head 39 The Stanford Center on Poverty and Inequality.docx

head 39
The Stanford Center on Poverty and Inequality
S TAT E O F T H E U N I O N
PAT H WAYS • The Poverty and Inequality Report 2016
KEY FINDINGS
• Over the past four decades,
only the very rich, the top 0.1
percent, have realized wealth
increases in the U.S. In 2012,
the top 0.1 percent included
160,000 households with total
net assets of more than 20
million.
• At the same time, the
middle class, those in the
50th-90th percentiles, have
experienced a decline in their
wealth share.
• Available data indicate that
there is significantly less
wealth inequality in Europe
than in the United States. No
other country analyzed has
top wealth shares as high as
the U.S.

BY GABRIEL ZUCMAN
wealth inequality
With the takeoff in income inequal-ity by now well-known,
attention
has shifted of late to trends in wealth
inequality. Until recently, it had been dif-
ficult to gather empirical evidence on
wealth inequality. However, important
new evidence on wealth inequality has
now become available, evidence that
suggests that wealth concentration is
rising fast in the U.S. and has reached
levels last seen only during the Gilded
Age. According to the latest available
data, in 2012 the top 1 percent owns 42
percent of total U.S. wealth, up from 25
percent in the 1970s.1
The simple purpose of this article is to
ask how such wealth inequality, which
would appear to be quite extreme,
compares to that of other developed
economies. Has there been a takeoff
in wealth inequality in other countries?
Is it as spectacular as the takeoff in the
U.S.? Does the current level of wealth
inequality in other countries match the
current level in the U.S.? We take on
questions of this sort in this article.
What Is Wealth?
To compare the distribution of wealth
across countries, it is of course critical to

use the same definition of wealth across
countries. Wealth is defined as the cur-
rent market value of all the assets owned
by households, net of all their debts.
Following international standards codi-
fied in the System of National Accounts,
assets include all the non-financial and
financial assets over which ownership
rights can be enforced and that provide
economic benefits to their owners.
This definition of wealth includes all pen-
sion wealth—whether held in individual
retirement accounts or through pension
funds and life insurance companies—
with the exception of Social Security
and unfunded defined benefit pensions.
It excludes all promises of future govern-
ment transfers. Including such transfers
is analytically difficult because these
types of assets lack observable market
prices. The wealth definition excludes
human capital for this same reason.
New Data Sources on Wealth
Inequality
With this definition in hand, wealth con-
centration can be studied using different
data sources.2 The ideal source would
be high-quality wealth tax declarations
for the entire population, with extensive
and truthful reporting by financial institu-
tions, domestic and foreign. No country
in the world has such a perfect data
source today. However, France, Spain,

the Netherlands, Norway, and Switzer-
land all impose direct-wealth taxes that
generate useful data on wealth. Among
these countries, Norway’s data are of the
highest quality, as extensive information
on most assets is collected for all Nor-
wegians (whether subject to the wealth
tax or not). Although Denmark stopped
taxing wealth in 1997, it also still collects
detailed full-population administrative
data on wealth.
Other tax data can be used to estimate
wealth indirectly. There are two main
40 wealth inequality
assets and assets at the bottom of the wealth distribution that
are not covered in tax data.
For all their promise, surveys also face two main limitations:
(1) they are not available on a long-run basis, and (2) they raise
serious difficulties regarding measurement at the top of the
distribution. The wealthy are hard to reach in surveys (sam-
pling error), and even those who respond may underestimate
their wealth (non-sampling error). As a result, surveys are not
representative of the richest individuals. In the Dutch wealth
survey, for instance, there are only two individuals with more
than €2 million in net wealth.7 This is a serious issue because
wealth is very concentrated (much more so than income). The
richest 10 percent typically own between 60 percent and 80
percent of aggregate wealth. Thus, to properly study cross-

country patterns in wealth inequality, it is critical to pay careful
attention to those at the very top, and this leads us away from
full reliance on surveys.
However, tax sources also raise difficulties at the top, espe-
cially for the recent period, given the large rise of the wealth
held in offshore tax havens such as Switzerland, the Cayman
Islands, Singapore, and so on.8 The wealthiest individuals
have incentives to hide assets. Evidence from Norway sug-
gests that offshore tax evasion at the very top can have a
significant effect on inequality measures, even in countries
with otherwise high-quality administrative data on wealth.
approaches here. First, estates and inheritance tax returns
provide information about wealth at death.3 From these
sources, one can infer how wealth is distributed across the
living population, using the method known as the “mortal-
ity multiplier,” which was invented shortly before World War
I by British and French economists.4 Second, one can use
individual income tax returns and capitalize the dividends,
interest, rents, and other forms of capital income declared on
such returns. Drawing on the detailed U.S. income tax data
and Financial Accounts balance sheets, Emmanuel Saez and
I recently used the capitalization technique to estimate the
distribution of U.S. wealth annually since 1913,5 as discussed
below.
Wealth inequality can also be studied using surveys. In the
U.S., the Survey of Consumer Finances is available on a trien-
nial basis from 1989 to 2013. In the euro area, the Household
Finance and Consumption Survey (HFCS) provides har-
monized micro-data on euro-area households’ wealth and
consumption. The development of wealth surveys has led to
a new wave of comparative studies that attempt to model
the distribution of wealth from the bottom—including groups
with negative net wealth—to the top.6 The key advantage of

surveys is that they include detailed socio-demographic data
and wealth questionnaires that allow us to measure broad
sets of assets for the entire population, including tax-exempt
0%
5%
10%
15%
20%
25%
19
13
19
18
19
23
19
28
19
33

19
38
19
43
19
48
19
53
19
58
19
63
19
68
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73
19
78

