Putting the magnifying glass on the 1%

NEW YORK —

Academics can be dismissive of the concerns of the popular media. But when it comes to the growth of the super-rich, the tabloids may have gotten it right.

The numbers tell the story. According to a study by John Van Reenen of the London School of Economics and Brian Bell of Oxford University, the share of national income earned by the top 1% in the United States surged to 18.3% in 2007, from 8% in 1979. In Britain, the trend was almost identical: The top 1% received 15.4% of the national income in 2007 compared with 5.9% in 1979. And these figures exclude capital gains.

“A lot of the action has been at the very top end of the distribution, the top 1% or the top 0.1%,” Van Reenen, director of the Center for Economic Performance at the LSE, told me. “It shows you that the media’s focus on the very rich and on bankers’ bonuses wasn’t misplaced.”

But while much of the shift in income distribution has been at the apex of the pyramid, that is not where most academic research on rising income inequality has been focused. If anything, Van Reenen said, academics “have tended to focus on the bottom of the distribution, much more than the top.”

Van Reenen and some like-minded colleagues have been working to fill that gap. Their efforts made it to the economic major leagues in January when Van Reenen convened a panel discussion on extreme wage inequality at the prestigious annual get-together of the American Economic Association.

One of the most striking findings will probably give comfort to the plutocrats: In contrast to previous generations, the super-rich today tend to have earned their fortunes rather than inherited them.

Steven Kaplan of the University of Chicago and Joshua Rauh of Stanford University in California studied Forbes magazine’s annual list of the 400 richest Americans. They found that in 1982 just 40% of these plutocrats had built their own businesses. By 2011, the super-rich had gotten much richer - the combined wealth of the Forbes 400 was $92 billion in 1982 and had surged to $1.53 trillion by 2011 - and many more of them had, as the meme of the 2012 U.S. presidential election campaign had it, built it themselves: 69%.

“This isn’t the ‘Downton Abbey’ rentier class,” explained Van Reenen, who has found a similar trend in Britain. “These incomes come from the labor market. You can say it is a triumph of the human capitalists over the physical capitalists.”

Among economists who study the surge in pay at the top, it is pretty much a truth universally acknowledged that taxes should rise at the summit, too. “Economics would suggest that when you have big increases in inequality, the top tax rate should rise,” Van Reenen said. “That seems very right and very reasonable.”

The impact and the structure of higher taxes for the rich are a more complicated and controversial issue. Timothy Besley and Maitreesh Ghatak, both of the London School of Economics, make a robust case for higher taxes on bankers’ bonuses. Their work is theoretical, but beyond the campus green what may be particularly interesting is the way they frame the wider debate.

“Little undermines the case for a market economy more than the perception that there is injustice in the rewards that it generates,” they argue in a recent paper. “The greatest clamor for reform should come from those who support the market system.”

“We have shown that some form of bonus taxation in the financial sector is optimal above and beyond standard progressive income taxation,” they conclude. “We have identified a form of taxation that we believe makes the market system both fairer and more efficient.”

This robustly pro-market rationale for higher taxes on bankers, who like to think of themselves as the very embodiment of capitalism, is eye-catching, particularly for anyone who spends much time in the United States where higher taxes and more efficient markets are usually portrayed as being anathema to one another.

Emmanuel Saez, an economist at the University of California, Berkeley, who is one of the pioneering students of incomes at the very top, has offered an even more provocative suggestion. At the American Economic Association meeting, he argued that when tax rates at the top are low, “top earners extract more pay at the expense of the 99%.” Higher tax rates for the rich, he suggested, “reduce the pretax income gap without hurting economic growth.”

This is a truly radical idea: that higher taxes at the top can reduce pretax inequality and not weaken the economy as a whole.

Outside the seminar room, however, these elegant ideas may run into political opposition intensified by the trends within the 1% that these same economists have documented.

“It may have a political effect,” Van Reenen said of the shift from inherited fortunes to self-made ones. “You feel you’ve earned it. This does make people more strongly inclined to resist taxation.”

