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Top Income Shares and Budget Deficits

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During the last thirty years most OECD countries have accumulated large public debts. The same period has been characterized by a considerable increase in the concentration of income at the top of the distribution and by substantial cuts to taxation imposed on high incomes. The paper argues that the concentration of income at the top, along with the decreasing taxation imposed on top incomes, may have affected OECD countries' fiscal performances in recent decades. Using a panel of 17 OECD countries between 1975 and 2005, the paper presents the first reported evidence of a positive relationship between the top 1 percent income share and budget deficits. Moreover, the disaggregated analysis of the budget components suggests that such result is due to a negative relationship between concentration of income at the top and budget revenues.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 249.

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Length: 23 pages
Date of creation: 01 Aug 2012
Date of revision: 08 Aug 2013
Handle: RePEc:rtv:ceisrp:249

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: Budget Deficits; Budget Revenues; Income Inequality; Top Income Shares; Top Marginal Tax Rate;

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References

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  1. Joshua Aizenman & Yothin Jinjarak, 2012. "Income inequality, tax base and sovereign spreads," NBER Working Papers 18176, National Bureau of Economic Research, Inc.
  2. Azzimonti, Marina & de Francisco, Eva & Quadrini, Vincenzo, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
  3. Andrew Leigh & Alberto Posso, 2009. "Top Incomes And National Savings," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(1), pages 57-74, 03.
  4. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-71, February.
  5. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
  6. Dan Andrews & Christopher Jencks & Andrew Leigh, 2009. "Do Rising Top Incomes Lift All Boats?," CAMA Working Papers 2009-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
  8. Woo, Jaejoon, 2003. "Social polarization, industrialization, and fiscal instability: theory and evidence," Journal of Development Economics, Elsevier, vol. 72(1), pages 223-252, October.
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  10. International Monetary Fund, 2003. "Income Inequality and Redistributive Government Spending," IMF Working Papers 03/14, International Monetary Fund.
  11. Andrew Leigh, 2007. "How Closely Do Top Income Shares Track Other Measures of Inequality?," CEPR Discussion Papers 562, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  12. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  13. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
  14. Jean-Paul Fitoussi & Francesco Saraceno, 2010. "Inequality and macroeconomic performance," Sciences Po publications 2010-13, Sciences Po.
  15. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
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  17. Roine, Jesper & Vlachos, Jonas & Waldenström, Daniel, 2007. "The Long-run Determinants of Inequality: What Can We Learn from Top Income Data?," Working Paper Series 721, Research Institute of Industrial Economics, revised 30 Apr 2008.
  18. Woo, Jaejoon, 2003. "Economic, political, and institutional determinants of public deficits," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 387-426, March.
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Cited by:
  1. Bethencourt, Carlos & Kunze, Lars, 2013. "The political economics of redistribution, inequality and tax avoidance," MPRA Paper 51127, University Library of Munich, Germany.

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