19
83
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88
19
93
19
98
20
03
20
08
20
13
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f T

ot
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H
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se
ho
ld
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FIGURE 1. Top 0.1% Wealth Share in the U.S., 1913-2012
Note: This figure depicts the share of total household wealth
held by the 0.1% richest families, as estimated by capitalizing
income tax returns. In
2012, the top 0.1% includes about 160,000 families with net
wealth above $20.6 million. Source: Saez and Zucman, 2016,
Appendix Table B1.
wealth inequality 41
Given the limitations of all existing data sources, one needs to
be pragmatic and combine the various available data sources.
Some countries, such as France and the U.S., attempt to
integrate household wealth surveys with administrative tax

data. Recently, Philip Vermeulen has proposed using a list of
rich individuals, such as the Forbes 400 in the U.S. and similar
rankings abroad, to improve survey data and better capture
the top tail of the distribution.9
In this report, I combine the available data to provide evidence
on how the U.S. compares to other countries. However, the
reader should keep in mind that the available data on wealth
are of disparate—and in many cases very insufficient—qual-
ity. To quantify wealth inequality, I will focus upon simple
concentration indicators such as the Gini coefficient, and the
share of aggregate wealth going to the top 10 percent, top 1
percent, and top 0.1 percent of households by wealth.
Wealth Inequality in the U.S.
It is useful to begin by considering what we know about
wealth inequality in the U.S. Emmanuel Saez and I construct
top wealth shares,10 by year since 1913, using comprehen-
sive data on the capital income reported on individual income
tax returns—such as dividends, interest, rents, and busi-
ness profits. We capitalize this income so that it matches the
amount of wealth recorded in the Federal Reserve’s Financial
Accounts, the national balance sheets that measure aggre-
gate wealth of U.S. households. In this way, we obtain annual
estimates of U.S. wealth inequality stretching back a century.
U.S. wealth inequality, it turns out, has followed a spectacular
U-shaped evolution. From the Great Depression in the 1930s
through the late 1970s, there was a substantial democratiza-
tion of wealth. The trend then inverted, with the share of total
household wealth owned by the top 0.1 percent increasing
from 7 percent in the late 1970s to 22 percent in 2012. In the
most recent data, the U.S. top 0.1 percent includes 160,000
households with total net assets of more than $20 million.

Figure 1 shows that wealth inequality has exploded in the
U.S. over the past four decades. The share of wealth held by
the top 0.1 percent of households is now almost as high as
in the late 1920s, when The Great Gatsby defined an era that
rested on the inherited fortunes of the robber barons of the
Gilded Age.
In recent decades, only a tiny fraction of the population saw
its wealth share grow. While the wealth share of the top 0.1
percent increased a lot in recent decades, that of the next 0.9
percent (i.e., 99–99.9) did not. And the share of total wealth
of the “merely rich”—households who fall in the top 10 per-
cent, but are not wealthy enough to be counted among the
top 1 percent—actually decreased slightly over the past four
decades. In other words, $20 million fortunes (and higher)
FIGURE 2. The Decline of Middle Class Wealth in the United
States (Composition of the Bottom 90% Wealth Share)
Note: This figure depicts the share and composition of the
wealth held by families in the bottom 90% of the wealth
distribution, as estimated by
capitalizing income tax returns. Source: Saez and Zucman,
2016, Appendix Table B5.
0%
5%
10%
15%
20%
25%

30%
35%
40%
19
17
19
22
19
27
19
32
19
37
19
42
19
47
19

52
19
57
19
62
19
67
19
72
19
77
19
82
19
87
19
92
19

97
20
02
20
07
20
12
P
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Pensions
Business assets
Housing (net of mortgages)
Equities & fixed claims
(net of non-mortgage debt)
grew much faster than smaller fortunes in the single-digit mil-
lions.
The flip side of these trends at the top of the wealth ladder is
the erosion of wealth among the middle class and the poor.
This erosion challenges the widespread notion that rising
middle-class wealth constituted a key structural change in
the U.S. economy, due to the development of pensions and
the rise in home ownership rates. Figure 2 shows that while
the share of wealth of the bottom 90 percent did gradually
increase from 15 percent in the 1920s to 36 percent in the
1980s, it dramatically declined thereafter. In the most recent
data, the bottom 90 percent collectively owns just 23 percent
of total U.S. wealth, about as much as in 1940.
In every country and historical period for which we have data,
the share of aggregate wealth owned by the bottom 50 per-

cent is extremely small, usually less than 5 percent. That is,
assets are overall only slightly greater than debts across the
bottom half of the distribution. This means that a decline in
the wealth share of the bottom 90 percent can be interpreted
as a decline in the wealth share of the “middle class,” that is,
the 50th–90th percentiles.
Contrasting the U.S. to Scandinavia
How does the U.S. compare to other countries? Because
Scandinavian countries have the most comprehensive data
on wealth, Scandinavia is a good starting point in addressing
this question. In a recent paper, Annette Alstadsæter, Niels
Johannesen, and I study the country that currently has the
best administrative wealth data: Norway.11
We exploit administrative wealth tax records that cover the
entire population of Norway, whether subject to the tax
or not. Just like in the U.S., we include all forms of assets
and liabilities at market value, so that our distributional fig-
ures cover 100 percent of the (recorded) aggregate wealth
of households. Because we use the same concept of aggre-
gate wealth in Norway as in the U.S., we can meaningfully
compare wealth inequality in the two countries. Our unit of
analysis is the household, as in the U.S. Households are
defined as those headed by a single person age 20 or above
or by a married couple.
Table 1 shows that wealth is much more equally distributed in
Norway than in the U.S. today. In both countries, the bottom
50 percent of the distribution owns almost no wealth in total
(its debts are as big as its assets), a key regularity across the
world. But the top half of the distribution looks markedly dif-
ferent. The Norwegian middle class owns close to half of all
wealth, versus just 20.3 percent of all wealth in the U.S. case.
Gini

coefficient
Top 1%
share
Top 10%
share
Australia 13.3 44.9
Austria 0.762 24.0 61.7
Belgium 0.608 12.6 44.1
Canada 15.5 50.3
Cyprus 0.698
Denmark 25.0
Finland 0.664 12.4 45.0
France 0.679 18.0 50.0
Germany 0.758 24.5 59.2
Greece 0.561 8.5 38.8
Italy 0.609 14.3 44.8
Luxembourg 0.661 22.4 51.4
Malta 0.600
Netherlands 0.654 23.9 59.6

