Seeking to Explain Top Incomes

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Seeking to Explain Top Incomes
A B Atkinson, Nuffield College, Oxford
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• Why study top incomes?
• Income tax data
• Historical development of top incomes in UK
• Comparative experience of OECD countries
• Decomposition by earned and investment income
• Explanation of capital incomes
• Explanation of top earnings
• Conclusions

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• UK share of top 1 in total gross income
• 2000 13.1
• Up 6 percentage points since 1978
• US share of top 1 in total gross income
• 2000 16.9
• Up 9 percentage points since 1978

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• Contribution to overall inequality
• Taxable capacity
• Economic power

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If S is share of top 1, then the Gini
coefficient can be approximated by S (1-S)
G, where G is the Gini coefficient for the rest
of the population. This means that, if the Gini
coefficient for the rest of the population is
40, then a rise of 8 percentage points in the
top share causes a rise of 4.8 percentage points
in the overall Gini.
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Start from tabulations from Income Tax
statistics 50,000 people with incomes in range
100k-150k with mean income 120kExpress
50,000 as total population using Control Total
for Population express total income as total
income using Control Total for Income e.g 1.4
of population with 10.5 of total
incomeInterpolate to get share of top 1
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Top income shares in UK
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Top income shares in UK
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• Distribution between top groups and rest of
  population
• S1
• Distribution within top groups
• Share of top 1 within top 10
• S1/S10

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Pareto a 1/ (1 log10(S1/S10)
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TO EXPLAIN

• V-shaped time path for top shares
• Between and Within Inequality
• US/UK versus Continental Europe

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• Share of top 1
• Proportion of earned income
• x Share of top 1 of earners
• x Alignment coefficient for earnings
• Proportion of investment income
• x Share of top 1 with investment income
• x Alignment coefficient for investment income
• Alignment coefficient
• Share in earnings of top 1 of income recipients
  / Share of top 1 of earners (less than 1)

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• MAJOR themes
• Decline in concentration of capital 1900-1979
• Rise in top earnings post 1979
• MINOR themes
• Decline in top earnings 1945-1979
• Modest recovery of capital post 1979

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• Accumulation Model (Pasinetti / Meade / Stiglitz)

Stable distribution with a Pareto upper tail 1/a
loge1 sr(1-t) / loge1g, where sr(1-t)
is the rate of accumulation out of wealth, r the
rate of return and t the tax rate, and g is the
overall rate of growth
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Key role for progressive income taxation
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Manchester United
Manchester City
Willingness to pay
(Manchester Rovers)
Spectators
Superstar rents
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Manchester United
Revenue
Manchester City
Willingness to pay
(Manchester Rovers)
Spectators
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• Superstar Theory
• Can explain rise in top earnings post 1979
• Can explain differences between countries
• BUT cannot explain
• Decline in top earnings 1945-1979

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• Managerial Hierarchy Model
• 1/a
• loge1 increment with promotion
• divided by
• logespan of managerial control

increment
span
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Explaining top earnings

• Superstar model
• Individuals with high abilities able to extract
  rent that depends on size of market supplied,
  affected by technology and globalisation
• But
• Superstar model not enough on its own, as need to
  explain previous fall in top earnings
• Combine with
• Hierarchy within organisation has regular salary
  increment, and span of control
• Pyramidal organisations of changing importance
  over time