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.:
- 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," IZA Discussion Papers 5234, Institute for the Study of Labor (IZA).
- 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.
- 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.
- Galor, Oded & Zeira, Joseph, 1988.
"Income Distribution and Macroeconomics,"
51644, University Library of Munich, Germany, revised 01 Sep 1989.
- 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.
- 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.
- 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.
- 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.
- Tommaso Ciarli & Andre' Lorentz & Maria Savona & Marco Valente, 2012. "The role of technology, organisation, and demand in growth and income distribution," LEM Papers Series 2012/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Maury Gittleman, & Brooks Pierce,, 2013. "Pay for Performance and Compensation Inequality: Evidence from the ECEC," Working Papers 465, U.S. Bureau of Labor Statistics.
- Eric Weyl & Charles Nathanson & Ben Lockwood, 2013. "Taxation and the Allocation of Talent," 2013 Meeting Papers 56, Society for Economic Dynamics.
- Olivier Bargain & Mathias Dolls & Herwig Immervoll & Dirk Neumann & Andreas Peichl & Nico Pestel & Sebastian Siegloch, 2011.
"Tax policy and income inequality in the U.S., 1978—2009: A decomposition approach,"
215, ECINEQ, Society for the Study of Economic Inequality.
- Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2011. "Tax Policy and Income Inequality in the U.S., 1978-2009: A Decomposition Approach," IZA Discussion Papers 5910, Institute for the Study of Labor (IZA).
- Bagchi, Sutirtha & Svejnar, Jan, 2013. "Does Wealth Inequality Matter for Growth? The Effect of Billionaire Wealth, Income Distribution, and Poverty," IZA Discussion Papers 7733, Institute for the Study of Labor (IZA).
- Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2013. "Partisan Tax Policy and Income Inequality in the U.S., 1979-2007," IZA Discussion Papers 7190, Institute for the Study of Labor (IZA).
- Kennedy, Jessica A. & Kray, Laura J., 2012. "Who is Willing to Sacrifice Sacred Values for Money and Social Status? Gender Differences in Reactions to Taboo Trade-offs," Institute for Research on Labor and Employment, Working Paper Series qt0tv798kj, Institute of Industrial Relations, UC Berkeley.
- Jonathan A. Parker & Annette Vissing-Jorgensen, 2010.
"The Increase in Income Cyclicality of High-Income Households and Its Relation to the Rise in Top Income Shares,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 1-70.
- Jonathan A. Parker & Annette Vissing-Jorgensen, 2010. "The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares," NBER Working Papers 16577, National Bureau of Economic Research, Inc.
- Jeffrey Thompson, 2012. "Raising Revenue from High-Income Households: Should States Continue to Place the Lowest Tax Rates on Those with the Highest Incomes?," Published Studies revenue_peri_march5, Political Economy Research Institute, University of Massachusetts at Amherst.
- Peter Hoeller, 2012. "Less Income Inequality and More Growth – Are they Compatible? Part 4. Top Incomes," OECD Economics Department Working Papers 927, OECD Publishing.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Sheppard).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.