Norway 17.9 50.1
Portugal 0.670 21.3 52.7
Slovak Republic 0.448 7.9 32.9
Slovenia 0.534
Spain 0.580 15.2 43.5
Sweden 57.6
United Kingdom 17.5 46.6
United States 41.8 77.2
TABLE 2. Wealth Inequality in the Euro Area
TABLE 1. Wealth Distribution: U.S. vs. Norway
Source: U.S.: Saez and Zucman (2016); Norway: Alstadsæter,
Johannesen and Zucman (2016);
top shares for other countries: OECD wealth distribution
database; Gini coefficients: Cowell and
Van Kerm (2015), Table 2.
Note: This table shows the distribution of household wealth in
Norway and the United States in
2012, based on tax data. Source: Norway: Alstadsæter,
Johannesen and Zucman (2016) using
wealth reported to tax authorities. U.S.: Saez and Zucman
(2016) using capitlized income tax
returns, and bottom 50% US obtained by Kennickell (2009,
Figure A3a) for 2007 using the SCF.
The distribution of houshold wealth in Norway and the United

States
in 2012, based on tax data
% of net household wealth at market value
Bottom 50% 1.2% 2.5%
50%–90% 48.7% 20.3%
Bottom 90% 49.9% 22.8%
Top 10% 50.1% 77.2%
Top 1% 17.9% 41.8%
Top 0.1% 8.0% 22.0%
Top 0.01% 3.6% 11.2%
Norway U.S.
wealth inequality 43
In the U.S., the top 0.1 percent owns as much wealth as the
bottom 90 percent does. In Norway, the top 0.1 percent share
is much smaller (8.0%).
Both the U.S. and Norwegian top shares are likely to be sub-
stantially underestimated, because tax data fail to capture
the wealth held in offshore tax havens. Accounting for this
wealth would, we estimate, raise the top 0.1 percent wealth
share by half in Norway (to about 12%), erasing part of the

gap with the U.S.—but only part of it.
The trends for the other Scandinavian countries are similar. In
Denmark, for instance, historical wealth concentration data
exist from as early as 1789 and then more frequently dur-
ing the 20th century. Danish wealth concentration decreased
over the course of industrialization, and this continued
throughout the 20th century. Today, the top 1 percent wealth
share (~25%) is a bit higher in Denmark than in Norway, but it
is not clear if this difference reflects a real economic phenom-
enon or measurement limitations.12 In any case, the Danish
top 1 percent share is far lower than that in the U.S.
Continental Europe and Other Countries
In most Continental European countries, wealth inequality
comparisons are available only via survey data. Table 2 pres-
ents Gini coefficients computed from the HFCS. The HFCS
aggregates euro-area surveys, some of which have serious
deficiencies. The results accordingly
should be interpreted with care.
As Table 2 shows, the Gini coefficient
for net wealth ranges between 0.45
(Slovakia) and 0.76 (Austria and Ger-
many). Data limitations make it hard to
say whether these differences reflect
real economic phenomenon or mea-
surement issues.
What the data suggest more clearly,
however, is that no country has top
wealth shares as high as the U.S.
Table 2 reports top 10 percent and top
1 percent wealth shares from a large
number of OECD countries, which
have very recently been published by

the OECD. There is a considerable
gap between the top 1 percent wealth
share of the U.S. (41.8%) and all other
OECD countries. The same is true for
the top 10 percent. Although it is likely
that the top shares of many European
FIGURE 3. Top Wealth Shares, Europe vs. U.S., 1810-2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
S
ha

re
o
f T
op
D
ec
ile
o
r
P
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nt
ile
in
T
ot
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W
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Top 10% wealth share: Europe
Top 10% wealth share: U.S.

Top 1% wealth share: Europe
Top 1% wealth share: U.S.
Source: Piketty and Zucman, 2015.
countries countries are underestimated in Table 2 (due to the
problems noted above with survey data), the gap seems too
big to be entirely due to measurement errors. There is signifi-
cantly less wealth inequality in Europe today than in the U.S.
This has not always been the case. In the 19th century, the
U.S. was to some extent the land of equality, at least for white
men. Wealth concentration was much less extreme than in
Europe (except in the southern U.S.). Over the course of the
20th century, this was reversed, and wealth concentration is
now significantly higher in the U.S., as shown in Figure 3.
Conclusions
In the introduction to this article, two key questions about the
structure of cross-national variability in wealth inequality were
posed, questions that have been taken on here. It is useful to
conclude by reiterating the answers to these questions.
Is the distribution of wealth more extreme in the contemporary
U.S. than in other well-off countries? Given limitations in data
quality and comparability, real caution is in order in answer-
ing this question. But the available data suggest that, as with
so many other poverty and inequality outcomes, the level of
wealth inequality in the U.S. is quite exceptional. If one com-
pares the U.S. to Scandinavian countries, where the data are
of high quality, it is clear that wealth inequality is much more
extreme in the U.S. If one instead compares to all euro-area

countries, the top wealth shares in the U.S. are still unusually
high, although in this case the comparisons have to rest on
lower-quality survey data.
Has there been an equally spectacular takeoff in wealth
inequality in all countries? The evidence reveals a much more
extreme takeoff in wealth inequality in the U.S. than in the
euro-area countries. The rapid takeoff in the U.S. has reversed
the U.S.-Europe ranking on wealth inequality: That is, whereas
wealth concentration was once much less extreme in the U.S.
than in Europe, now it is much more extreme in the U.S. than
in Europe.
The emergence of extreme wealth inequality in the U.S.
may be understood as the realization of long-standing con-
cerns about the underlying dynamics of change in the U.S.
It is notable that U.S. economists of the early 20th century
were very concerned about the possibility that their country
had become as unequal as Old Europe. Irving Fisher, then
president of the American Economic Association, gave his
presidential address in 1919 on this topic. He argued that the
concentration of income and wealth was becoming as dan-
gerously excessive in America as it had been for a long time
in Europe. He called for steep tax progressivity to counter-
act this tendency. Fisher was particularly concerned that as
much as half of U.S. wealth was owned by just 2 percent of
Americans, a situation that he viewed as “undemocratic.”13
One can interpret the spectacular rise of tax progressivity that
occurred in the U.S. during the first half of the 20th century as
an attempt to preserve the egalitarian, democratic American

