of Personal Incomes 2007-08: Taxpayers with top incomes by INDUSTRY
Agricultural, Hunting & Fishing
Mining and Quarrying
Manufacturing
Electricity, Gas and Water supply
Construction
Wholesale and retail trade
Hotel and Restaurants
Transport, Storage and Com m unication
Financial Interm ediation
Real estate, Renting and Business activities
Public adm inistration and Defence
Education
Health and Social w ork
Other com m unity services
Other Services
Extra-territorial organisation and bodies
Unclassified
Individuals w ith pension incom e 1
All
all taxpayers
(000s)
269
47
2,700
173
2,080
3,500
1,000
1,470
1,040
4,210
1,220
2,900
2,540
1,140
228
2
237
7,710
32,500
Source: Survey of Personal Incom es 2007-08
.. not available or sample size too small to produce a reliable estimate
Notes:
Table covers taxpayers only.
Top 10% etc. ranked by total income for income tax before deductions.
1. Individuals with any pension income (state or private pension).
col %
0.8
0.1
8.3
0.5
6.4
10.8
3.1
4.5
3.2
13.0
3.8
8.9
7.8
3.5
0.7
0.0
0.7
23.7
100.0
top 10%
(000s)
19
17
303
30
199
278
29
143
307
759
120
184
225
99
20
..
41
472
3,250
col %
0.6
0.5
9.3
0.9
6.1
8.6
0.9
4.4
9.5
23.4
3.7
5.7
6.9
3.0
0.6
..
1.2
14.6
100.0
top 5%
(000s)
11
10
134
11
79
140
14
66
202
424
33
52
128
50
12
..
25
234
1,620
col %
0.7
0.6
8.2
0.7
4.9
8.7
0.8
4.1
12.5
26.1
2.0
3.2
7.9
3.1
0.7
..
1.5
14.4
100.0
top 1%
(000s)
2
2
21
1
12
24
2
8
69
92
2
4
26
10
3
..
6
41
325
col %
0.7
0.6
6.4
0.3
3.6
7.4
0.7
2.3
21.2
28.5
0.7
1.3
8.1
3.0
0.8
1.9
12.5
100.0
top 0.5%
(000s)
1
1
9
0
5
11
1
3
42
49
1
1
7
6
1
..
4
20
162
col %
0.8
0.5
5.7
0.3
3.3
6.8
0.6
2.0
25.8
30.2
0.5
0.8
4.4
3.4
0.8
2.2
12.1
100.0
Explanations of recent trends in
top incomes
 Tax reductions, producing:
• A reduction in avoidance and evasion
• Increased work effort and entrepreneurship
• Increased ability to build wealth
 International trade and technical change:
• Increasing the demand for skilled labour
 Greater use of performance related pay
 Erosion of pay norms
 Increased income of ‘stars’
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The effects of top income taxes
 Elasticities of income with respect to (1-t):
• ‘Broad income’ = 0.12 (work effort effect)
• Taxable income = 0.4 (work and compliance)
• For high incomes = 0.57
• For low incomes = 0.18
 So, an increase in marginal tax rate from
50% to 51% would reduce broad income by
0.24% but taxable income by 0.48%.
 Tax revenue may not increase.
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Other possible tax policy responses (1)
Increase taxation of capital gains
 This is suggested by important contribution
of capital gains to the increased share of top
incomes.
 It would increase the taxation of ‘carried
interest’ and many forms of bonuses, which
could be regarded as labour income.
 It would raise problems with inflationary
gains and could harm venture capital.
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Other possible tax policy responses (2)
Increase use of taxes on wealth, estates and
inheritances:
 Goes against recent trends in OECD
countries.
 There are arguments that taxes on estates
and inheritances are not very distortionary
 It would be possible to improve the design
of net wealth taxes to reduce scope for
abuse.
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Other possible tax policy responses (3)
Some other possibilities:
 Increase taxation of real property.
 Reduce the differences between taxation of
capital and labour incomes.
 Remove special regimes to attract highincome workers.
 Improve cross-border enforcement of tax
laws.
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But ..Unintended Consequences?
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If the main source of increased income inequality at the top end
was mainly financial sector bonuses for “superstars” changes to
financial sector regulation and risk taking may result in reversal of
recent income trends absent of any significant tax policy change:
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Implication is future changes may have relatively larger impact on other
sectors and economic growth than current thinking allows for.
Greater tax and redistribution may lead to long term social
problems such as generations of workless households, and a
breakdown in traditional family structures incentivised by tax and
benefit structures
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Importance of OECD Making Work Pay Agenda
International Tax Dialogue
4th Global Conference on Tax and Inequality
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ITD conference late 2011 in Egypt to address this key
issue.
Detailed agenda still under discussion but an
opportunity for senior tax policy makers and
administrators to discuss further:
• The empirical evidence
• Possible tax responses and their overall desirability
• Opportunities for co-operation and learning from best practice
• Tax systems and their impact on state legitimacy and capability: