CAREER: The Evolution of Income Inequality During the 20th Century: Effects of Taxation and Policy Consequences

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

The general objective of this research is to study the evolution of income inequality in four OECD countries: the U.S., Canada, Australia, and New-Zealand using income tax returns statistics available since the beginning of the century. To carry out this study, homogeneous series of income shares received from the top fractiles of the income distribution and the composition of income within each of these fractiles will be build. All these countries have produced detailed income tax statistics that are particularly well-suited for analyzing the top of the income distribution. These statistics have not yet been used extensively to study the evolution of inequality over the long-period. The goal of the analysis is to assess whether changes in inequality are due primarily to shocks such as world wars or macro-economic depressions and tax policy or due to deeper technological transformations. The data will also allow to do a comprehensive study of the short term, and long term effects of taxation on incomes. Exploiting the numerous tax reforms, we plan to investigate how each source of income responds to taxation, and in particular, whether the high top tax rates on capital income over long time periods have had adverse effects on the concentration of wealth. Understanding the mechanisms behind the evolution of inequality of capitalist countries over the course of their development is critical to assess whether capitalist economies have a natural tendency to create increasing inequality and whether government interventions are required or effective to curb the level of inequality. The analysis of the behavioral response of of high incomes to taxation is of central importance to assess the efficiency of the tax system and the costs of taxing the rich to finance redistributive programs. Understanding better the mechanisms of these behavioral responses to taxation can help improve current tax systems and transfer programs for lower incomes.