(c) Copyright Thomson Reuters 2013.

Author Infomation

Chrystia Freeland
Chrystia Freeland
  • -10

    takachan

    a flat tax is the only fair tax. period

  • -7

    gaijinfo

    Redistributiion of wealth is wrong on many levels.

    1) If you taxed all the 1% at 100% tax rates it wouldn't come close to paying for everything.

    2) Historical data shows that regardless of tax rates, tax revenues don't change much

    3) Rich people got rich by being smart, not by being lucky. Smart people know how to avoid taxes.

    4) The purpose of taxes is not to promote "income equality." It's to generate government revenue.

    5) If you're broke, raising taxes on the rich won't fix that. You'll still be broke.

    6) Any schemes based on transfers of wealth from rich to poor will only last so long.

    7) For all the reasons above, ALL democracies are ultimately doomed to failure and economic collapse.

  • 10

    tkoind2

    The factor that most people overlook is that the super rich only get there by exploiting everyone else. From the janitor at their office building right up to the top paid ordinary workers. It is really quite simple how they do so.

    1. Downsizing and Work Consolidation: Reducing the number of employees by consolidating multiple jobs in one has been a huge means of reducing cost and upping profits that end up in the hands of the rich. Joe worker has to do the job of 2-3 or more people today. Support staff, assistants, teams are vanishing in corporations and many other companies while one worker is expected to do more and more.

    2. Flat or Declining Income: While the rich and major shareholders get wealthy, most working people are seeing income flatten or even decline. That loss goes somewhere, most often into someone else's pocket.

    3. Taxes and Paying A Fair Share: There is this notion that not taxing the rich will result in jobs. This is obviously utter nonsense. Reagan's trickle down was dismissed as nonsense, yet here that idea is again in this current political generation. The wealthy should carry a greater social burden as their wealth is entirely dependent upon their ability to exploit society for profit. Taxing them more heavily should be their way of repaying society for their wealth.

    4. Eat the Rich: I continue to think that the punks were on to something here. If the rich think that we will rise up and eat them, they are more likely to do right by society. I don't mean eat them literally, but if they feel that society will not allow them to become more wealthy while workers become unemployed and poor without our rising up and putting an end to their wealth, they are likely to make better decisions about society. If they don't, well... we can still eat them.

    Bottom line, concentration of wealth is bad for society. Distribution of wealth is good. 5mil workers with incomes do the world economy better than 1 rich person with millions. Even the conservative economists know this, even if they refuse to admit it. If the rich want to be stable and safe, they need to create middle class jobs that allow consumption and allow society to thrive. The alternative is to sow the seeds of future revolution by ending the middle class and concentrating wealth.

    Seems like a no brainer doesn't it? Distribution of wealth is the only safe answer for our future. Whether that is voluntary or forced, it will happen one day. So let's share the wealth and help the world remain stable.

  • 7

    tkoind2

    Takachan a flat tax is another failed idea. It does not resolve the issues of working people and actually harms the poor. A flat Tax in Japan, for example would seriously harm the lower 30% of households and likely lead to greater social issues.

    It has been an American right wing notion for generations and dismissed as a simply wrong solution.

    The problem is wealth accumulation and lack of middle class incomes. Flat taxes do not address the root issue.

    "3) Rich people got rich by being smart, not by being lucky. Smart people know how to avoid taxes."

    Just plain wrong. It is an American fantasy that somehow the rich are all so smart. When in fact it is opportunity and pre-existing wealth that usually leads to more wealth. Very few people go rags to riches. Most people go semi riches to super riches. Why? Access to the right schools, right social circles, right pre-existing opportunities, right everything that the normal equally smart poor person cannot leverage to gain wealth.

    There are number for number far more very bright people out there who are not rich, than who are. Opportunity is the thing that most often separates them. Not how smart they are.

    "7) For all the reasons above, ALL democracies are ultimately doomed to failure and economic collapse."

    Wrong again here. Where is your historical evidence? You don't have any do you?" Show me your list of failed democracies because of economic collapse." You can't can you? Because this is a nonsense assertion. There have not been enough long term democratic state history to make this conclusion.