ethos, celebrated a century before by Tocqueville and others.
It might accordingly be imagined that, given that the U.S.
now has higher levels of wealth inequality than Europe, there
would be profound pressures to install a more progressive tax
system in the U.S. The pressure to do so is in fact quite lim-
ited. Why? The key complicating development in this regard
is that attitudes towards inequality are dramatically different
today. Many U.S. observers now view Europe as exces-
sively egalitarian, and many European observers view the
U.S. as excessively unequal. There has in this sense been a
great reversal not just in objective levels of wealth inequality
but also in attitudes about the appropriate “target levels” of
wealth inequality.
This change in the desired target level is likely to be conse-
quential. If the growth in wealth concentration in the U.S. is
now understood as unproblematic (rather than “undemo-
cratic”), then of course it may well continue apace. ■
Gabriel Zucman is Assistant Professor of Economics at the Uni-
versity of California–Berkeley.
NOTES
1. Saez, Emmanuel, and Gabriel Zucman.
2016. “Wealth Inequality in the United States
Since 1913: Evidence from Capitalized Income
Tax Returns.” Quarterly Journal of Economics,
forthcoming.
2. Piketty, Thomas, and Gabriel Zucman.
2015. “Wealth and Inheritance in the Long
Run.” Handbook of Income Distribution, 2,
1303–1368.

3. The difference between inheritance and es-
tate taxes is that inheritance taxes are comput-
ed at the level of each inheritor, whereas estate
taxes are computed at the level of the total
estate (i.e., total wealth left by the decedent).
4. The “mortality multiplier” weights wealth-
at-death by the inverse of the mortality rate
conditional on age, gender, and wealth, in order
to generate estimates for the distribution of
wealth among the living population.
5. Saez and Zucman, 2016.
6. For a survey article using HFCS data for
15 euro-area countries, see Cowell, Frank A.,
and Philip Van Kerm. 2015. “Wealth Inequality:
A Survey.” Journal of Economic Surveys,
671–710.
7. Vermeulen, Philip. 2016. “How Fat Is the Top
of the Wealth Distribution?” mimeo.
8. Zucman, Gabriel. 2013. “The Missing
Wealth of Nations: Are Europe and the US Net
Debtors or Net Creditors?” Quarterly Journal
of Economics, 128(3), 1321–1364; Zucman,
Gabriel. 2014. “Taxing Across Borders: Tracking
Personal Wealth and Corporate Profits.” Journal
of Economic Perspectives, 28(4), 121–148;
Zucman, Gabriel. 2015. The Hidden Wealth
of Nations. Chicago, IL: University of Chicago
Press.
9. Vermeulen, 2016.

10. Saez and Zucman, 2016.
11. Alstadsæter, Annette, Niels Johannesen,
and Gabriel Zucman. 2016. “Tax Evasion and
Inequality,” mimeo.
12. Roine, Jesper, and Daniel Waldenström.
2015. “Long-Run Trends in the Distribution
of Income and Wealth.” Handbook of Income
Distribution, 2A.
13. Fisher, Irving. 1920. “Economists in Public
Service.” American Economic Review, 9, 5–21.
Wealth Inequality
Journal of Economic Perspectives: Vol. 27 No. 3 (Summer 2013
)
The Top 1 Percent in International and Historical Perspective
Article Citation
Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty, and
Emmanuel Saez. 2013. "The Top 1
Percent in International and Historical Perspective." Journal of
Economic Perspectives, 27(3): 3-20.
DOI: 10.1257/jep.27.3.3
Abstract
The top 1 percent income share has more than doubled in the Un
ited States over the last 30

years, drawing much public attention in recent years. While oth
er English-speaking countries have
also experienced sharp increases in the top 1 percent income sha
re, many high-income countries
such as Japan, France, or Germany have seen much less increase
in top income shares. Hence, the
explanation cannot rely solely on forces common to advanced c
ountries, such as the impact of new
technologies and globalization on the supply and demand for ski
lls. Moreover, the explanations
have to accommodate the falls in top income shares earlier in th
e twentieth century experienced in
virtually all high-income countries. We highlight four main fact
ors. The first is the impact of tax
policy, which has varied over time and differs across countries.
Top tax rates have moved in the
opposite direction from top income shares. The effects of top rat
e cuts can operate in conjunction
with other mechanisms. The second factor is a richer view of th
e labor market, where we contrast
the standard supply-side model with one where pay is determine
d by bargaining and the reactions
to top rate cuts may lead simply to a redistribution of surplus. I
ndeed, top rate cuts may lead
managerial energies to be diverted to increasing their remunerat
ion at the expense of enterprise
growth and employment. The third factor is capital income. Ove
rall, private wealth (relative to
income) has followed a U-shaped path over time, particularly in
Europe, where inherited wealth is,
in Europe if not in the United States, making a return. The fourt
h, little investigated, element is
the correlation between earned income and capital income, whic
h has substantially increased in
recent decades in the United States.

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Authors
Alvaredo, Facundo (U Oxford and CONICET, Buenos Aires)
Atkinson, Anthony B. (Nuffield College, U Oxford and London
School of Economics and Political
Science)
Piketty, Thomas (Paris School of Economics)
Saez, Emmanuel (U CA, Berkeley)
JEL Classifications
D31: Personal Income, Wealth, and Their Distributions
F66: Globalization: Labor
J24: Human Capital; Skills; Occupational Choice; Labor Produc
tivity
J31: Wage Level and Structure; Wage Differentials
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Journal of Economic Perspectives—Volume 27, Number 3—
Summer 2013—Pages 3–20
FF or three decades, the debate about rising income inequality
in the United or three decades, the debate about rising income
inequality in the United States has centered on the dispersion of
wages and the increased premium States has centered on the
dispersion of wages and the increased premium for
skilled/educated workers, attributed in varying proportions to
skill-for skilled/educated workers, attributed in varying
proportions to skill-
biased technological change and to globalization (for example,
see Katz and Autor biased technological change and to
globalization (for example, see Katz and Autor
1999 for a survey). In recent years, however, there has been a
growing realization 1999 for a survey). In recent years,
however, there has been a growing realization
that most of the action has been at the very top. This has
attracted a great deal of that most of the action has been at the
very top. This has attracted a great deal of
public attention (as witnessed by the number of visits to and
press citations of our public attention (as witnessed by the
number of visits to and press citations of our
World Top Incomes Database at
http://topincomes.parisschoolofeconomics.eu/) World Top
Incomes Database at

