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Top Income Shares and Budget Deficits

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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  1. Stefanie Stantcheva & Emmanuel Saez & Thomas Piketty, 2012. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," 2012 Meeting Papers 78, Society for Economic Dynamics.
  2. Aizenman, Joshua & Jinjarak, Yothin, 2012. "Income inequality, tax base and sovereign spreads," Santa Cruz Department of Economics, Working Paper Series qt4fc5p36t, Department of Economics, UC Santa Cruz.
  3. Roine, Jesper & Vlachos, Jonas & Waldenström, Daniel, 2009. "The long-run determinants of inequality: What can we learn from top income data?," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 974-988, August.
  4. 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.
  5. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
  6. Anthony Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Post-Print halshs-00754557, HAL.
  7. Luiz de Mello & Erwin R. Tiongson, 2006. "Income Inequality and Redistributive Government Spending," Public Finance Review, , vol. 34(3), pages 282-305, May.
  8. 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.
  9. Woo, Jaejoon, 2003. "Economic, political, and institutional determinants of public deficits," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 387-426, March.
  10. Andrews, Daniel & Jencks, Christopher & Leigh, Andrew, 2009. "Do Rising Top Incomes Lift All Boats?," Scholarly Articles 4415903, Harvard Kennedy School of Government.
  11. 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.
  12. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  13. 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.
  14. Marina Azzimonti-Renzo & Eva de Francisco & Vincenzo Quadrini, 2012. "Financial globalization, inequality, and the raising of public debt," Working Papers 12-6, Federal Reserve Bank of Philadelphia.
  15. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  16. Jean-Paul Fitoussi & Francesco Saraceno, 2010. "Inequality and macroeconomic performance," Working Papers hal-01069429, HAL.
  17. 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.
  18. Woo, Jaejoon, 2003. "Social polarization, industrialization, and fiscal instability: theory and evidence," Journal of Development Economics, Elsevier, vol. 72(1), pages 223-252, October.
  19. International Monetary Fund, 2003. "Income Inequality and Redistributive Government Spending," IMF Working Papers 03/14, International Monetary Fund.
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