There have been protests about the amount of income going to the top 1%. In of itself, I have never thought we could tell too much about what is the “right” distribution of income with a certain number – after all, we would expect the top 1% to have significantly more income in some sense.
- How do these figures look for New Zealand?
- What are the drivers of this.
It turns out I discovered a little bit more than I was expecting when I ran through the numbers …
Well it turns out that we haven’t seen the same increase in the proportion of income going to the top 1% in New Zealand. The numbers suggest it went from around 7% in the 1970s to about 5.5% in the early 1980s – when we had a government that was determined to crush private investment and try to run the economy centrally. I would say that this drop was indicative of how much of a poor state the economy was in. By the time we got to the 90’s the figure got to 9% – which is about where it has stayed.
To me, a small increase in the share going to the top 1% in the past few decades makes sense – due to the aging of the population. When the population is young, human capital tends to be more evenly spread (homogeneous), however as people get older the individuals that decided to invest in human and physical capital benefit – leading to a dispersal of income. As a result, these figures in themselves don’t point too an elevated level of injustice, capture by the capital classes, or any such social concern.
Now given that we aren’t concerned about New Zealand anymore, we still have to ask about the huge increase in the United States – and what that implies.
The US and tax data
So there are a few reasons why the income going to the top 1% could have risen in the US – and they may all share a role:
- Population demographics,
- Increasing concentration of capital
- Increasing concentration of skills
- Increasing control over intellectual property/property rights
- Political capture
- Increasing value of the composition of goods/services created by the top 1%
- Increasing gains from globalisation accruing to the top 1%
- Poor bargaining position for the 99% when negotiating trade with the top 1%
Now I can’t really decipher which of the above is a more important explanation. However, in my investigations I did discover something interesting about the income figures. Finally, let me graph the income figures I’ve been discussing above:
Notice the big jump in income going to the top 1% of adults post-1986 in the US? When I look at a series like that I would normally call that a structural break – and treat the two sides of the series relatively separately – but I don’t just want to ignore the pre-1986 numbers. [We get a similar, temporary, leap in 1999 – which is curious]
So I had a little look around at where the figures were from – they came from tax statistics. As the authors say:
It is obvious that those paying tax have a financial incentive to present their affairs in a way that reduces tax liabilities. There is tax avoidance and tax evasion.
So tax evasion impacts upon the result. And it turns out that there was a huge change to the tax system in the US in 1986 – one that would have lead to a reduction in tax evasion (tax evasion that would have lowered the recorded share of income accruing to the top 1% in all prior periods).
Now there has been an increase in the proportion of income accruing to the top 1% since then – going from 13% to 18% – but this shows us that the low figures of 8% in previous periods are really incomparable … in the “good old days” income looked more equal partially due to tax evasion instead of real equality.
This is an important fact to keep in mind when we discuss what is going on over in the US of A
Update: Mankiw mentions the data here. He also mentions that the pattern holds for a number of countries, including NZ and Australia. I would like to point out that the magnitude of the change in Aussie and NZ was significantly smaller – it was the same shape, but we are talking about a much smaller increase.
Now I am not trying to say that is a bad or good thing – but there are undeniably differences there. For once I’m doing what I should, and trying relatively hard to be relatively objective and not really push for a “good” or “bad” conclusion from the data. The point I was initially aiming to get to with this post before discovering the issue regarding tax regimes.