http://topincomes.parisschoolofeconomics.eu/)
and has represented a challenge to the economics profession.
Stories based on the and has represented a challenge to the
economics profession. Stories based on the
supply and demand for skills are not enough to explain the
extreme top tail of supply and demand for skills are not enough
to explain the extreme top tail of
the earnings distribution; nor is it enough to look only at earned
incomes. Different the earnings distribution; nor is it enough to
look only at earned incomes. Different
approaches are necessary to explain what has happened in the
United States over approaches are necessary to explain what has
happened in the United States over
the past century and also to explain the differing experience in
other high-income the past century and also to explain the
differing experience in other high-income
countries over recent decades. We begin with the international
comparison in the countries over recent decades. We begin with
the international comparison in the
fi rst section and then turn to the causes and implications of the
evolution of top fi rst section and then turn to the causes and
implications of the evolution of top
income shares.income shares.
The Top 1 Percent in International and
Historical Perspective†
■ ■ Facundo Alvaredo is Research Fellow at Nuffi eld College
and Department of Economics,
Oxford, United Kingdom, and CONICET (Consejo Nacional de
Investigaciones Científi cas
y Técnicas), Buenos Aires, Argentina, and Affi liate Member,
Paris School of Economics, Paris,
France. Anthony B. Atkinson is Fellow of Nuffi eld College,
Oxford, and Centennial Professor at the
London School of Economics, London, United Kingdom.

Thomas Piketty is Professor of Economics
at the Paris School of Economics, Paris, France. Emmanuel Saez
is Professor of Economics, Univer-
sity of California at Berkeley, United States. Their email
addresses are [email protected],
[email protected] eld.ox.ac.uk, [email protected], and
[email protected], respectively.
† To access the disclosure statements, visit
http://dx.doi.org/10.1257/jep.27.3.3 doi=10.1257/jep.27.3.3
Facundo Alvaredo, Anthony B. Atkinson, Thomas
Piketty, and Emmanuel Saez
http://dx.doi.org/10.1257/jep.27.3.3
4 Journal of Economic Perspectives
We should start by emphasizing the factual importance of the
top 1 percent. We should start by emphasizing the factual
importance of the top 1 percent.
It is tempting to dismiss the study of this group as a passing
political fad due to It is tempting to dismiss the study of this
group as a passing political fad due to
the slogans of the Occupy movement or as the academic
equivalent of reality the slogans of the Occupy movement or as
the academic equivalent of reality
TV. But the magnitudes are truly substantial. Based on pre-tax
and pre-transfer TV. But the magnitudes are truly substantial.
Based on pre-tax and pre-transfer
market income (excluding nontaxable fringe benefi ts such as
health insurance market income (excluding nontaxable fringe
benefi ts such as health insurance
but including realized capital gains) per family reported on tax
returns, the share but including realized capital gains) per
family reported on tax returns, the share

of total annual income received by the top 1 percent has more
than doubled from of total annual income received by the top
1 percent has more than doubled from
9 percent in 1976 to 20 percent in 2011 (Piketty and Saez, 2003,
and the World 9 percent in 1976 to 20 percent in 2011 (Piketty
and Saez, 2003, and the World
Top Incomes Database). There have been rises for other top
shares, but these Top Incomes Database). There have been rises
for other top shares, but these
have been much smaller: during the same period, the share of
the group from have been much smaller: during the same period,
the share of the group from
95th to 99th percentile rose only by 3 percentage points. The
rise in the share of 95th to 99th percentile rose only by
3 percentage points. The rise in the share of
the top 1 percent has had a noticeable effect on overall income
inequality in the the top 1 percent has had a noticeable effect on
overall income inequality in the
United States (Atkinson, Piketty, and Saez 2011,
Section 2.2).United States (Atkinson, Piketty, and Saez 2011,
Section 2.2).
The United States Top 1 Percent in International Perspective
Figure 1 depicts the US top 1 percent income share since 1913.
Simon Kuznets Figure 1 depicts the US top 1 percent income
share since 1913. Simon Kuznets
(1955) famously hypothesized that economic growth would fi
rst be accompanied by (1955) famously hypothesized that
economic growth would fi rst be accompanied by
a rise in inequality and then by a decline in inequality. At fi rst
glance, it is tempting a rise in inequality and then by a decline
in inequality. At fi rst glance, it is tempting
Figure 1
Top 1 Percent Income Share in the United States

Source: Source is Piketty and Saez (2003) and the World Top
Incomes Database.
Notes: The fi gure reports the share of total income earned by
top 1 percent families in the United States
from 1913 to 2011. Income is defi ned as pre-tax market
income; it excludes government transfers and
nontaxable fringe benefi ts. The fi gure reports series including
realized capital gains (solid squares)
and series excluding realized capital gains (hollow squares).
0%
5%
10%
15%
20%
25%
1913
1920
1927
1934
1941
1948
1955
1962
1969

1976
1983
1990
1997
2004
2011
Top 1% income share excluding capital gains
Top 1% income share including capital gains
Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, and
Emmanuel Saez 5
to conclude from Figure 1 that the Kuznets curve has been
turned upside-down. But to conclude from Figure 1 that the
Kuznets curve has been turned upside-down. But
this suggestion is too facile. After all, the interwar period did
not exhibit a secular this suggestion is too facile. After all, the
interwar period did not exhibit a secular
downward trend in shares of top incomes. Apart from the bubble
of the late 1920s, downward trend in shares of top incomes.
Apart from the bubble of the late 1920s,
the US top 1 percent share was between 15 and 20 percent
throughout this time. the US top 1 percent share was between 15
and 20 percent throughout this time.
At the time of Pearl Harbor in 1941, the share of the top
1 percent was essentially At the time of Pearl Harbor in 1941,
the share of the top 1 percent was essentially
the same as in 1918. The downward trend in top shares started
at the time of World the same as in 1918. The downward trend
in top shares started at the time of World

