Interesting article in the Washington Post over the weekend. The article explores the makeup of the highest earning taxpayers in the U.S.:

For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1 percent of earners took in more than 10 percent of the personal income in the United States, including capital gains, and the top 1 percent took in more than 20 percent. But economists had little idea who these people were. How many were Wall street financiers? Sports stars? Entrepreneurs? Economists could only speculate, and debates over what is fair stalled.

Now a mounting body of economic research indicates that the rise in pay for company executives is a critical feature in the widening income gap.

The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The lead author of the study which forms the basis of the article is Williams Professor Jon Bakija. It sounds like the research which formed the basis for the paper involved a lot detailed “grunt” work of going through (presumably) redacted tax returns:

[L]ate last year, economists Bakija, Cole and Heim completed their massive analysis of income tax returns.

Little noticed outside academic circles, their research focused on the top 0.1 percent of earners. From those tax returns, they could glean a taxpayer’s occupation, which is self-reported. Using the employer’s tax identification number, the researchers found the industry they were employed in.

After executives, managers and financial professionals, the next largest groups in the top 0.1 percent of earners was lawyers with 6.2 percent and real estate professionals at 4.7 percent. Media and sports figures, who are often assumed to represent a large portion of very high-income earners, collectively made up only 3 percent.

“Basically, executives represent a much bigger share of the top incomes than a lot of people had thought,” said Bakija, a professor at Williams College, who with his co-authors is continuing the research. “Before, we just didn’t know who these people were.”

I would guess (and hope!) that at least some Williams students were involved in this project. If so, kudos to them for contributing to a project with very serious public policy implications. Channeling DK, I wonder if any senior theses have been or will be written based on this data?

One of the themes I took away from the article is that at least some of the growing income inequality in the U.S. is a result of a change is social values, which have made it more acceptable/common to seek very large pay packages at the upper levels of business, in a way which was less common 40-50 years ago.

What role should government have in regulating income equality, if any? Are high levels of taxation for purposes of lessening income inequality morally right? Economically efficient? What do you think?

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