Media focus on super rich not misplaced
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 US 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 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 $92bn in 1982 and had surged to $1.53 trillion by 2011 — and many more of them had 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 labour 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 LSE, 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.
Their robustly pro-market rationale for higher taxes on bankers is eye-catching, particularly for anyone who spends much time in the US 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 has offered an even more provocative suggestion. 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.”
*Chrystia Freeland is managing director and editor, Consumer News, for Thomson Reuters
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