War II and continued until the end of the 1960s. There was then
a sharp reversal War II and continued until the end of the 1960s.
There was then a sharp reversal
such that the top share is today back in the same range as in the
1920s. Interest-such that the top share is today back in the same
range as in the 1920s. Interest-
ingly, the Great Recession of 2008 –2009 does not seem to have
reversed the upward ingly, the Great Recession of 2008 –2009
does not seem to have reversed the upward
trend. There was a fall in the top 1 percent share in 2008 –2009
but a rebound in trend. There was a fall in the top 1 percent
share in 2008 –2009 but a rebound in
2010. This would be consistent with the experience of the
previous economic down-2010. This would be consistent with
the experience of the previous economic down-
turn: top income shares fell in 2001–2002 but quickly recovered
and returned to the turn: top income shares fell in 2001–2002
but quickly recovered and returned to the
previous trend in 2003 –2007. Another piece of evidence that is
consistent with this previous trend in 2003 –2007. Another
piece of evidence that is consistent with this
interpretation is the smaller cyclical variation in the series
excluding capital gains interpretation is the smaller cyclical
variation in the series excluding capital gains
(shown by the hollow squares in Figure 1).(shown by the hollow
squares in Figure 1).
Has the US experience been reproduced in other high-income
countries? Has the US experience been reproduced in other
high-income countries?
The evolution of the shares of the top 1 percent is shown for
four Anglo-Saxon The evolution of the shares of the top 1
percent is shown for four Anglo-Saxon
countries in Figure 2A and for France, Germany, Sweden, and
Japan in Figure 2B countries in Figure 2A and for France,
Germany, Sweden, and Japan in Figure 2B

(it should be noted that the estimates for France and the United
Kingdom do (it should be noted that the estimates for France
and the United Kingdom do
not include capital gains, the estimates for Canada, Germany,
Japan, and Sweden not include capital gains, the estimates for
Canada, Germany, Japan, and Sweden
include realized capital gains after the year therein shown, and
the estimates include realized capital gains after the year
therein shown, and the estimates
for Australia include them only partially and at varying degrees
over time). The for Australia include them only partially and at
varying degrees over time). The
other Anglo-Saxon countries—Australia, Canada, and the
United Kingdom—all other Anglo-Saxon countries—Australia,
Canada, and the United Kingdom—all
show a strong asymmetric U-shape. However, the rises were
less marked in two show a strong asymmetric U-shape.
However, the rises were less marked in two
of these countries. Over the period 1980 to 2007, when the top
1 percent share of these countries. Over the period 1980 to
2007, when the top 1 percent share
rose by some 135 percent in the United States and the United
Kingdom, it rose rose by some 135 percent in the United States
and the United Kingdom, it rose
by some 105 percent in Australia and 76 percent in Canada
(and by 39 percent by some 105 percent in Australia and 76
percent in Canada (and by 39 percent
in New Zealand, not shown). The experience is markedly
different in continental in New Zealand, not shown). The
experience is markedly different in continental
Europe and Japan, where the long pattern of income inequality
is much closer to Europe and Japan, where the long pattern of
income inequality is much closer to
an L-shaped than a U-shaped curve. (Sweden and other
Scandinavian countries an L-shaped than a U-shaped curve.
(Sweden and other Scandinavian countries

such as Norway (not shown) are intermediate cases.)such as
Norway (not shown) are intermediate cases.)11 There has been
some rise in There has been some rise in
recent years in the top shares in these countries, but the top
1 percent shares are recent years in the top shares in these
countries, but the top 1 percent shares are
not far today from their levels in the late 1940s, whereas in the
United States the not far today from their levels in the late
1940s, whereas in the United States the
share of the top 1 percent is higher by more than a half.share of
the top 1 percent is higher by more than a half.
To us, the fact that high-income countries with similar
technological and To us, the fact that high-income countries
with similar technological and
productivity developments have gone through different patterns
of income productivity developments have gone through
different patterns of income
inequality at the very top supports the view that institutional
and policy differences inequality at the very top supports the
view that institutional and policy differences
play a key role in these transformations. Purely technological
stories based solely play a key role in these transformations.
Purely technological stories based solely
upon supply and demand of skills can hardly explain such
diverging patterns. What upon supply and demand of skills can
hardly explain such diverging patterns. What
is more, within countries, we have to explain not only why top
shares rose (in the is more, within countries, we have to explain
not only why top shares rose (in the
U-shaped countries) but also why they fell for a sustained
period of time earlier in U-shaped countries) but also why they
fell for a sustained period of time earlier in
1 The Swedish top 1 percent share was very high during World
War I. The same is observed in Denmark—

see the discussion in Atkinson and Søgaard (2013).
Figure 2
The Evolution of the Shares of the Top 1 Percent in Different
Countries
Source: The World Top Incomes Database.
Notes: The fi gure reports the share of total income earned by
the top 1 percent in four English-speaking
countries in panel A, and in four other OECD countries ( Japan
and three continental European
countries) in panel B. Income is defi ned as pre-tax market
income. The estimates for Australia include
realized capital gains partially and at varying degrees over time.
0%
5%
10%
15%
20%
25%
1910
1915
1920
1925

1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
A: Top 1 Percent Income Shares in English-speaking Countries
(U-Shape)
United States—including capital gains
Australia
Canada-including capital gains from 1972
United Kingdom—families
United Kingdom—adults

0%
5%
10%
15%
20%
25%
B: Top 1 Percent Income Shares in Continental Europe and
Japan (L- Shape)
France
Germany—including capital gains from 1950
Japan—including capital gains from 1947
Sweden—including capital gains
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960