    Equally so, there has not been an example of where these states can evolve yet. We just don't know where democracy can lead yet, but I predict that it will evolve towards greater balance.

    The alternative is that we go backwards to feudal systems again. Now while this seems to be the trend, modern people are far more likely to fight to keep democracy alive. Again it is some kind of right wing fantasy that the world will collapse into chaos or the rule of some epic tyranny. You deeply fail to understand the power of people to fight back. There just has not been enough wrong done yet to see that happen. But trust me, when things are bad enough, there will be a movement to keep democratic life alive.

  • 8

    Frungy

    This entire nonsense is based on a false idea, namely that top managers earn their huge salaries. There have been numerous studies showing that fortune 500 CEOs make the right decision less than 50% of the time, and that they possess no special skills or talents that make them worth those salaries, nor do they work harder than anyone else (in fact frequently they barely work at all).

    The old pay scales were based on the assumption that higher up the totem pole meant more responsibility, more work, and more risk of getting fire if anything went wrong anywhere beneath you on the totem pole. These days that simply isn't true above the level of middle management. If a CEO makes a disasterous decision then he hires a media consultant to spin the disaster to the stockholders, fires a couple of middle managers as scapegoats and continues on his way. Even when they are fired they receive massive "golden parachutes" to offset any loss, so there is no increased risk.

    The problem is that CEOs often serve on other boards of directors, creating an incestuous circle where they vote their fellow CEOs higher salaries in return for voting themselves higher salaries.

    At the end of the day a higher tax rate will just drive short-sighted cost-cutting so that these CEOs can increase their salaries to offset the taxation.

    We have a minimum wage, why not a maximum wage? Set it at 100 times the lowest salary in the company. That way if the CEO wants to increase his salary he has to first increase the salary of everyone below him. That sounds more fair to me.

  • 6

    Steve Christian

    Feudalism was not a fluke. Its the natural pooling of wealth at the top that occurs in a free or semi-free market. The only way to avoid feudalism is to have controls that are not natural.

    3) Rich people got rich by being smart, not by being lucky. Smart people know how to avoid taxes.

    Most rich people got rich the old fashioned way....they inherited it! So yes, it was luck.

    And trust me, if anyone lower middle class or below were relieved of all tax burdens, they would still never make it to the status of being rich in their lifetimes. Its not taxes, but expenses such as food that eat up most of their incomes.

    But you know, some people protect the rich because they hang on to silly dreams that maybe they will be rich one day too. I suggest finding a more realistic dream and stop trying to muck fair criticisms of the rich who are making us all poorer each year.

  • 1

    GW

    As Tkoind2 hinted its really in the super rich peoples interest to make things fairer wage wise, now clearly it is NOT.

    Wages for middle & slower have been stagnant for a few decades now, while upper levels wages have risen quite a bit & near the top have gone off the charts. Clearly its unsustainable, so if the rich dont want to lose how they got there they MUST allow others to have more of the profit otherwise the system will stop working & everyone will be taking massive hits but it will the super rich who lose most at that point.

    So super rich, start doing the right things otherwise the %$#@ will start hitting the fans & it will get ugly.

    This all works when wealth is distributed from poor to rich, but now WAY too much is in the rich folks hands, & THEY DIDNT EARN IT, THEY JUST TAKE IT!!! So its really up to them change is a comin one way or another choice is theirs which way this goes.

  • 5

    almxx

    A self made fortune does not exist. To be self made, the person must invent,supply the materials needed, manufacture,distribute and buy the item himself. No workers and no customers except himself. Billionaires need an army of low paid workers and overcharged customers. Self made indeed.......the person would also have to have created himself.

  • 3

    plasticmonkey

    Some absolutely spot on comments by tkoind, Frungy, Steve Christian, GW, and almxx.

    There are reasonable solutions to this injustice; what's needed first is the political will to admit to the issue, and then commit to it. Enough of the phony excuses like

    "Any schemes based on transfers of wealth from rich to poor will only last so long."

