Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data
AbstractThis paper presents summary statistics on the occupations of taxpayers in the top percentile of the national income distribution and fractiles thereof, as well as the patterns of real income growth between 1979 and 2005 for top earners in each occupation, based on information reported on U.S. individual income tax returns. The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. During 1979-2005 there was substantial heterogeneity in growth rates of income for top earners across occupations, and significant divergence in incomes within occupations among people in the top 1 percent. We consider the implications for various competing explanations for the substantial changes in income inequality that have occurred in the U.S. in recent times. We then use panel data on U.S. tax returns spanning the years 1987 through 2005, to estimate the elasticity of gross income with respect to net-of-tax share (that is, one minus the marginal tax rate). Information on occupation allows us to control for other influences on income in a flexible way using interactions among occupation, position in the income distribution, stock prices, housing prices, and the business cycle. We also allow for income shifting across years in response to anticipated tax changes, for the long-run effect of a tax reform to differ from the short-run effects, for heterogeneous mean-reversion across incomes, and for heterogeneous elasticities across income classes. In a specification that does all this, we estimate a significant elasticity of 0.7 among taxpayers in the top 0.1 percent of the income distribution. Outside of the top 0.1 percent of the income distribution, we find no conclusive evidence of a positive elasticity of income with respect to net-of-tax shares. We find that the estimate for the top 0.1 percent is not robust to controlling for a spline in lagged income that is very flexible at the upper reaches of the income distribution, suggesting that the method used to allow for income dynamics is very important. Allowing for income shifting across years in response to anticipated tax changes has important consequences for the estimates.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2010-22.
Length: 78 pages
Date of creation: Mar 2008
Date of revision: Jan 2012
Find related papers by JEL classification:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-HIS-2010-11-13 (Business, Economic & Financial History)
- NEP-MIG-2010-11-13 (Economics of Human Migration)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2000.
"Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools,"
NBER Working Papers
7831, National Bureau of Economic Research, Inc.
- Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
- Alberto Bisin & Giorgio Topa & Thierry Verdier, 2004. "Religious Intermarriage and Socialization in the United States," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 615-664, June.
- Bisin, Alberto & Patacchini, Eleonora & Verdier, Thierry & Zenou, Yves, 2010.
"Bend It Like Beckham: Ethnic Identity and Integration,"
IZA Discussion Papers
5234, Institute for the Study of Labor (IZA).
- Alberto Bisin & Eleonora Patacchini & Thierry Verdier & Yves Zenou, 2010. "Bend It Like Beckham: Ethnic Identity and Integration," CReAM Discussion Paper Series 1025, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
- Bisin, Alberto & Patacchini, Eleonora & Verdier, Thierry & Zenou, Yves, 2010. "Bend It Like Beckham: Ethnic Identity and Integration," CEPR Discussion Papers 8054, C.E.P.R. Discussion Papers.
- Alberto Bisin & Eleonora Patacchini & Thierry Verdier & Yves Zenou, 2010. "Bend It Like Beckham: Ethnic Identity and Integration," NBER Working Papers 16465, National Bureau of Economic Research, Inc.
- Margo, Robert A., 1999. "Regional Wage Gaps and the Settlement of the Midwest," Explorations in Economic History, Elsevier, vol. 36(2), pages 128-143, April.
- Jeremy Atack & Fred Bateman & Michael Haines & Robert A. Margo, 2009.
"Did Railroads Induce or Follow Economic Growth? Urbanization and Population Growth in the American Midwest, 1850-60,"
NBER Working Papers
14640, National Bureau of Economic Research, Inc.
- Jeremy Atack & Fred Bateman & Michael Haines & Robert A. Margo, 2009. "Did Railroads Induce Or Follow Economic Growth? Urbanization And Population Growth In The American Midwest, 1850-60," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-178, Boston University - Department of Economics.
- Galor, Oded & Zeira, Joseph, 1993.
"Income Distribution and Macroeconomics,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Maury Gittleman, & Brooks Pierce,, 2013. "Pay for Performance and Compensation Inequality: Evidence from the ECEC," Working Papers 465, U.S. Bureau of Labor Statistics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Sheppard).
If references are entirely missing, you can add them using this form.