1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
7
the twentieth century. The most obvious policy difference—
between countries and the twentieth century. The most obvious
policy difference—between countries and
over time—regards taxation, and it is here that we begin.over
time—regards taxation, and it is here that we begin.
Taxes and Top Shares
During the twentieth century, top income tax rates have
followed an inverse During the twentieth century, top income
tax rates have followed an inverse
U-shaped time-path in many countries, as illustrated in Figure
3. In the United U-shaped time-path in many countries, as
illustrated in Figure 3. In the United
States, top income tax rates were consistently above 60 percent

from 1932 to 1981, States, top income tax rates were
consistently above 60 percent from 1932 to 1981,
and at the start of the 1920s, they were above 70 percent (of
course, varying propor-and at the start of the 1920s, they were
above 70 percent (of course, varying propor-
tions of taxpayers were subject to the top rate). High income tax
rates are not just tions of taxpayers were subject to the top
rate). High income tax rates are not just
a feature of the post-World War II period, and their cumulative
effect contributed a feature of the post-World War II period,
and their cumulative effect contributed
to the earlier decline in top income shares. While many
countries have cut top to the earlier decline in top income
shares. While many countries have cut top
tax rates in recent decades, the depth of these cuts has varied
considerably. For tax rates in recent decades, the depth of these
cuts has varied considerably. For
example, the top tax rate in France in 2010 was only 10
percentage points lower example, the top tax rate in France in
2010 was only 10 percentage points lower
than in 1950, whereas the top tax rate in the US was less than
half its 1950 value.than in 1950, whereas the top tax rate in the
US was less than half its 1950 value.
Figure 4 plots the changes in top marginal income tax rates
(combining Figure 4 plots the changes in top marginal income
tax rates (combining
both central and local government income taxes) since the early
1960s against both central and local government income taxes)
since the early 1960s against
the changes over that period in top 1 percent income shares for
18 high-income the changes over that period in top 1 percent
income shares for 18 high-income
countries in the World Top Incomes Database. It shows that
there is a strong corre-countries in the World Top Incomes
Database. It shows that there is a strong corre-

lation between the reductions in top tax rates and the increases
in top 1 percent lation between the reductions in top tax rates
and the increases in top 1 percent
Figure 3
Top Marginal Income Tax Rates, 1900 – 2011
Source: Piketty and Saez (2013, fi gure 1).
Notes: The fi gure depicts the top marginal individual income
tax rate in the United States, United
Kingdom, France, and Germany since 1900. The tax rate
includes only the top statutory individual
income tax rate applying to ordinary income with no tax
preference. State income taxes are not included
in the case of the United States. For France, we include both the
progressive individual income tax and
the flat rate tax “Contribution Sociale Generalisée.”
0%
10%
20%
30%
40%
50%
60%
70%
80%

90%
100%
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
US UK
France Germany
pre-tax income shares. For example, the United States
experienced a reduction pre-tax income shares. For example, the
United States experienced a reduction
of 47 percentage points in its top income tax rate and a 10
percentage point of 47 percentage points in its top income tax
rate and a 10 percentage point
increase in its top 1 percent pre-tax income share. By contrast,

countries such increase in its top 1 percent pre-tax income
share. By contrast, countries such
as Germany, Spain, or Switzerland, which did not experience
any signifi cant top as Germany, Spain, or Switzerland, which
did not experience any signifi cant top
rate tax cut, did not show increases in top 1 percent income
shares. Hence, the rate tax cut, did not show increases in top
1 percent income shares. Hence, the
evolution of top tax rates is strongly negatively correlated with
changes in pre-tax evolution of top tax rates is strongly
negatively correlated with changes in pre-tax
income concentration.income concentration.
This negative correlation can be explained in a variety of ways.
As pointed out This negative correlation can be explained in a
variety of ways. As pointed out
originally by Slemrod (1996), it is possible that the rise in top
US income shares originally by Slemrod (1996), it is possible
that the rise in top US income shares
occurred because, when top tax rates declined, those with high
incomes had less occurred because, when top tax rates declined,
those with high incomes had less
Figure 4
Changes in Top Income Shares and Top Marginal Income Tax
Rates since 1960
(combining both central and local government income taxes)
Source: Piketty, Saez, and Stantcheva (2011, revised October
2012, fi gure 3). Source for top income
shares is the World Top Incomes Database. Source for top
income tax rates is OECD and country-
specifi c sources.
Notes: The fi gure depicts the change in the top 1 percent
income share against the change in the top
income tax rate from 1960– 64 to 2005–2009 for 18 OECD

countries. If the country does not have
top income share data for those years, we select the fi rst
available fi ve years after 1960 and the most
recent 5 years. For the following fi ve countries, the data start
after 1960: Denmark (1980), Ireland (1975),
Italy (1974), Portugal (1976), Spain (1981). For Switzerland,
the data end in 1995 (they end in 2005 or
after for all the other countries). Top tax rates include both the
central and local government top tax
rates. The correlation between those changes is very strong. The
elasticity estimates of the ordinary least
squares regression of �log(top 1% share) on �log(1 – MTR)
based on the depicted dots is 0.47 (0.11).
Italy
C
h
an
ge
i
n
t
o
p
1
%
i
n
co

m
e
sh
ar
e
(p
er
ce
n
ta
ge
p
o
in
ts
)
10
8
6
4
2
0

Change in top marginal income tax rate (percentage points)
–40 –30 –20 –10
0 10
US
UK
Ireland
Portugal
Norway
Canada
Australia
NZ
Japan
Spain
Denmark
Sweden
France
Netherlands
Finland
Germany
Switzerland