    The healthiest society is one in which the rights of everyone to participate on equal footing is actively defended. Denmark has a law under which any company employing over a certain number of people is required to be something like 40% employee owned (excuse me if the details are off on that). That is government action that is democratically motivated and willed, and helps to build a healthier society, not just a super rich elite.

  • -3

    gaijinfo

    The Marxism is strong here...

    ...yet....

    ...something is different...

    Curious. What could it be? What do modern liberals lack that traditional Marxists had in spades?

    It's as if...there were some rumblings of a logical, structured, argument, but then it vanished.

    A million neurons begging to fire...then...silenced by a familiar cry:

    "Other people are rich..I'm not..SOCIETY IS BROKEN! SOMEBODY FIX IT!"

  • 0

    lucabrasi

    @gaijinfo

    It's as if...there were some rumblings of a logical, structured, argument, but then it vanished.

    No. Plenty of us Communists/ Socialists/ Christians still around.

    It's just that we've got better things to do than waste our time on irrelevant sites.

  • -5

    fupayme

    god....yes lets blame all the rich people.....QQ moar you lazy bums

    I've been super poor, and guess who's fault it was? MINE

    I was lazy, I didn't take risks, I just did what everyone else did, and it sucked, but it was MY FAULT

    So because now I earn over 6 figures , because I decided to work 18 hour days 7 days a week for the past 2-3 years to get to where I am now, that means I somehow exploited someone?

    Everyone is capable of achieving what they want, its just about having that HUNGER for it.

    Most people want success without putting in the sacrifice, and that is why the 99% cry about injustice

    Even if you think the system is Rigged against you, do you just give up? No, you find ways to either USE the system to your advantage, or you create your own system and set of rules

    Don't make excuses if you aren't happy with your life, go out and do something about it. Go get what your worth

  • -5

    fupayme

    I never understand people who just accept their situation when they have the freedom to change it through hard work, creativity and ambition

  • 1

    lucabrasi

    @fupayme

    It's all capitalism: inhuman and rotten. The fact you've pulled yourself up to a level where you earn "over 6 figures" doesn't reflect well. You're just good at playing the game.

  • 5

    Steve Christian

    and that is why the 99% cry about injustice

    You are not part of the 1 percent and neither are the people here on both sides of the issue. We are the 99 percent and we are not in agreement.

    So because now I earn over 6 figures , because I decided to work 18 hour days 7 days a week for the past 2-3 years to get to where I am now, that means I somehow exploited someone?

    Based on that supreme lack of details I would guess that at the very least you assisted in exploitation of someone Six figures does not just appear out of thin air. Even with your 18 hour days there is no way you are actually worth that much.

    So anyway, how is your family doing with you working 18 hours a day? Do your children even know your name? Do you even have any? Do you even have half a clue why I switched to talking about families?

    Don't make excuses if you aren't happy with your life, go out and do something about it.

    You are seriously confused. No one here said they were unhappy with their life. They were pointing to the very real problem of wealth pooling at the top and how greed has had a negative effect on America in general, such as people getting laid off and not being able to find a job in two months in a bad economy, get their house taken from them by the bank, and never mind the mouths they have to feed.

    And I cannot see how having everyone fighting and scratching for a decent wage is going to make people happy. Someone has to do the actual labor you know. You expect them to all open their own business or something?

    Lots of people may not work 18 hour days, but that does make them lazy. Its a fact that wages have dropped in actual value and that minimum wage is not keeping up with the poverty line. Somebody has to work those minimum wage jobs too you know. Its not like there are six figure jobs lined for every one. Or do you think there is?

  • 3

    Frungy

    fupaymeFeb. 16, 2013 - 10:28PM JST I was lazy, I didn't take risks, I just did what everyone else did, and it sucked, but it was MY FAULT

    I can't help but notice a common thread in many people like fupayme's posts on this subject. Risk tasking is a gamble. Rich people like to claim that they had to take risks, but if they knew the outcome then it wasn't a risk, and if they made a fortune then it was just luck.

