The Long-Run Determinants of Inequality: What Can We Learn from Top Income Data?

Abstract

This paper studies determinants of income inequality using a newly assembled panel of 16 countries over the entire twentieth century. We focus on three groups of income earners: The rich (P99-100), the upper middle class (P90-99), and the rest of the population (P0-90). The results show that periods of high economic growth disproportionately increases the top percentile income share at the expense of the rest of the top decile. Financial development is also pro-rich and the outbreak of banking crises is associated with reduced income shares of the rich. Trade openness has no clear distributional impact (if anything openness reduces top shares). Government spending, however, is negative for the upper middle class and positive for the nine lowest deciles but does not seem to affect the rich. Finally, tax progressivity reduces top income shares and when accounting for real dynamic effects the impact can be important over time.

Keywords: Top incomes, Income inequality, Financial development, Trade openness, Government spending, Taxation, Economic development

JEL Classification: D31, F10, G11, N30