"Top Incomes in the Long Run of History" with Tony Atkinson and

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66Journal of Economic Literature, Vol. XLIX (March 2011)for the fact that large fortunes never recoveredfrom the 1914–45 shocks, while smallerfortunes did recover perfectly well? The mostnatural and plausible candidate for an explanationseems to be the creation and developmentof the progressive income tax.” Itshould be stressed here that this conclusionrefers to the impact on the distribution ofgross income: i.e., income before the deductionof income tax. (See table 4.2 in Atkinson2007a for the United Kingdom for one of thefew tables that relate to the distribution ofincome after tax.)Evidence about the impact of taxationis discussed in many of the studies. In thecase of Sweden, Roine and Waldenström(2008) conclude that “Progressive taxationhence seems to have been a major contributingfactor in explaining the evolution ofSwedish top incomes in the postwar period.However, given that much of the fall in topincomes happens before taxes reach extremelevels and largely as a result of decreasingincome from wealth, an important effect oftaxation in terms of top income shares hasbeen to prevent the accumulation of newfortunes” (p. 382). In the case of Finland,Markus Jäntti et al. (2010) conclude that thedecline in income tax progressivity since themid 1990s is a central factor explaining theincrease of top income shares in Finland. Inthe case of Switzerland, a country that hasnever imposed very high rates of taxation,Dell, Piketty, and Saez (2007) conclude thatthe observed stability of top shares is consistentwith the explanation of trends elsewherein terms of tax effects.Outside Europe, Moriguchi and Saez(2008) recall in the case of Japan “that theenormous fortunes that generated the hightop 1 percent income share in the pre–Second World War period had been accumulatedat the time when progressive incometax hardly existed and capitalists could reinvestalmost all of their incomes for furthercapital accumulation” (p. 728). They go onto say that the fiscal environment faced byJapanese capitalists after the Second WorldWar was vastly different: the top marginaltax rate for individual income tax stayed at60–75 percent from 1950 until the 1988 taxreform. Progressive taxation hindered thereaccumulation of large wealth, resulting inmore equal distribution of capital income.This is the same mechanism that Piketty hadearlier identified in France, and was highlightedin the case of the United States byPiketty and Saez (2003). Noting that “it isdifficult to prove in a rigorous way that thedynamic effects of progressive taxation oncapital accumulation and pre-tax inequalityhave the right quantitative magnitude andaccount for the observed facts” (p. 23), theyconclude that the interpretation seems reasonableon a priori grounds.On the other hand, there are differentfindings in some countries. Saez and Veall(2005) devote a whole section of their studyof Canada to the role of taxation and theconsequences of the drop in marginal taxrates since the 1960s. They conclude that“the concentration of the surge in the lastdecade and among only the very top incomeshares suggests that tax changes in Canadacannot be the sole cause” (p. 847). Theireconometric analysis finds that “Canadiantop income changes are much more stronglyassociated with similar U.S. changes thanwith Canadian tax developments.” Theeconometric research of Leigh and van derEng (2009) for Indonesia does not find conclusiveevidence of a link with marginal taxrates. Alvaredo (2009) notes that in Portugalthe top tax rate has been constant at a newlower rate for a long period, during whichtop shares continued to rise. The same istrue for the United Kingdom (Atkinson2007b), where top shares rose steadily overthe twenty years since the top rate of incometax was reduced to 40 percent.As these latter cases bring out, a key elementin assessing the effect of taxation
Atkinson, Piketty, and Saez: Top Incomes in the Long Run of History67concerns the timing of the impact. Is thecurrent income share a function of the currenttax rate or of the past tax rates? Theanswer depends on the underlying behavioralmodel. The models used by Saez (2004)to examine the relation between marginaltax rates and reported incomes are based oncurrent tax rates. On the other hand, modelsof wealth accumulation typically treat thechange in wealth as a function of the currenttax rate. In this case, the present top incomeshares may reflect a weighted average ofpast tax rates. Piketty (2001, 2003) providesnumerical simulations with a fixed saving ratemodel, which indicate that substantial capitaltaxes are a serious obstacle to the recoveryof wealth holdings from negative shocks, andthat the barriers would be further raised ifthe reduction in the rate of return were toreduce the propensity to save.7. ConclusionIn this paper, we have argued that the studyof top incomes is important from the standpointof overall inequality and of the designof public policy. The tax data, on which thestudies reviewed here are based, are subjectto serious limitations, which we haveexamined at length. The data can however,in our judgment, be used for distributionalanalysis, and they are the only source coveringsuch a long run of years. The data covermuch of the twentieth century, including theGreat Depression, the Golden Age, and theRoaring Nineties. In some cases, the datareach back before the First World War andinto the nineteenth century. The estimatespresented here are designed to be broadlycomparable and provide evidence for morethan twenty countries, containing more thanhalf of the world’s population.It will be clear to the reader that muchremains to be done. Major countries, such asBrazil and Russia, are still missing from thedatabase; and Latin America is representedonly by Argentina. Only a start has so far beenmade on testing different explanations and onevaluating the impact of policy. The resultsfrom income tax data need to be combinedwith those from other sources of evidence,such as the data on inherited wealth (Piketty2009), on long-run studies of company data(for example, Carola Frydman and Raven E.Saks 2010 and Steven N. Kaplan and JoshuaRauh 2010) and of key sectors such as thefinancial industry (Thomas Philippon andAriell Reshef 2009). We hope however tohave demonstrated the potential of the fieldand we hope that the data will provide a richsource for future researchers.ReferencesAaberge, Rolf, and Anthony B. Atkinson. 2010. “TopIncomes in Norway.” In Top Incomes: A GlobalPerspective, ed. Anthony B. Atkinson and ThomasPiketty, 448–81. Oxford and New York: Oxford UniversityPress.Acemoglu, Daron. 2002. “Technical Change, Inequality,and the Labor Market.” Journal of Economic Literature,40(1): 7–72.Alvaredo, Facundo. 2009. “Top Incomes and Earningsin Portugal 1936–2005.” Explorations in EconomicHistory, 46(4): 404–17.Alvaredo, Facundo. 2010. “The Rich in Argentina overthe Twentieth Century, 1932–2004.” In Top Incomes:A Global Perspective, ed. Anthony B. Atkinson andThomas Piketty, 253–98. Oxford and New York:Oxford University Press.Alvaredo, Facundo, and Elena Pisano. 2010. “TopIncomes in Italy, 1974–2004.” In Top Incomes: AGlobal Perspective, ed. Anthony B. Atkinson andThomas Piketty, 625–63. Oxford and New York:Oxford University Press.Alvaredo, Facundo, and Emmanuel Saez. 2009.“Income and Wealth Concentration in Spain froma Historical and Fiscal Perspective.” Journal of theEuropean Economic Association, 7(5): 1140–67.Atkinson, Anthony B. 2005. “Top Incomes in the UKover the 20th Century.” Journal of the Royal StatisticalSociety: Series A (Statistics in Society), 168(2):325–43.Atkinson, Anthony B. 2007a. “The Distribution of TopIncomes in the United Kingdom 1908–2000.” In TopIncomes over the Twentieth Century: A Contrastbetween Continental European and English-SpeakingCountries, ed. Anthony B. Atkinson and ThomasPiketty, 82–140. Oxford and New York: Oxford UniversityPress.Atkinson, Anthony B. 2007b. “Measuring Top Incomes:Methodological Issues.” In Top Incomes over the
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