    However, when someone takes risks and isn't lucky and becomes poor... it is their fault? This logic is so transparently false that even a 5 year old would be able to point out the error.

    We live in a society that praises risk taking... but only if you get lucky. So in other words Capitalism isn't based on skill, talent, knowledge, or anything else laudible, but rather on good old-fashioned gambling?

    Fupayme, if you make 6 figures by taking risks then I sincerely hope that you're prepared for the day when your luck runs out, because as they say in Vegas, The House Always Wins.

  • 3

    lucabrasi

    @Frungy

    A million thumbs-up! Why can't these people develop a bit of sympathy, or even empathy, when it comes to those a bit less fortunate?

  • -3

    fupayme

    yes, I got to where I am now because i was "LUCKY" , it had nothing to do with my work ethic and change in attitude towards how I was living my life.

    don't worry guys, i will get whats coming to me.

    I'm obviously an evil person who exploits people for my personal gain, and karma will give me that swift kick in the butt in the future

    yes I cannot be worth 6 figures. Its not like I reinvest my earnings while under consuming and keeping my expenses as low as possible. its not like I expand my business and take care of my customers up until 5AM everyday then wake up again at 9AM to do it all over again 362 days a year (took 3 days off last year because I caught a cold)

    Also I didn't find a great niche market where I could target my business, build a strong brand reputation, and get the lead ahead of my competition.

    None of these things determined the success my business is having now.

    it was all fairydust, rainbows and leprechauns

  • -2

    plasticmonkey

    @fupayme

    take care of my customers up until 5AM everyday then wake up again at 9AM to do it all over again 362 days a year

    So you must be writing these posts on the job, I guess.

    There are lots of people in this world who work as hard as you do (or harder) who don't earn six figure salaries. The fact is the rich don't just earn money, they control it. That's why not everyone is going to get rich, no matter how many hours they work.

    The question is whether we want a society that allows free reign to those with power (i.e. feudalism), or a more democratic system that allows greater access to participation without eliminating incentives that create innovation and growth.

  • 0

    bruinfan

    A higher land tax would help. See Georgism on Wikipedia. If not, you will get a rentier class (not to be confused as is often the case with innovating capitalists, who add value to society).

  • -1

    fupayme

    @plasticmonkey

    yeah I understand what you are saying, and I know you can't just work hard at doing any job, but its the hard work + being creative + taking calculated risks that leads to the success

    I cornered the market in what I did, because I saw the demand for it , even though it was a small niche market.

    But that is where all success starts nowadays. You have to build a small base group of loyal fans / customers, then treat them very well, and they will spread the word for you.

    The system you are describing though, sounds like you would need to use govt force / power to dictate the rules of the land. Which isn't very democratic, since elected gov't officials are also human beings who crave more power and the want to stay in office.

    The only reason why the 1% can retain their power, is because they can influence the gov't to do its will , either through force, or by creating new laws / rules which benefit them

    So are you advocating a more Libertarian approach to things? Because that means a Free Market which is where capitalism and only the strong survive

  • -3

    plasticmonkey

    use govt force / power to dictate the rules of the land. Which isn't very democratic, since elected gov't officials are also human beings who crave more power and the want to stay in office.

    There are obvious problems of corruption, but they're fixable. I'd prefer to have a system in which a democratically elected government levels the field for all players, rather than one in which an unelected cartel of business leaders decides how to maximize its own profits.

    It took hundreds of years of struggle for working people to gain the opportunities to live better lives. Those gains have eroded gradually since the Reagan era, when the government ceded economic policy-making to big business. Democracy includes economics, not just politics, and the government is a necessary arbiter. A libertarian approach will only benefit the people at the top.

    America is already on the road to a neo-feudalism. Just take a look at all the gated "communities".

  • -1

    fupayme

    Yes but America's Gov't is now extremely large, and its not helping to solve any problems.

    How much larger does the Gov't need to get to create this even playing field for all participants?

    Also the working people gained the most standard of living under a less regulated market. Its why the USA had its huge boom after WW2.

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