Elasticity = .47 (.11)
Emmanuel Saez 9
reason to seek out tax avoidance strategies. This argument has
more recently been reason to seek out tax avoidance strategies.
This argument has more recently been
used to deny that any real increase in income concentration
actually took place—used to deny that any real increase in
income concentration actually took place—
that it is a pure statistical artifact. Under this scenario, the real
US top income shares that it is a pure statistical artifact. Under
this scenario, the real US top income shares
were as high in the 1960s as they are today, but a smaller
fraction of top incomes were as high in the 1960s as they are
today, but a smaller fraction of top incomes
was reported on tax returns. While this factor may have affected
the pattern of the was reported on tax returns. While this factor
may have affected the pattern of the
data at certain times—for example, the jump in top US income
shares following data at certain times—for example, the jump in
top US income shares following
the 1986 Tax Reform Act—closer examination of the US case
suggests that the tax the 1986 Tax Reform Act—closer
examination of the US case suggests that the tax
avoidance response cannot account for a signifi cant fraction of
the long-run surge avoidance response cannot account for a
signifi cant fraction of the long-run surge
in top incomes. Top income shares based on a broader defi
nition of income that in top incomes. Top income shares based
on a broader defi nition of income that
includes realized capital gains, and hence a major portion of

avoidance channels, includes realized capital gains, and hence a
major portion of avoidance channels,
have increased virtually as much as top income shares based on
a narrower defi ni-have increased virtually as much as top
income shares based on a narrower defi ni-
tion of income subject to the progressive tax schedule (see
Figure 1 and Piketty, tion of income subject to the progressive
tax schedule (see Figure 1 and Piketty,
Saez, and Stantcheva 2011 for a detailed analysis).Saez, and
Stantcheva 2011 for a detailed analysis).
The explanation that changes in tax rates in the top tax brackets
do lead to The explanation that changes in tax rates in the top
tax brackets do lead to
substantive behavioral change has indeed received some
support. After noting that substantive behavioral change has
indeed received some support. After noting that
top US incomes surged following the large top marginal tax rate
cuts of the 1980s, top US incomes surged following the large
top marginal tax rate cuts of the 1980s,
Lindsey (1987) and Feldstein (1995) proposed a standard
supply-side story whereby Lindsey (1987) and Feldstein (1995)
proposed a standard supply-side story whereby
lower tax rates stimulate economic activity among top earners
involving more work, lower tax rates stimulate economic
activity among top earners involving more work,
greater entrepreneurship, and the like. In this scenario, lower
top tax rates would greater entrepreneurship, and the like. In
this scenario, lower top tax rates would
lead to more economic activity by the rich and hence more
economic growth.lead to more economic activity by the rich and
hence more economic growth.
Behavioral change is at the heart of the optimal income tax
analysis pioneered Behavioral change is at the heart of the
optimal income tax analysis pioneered

by Mirrlees (1971) and publicly evoked in the debate about top
tax rates in the by Mirrlees (1971) and publicly evoked in the
debate about top tax rates in the
UK, where the Chancellor of the Exchequer has argued that
reducing the top tax UK, where the Chancellor of the Exchequer
has argued that reducing the top tax
rate below 50 percent (for broadly the top 1 percent) will not
reduce revenue. rate below 50 percent (for broadly the top 1
percent) will not reduce revenue.
The standard optimal tax formula (Diamond and Saez 2011)
implies, with an elas-The standard optimal tax formula
(Diamond and Saez 2011) implies, with an elas-
ticity of taxable income of 0.5, that the revenue-maximizing top
tax rate would be ticity of taxable income of 0.5, that the
revenue-maximizing top tax rate would be
57 percent.57 percent.22 When allowance is made for other
taxes levied in the United Kingdom, When allowance is made
for other taxes levied in the United Kingdom,
such as the payroll tax, this implies a top income tax rate in the
United Kingdom of such as the payroll tax, this implies a top
income tax rate in the United Kingdom of
some 40 percent (Atkinson 2012).some 40 percent (Atkinson
2012).
Richer Models of Pay Determination
The optimal tax literature has, however, remained rooted in an
oversimpli-The optimal tax literature has, however, remained
rooted in an oversimpli-
fi ed model of pay determination that takes no account of
developments in labor fi ed model of pay determination that
takes no account of developments in labor
economics, and the same applies to the explanations of changing
top income economics, and the same applies to the explanations
of changing top income
shares. Changes in the pay of a worker are assumed to have no

impact on either shares. Changes in the pay of a worker are
assumed to have no impact on either
the other side of the labor market or on other workers. The
worker generates more the other side of the labor market or on
other workers. The worker generates more
output and pay adjusts by the same amount. Each person is an
island. However, in output and pay adjusts by the same amount.
Each person is an island. However, in
the now-standard models of job-matching, a job emerges as the
result of the costly the now-standard models of job-matching, a
job emerges as the result of the costly
creation of a vacancy by the employer and of job search by the
employee. A match creation of a vacancy by the employer and
of job search by the employee. A match
2 The revenue-maximizing top tax rate formula takes the form
τ = 1/(1 + a · e) where a is the Pareto
parameter of the top tail of the income distribution, and e is the
elasticity of pre-tax income with respect
to the net-of-tax rate 1 – τ. With e = 0.5 (as estimated from
Figure 4) and a = 1.5 (the current Pareto
parameter of the US income distribution), we get τ = 1/(1 + 0.5
· 1.5) = 57 percent.
creates a positive surplus, and there is Nash bargaining over the
division of the creates a positive surplus, and there is Nash
bargaining over the division of the
surplus, leading to a proportion surplus, leading to a proportion
ββ going to the worker and (1 – going to the worker and (1 – ββ
) to the employer. ) to the employer.
Typically, Typically, ββ is assumed fi xed, but it is possible
that what we have observed, at least at is assumed fi xed, but it

is possible that what we have observed, at least at
the top, is an increase in the top, is an increase in ββ, which can
lead to changes in the distribution of income., which can lead to
changes in the distribution of income.33
Why should Why should ββ have increased? The extent to which
top earners exercised have increased? The extent to which top
earners exercised
bargaining power may have interacted with the changes in the
tax system. When bargaining power may have interacted with
the changes in the tax system. When
top marginal tax rates were very high, the net reward to a highly
paid executive for top marginal tax rates were very high, the net
reward to a highly paid executive for
bargaining for more compensation was modest. When top
marginal tax rates fell, bargaining for more compensation was
modest. When top marginal tax rates fell,
high earners started bargaining more aggressively to increase
their compensation. high earners started bargaining more
aggressively to increase their compensation.
In this scenario, cuts in top tax rates can increase top income
shares—consistent In this scenario, cuts in top tax rates can
increase top income shares—consistent
with the observed trend in Figure 1—but the increases in top 1
percent incomes with the observed trend in Figure 1—but the
increases in top 1 percent incomes
now come at the expense of the remaining 99 percent.now come
at the expense of the remaining 99 percent.
One can also weave this notion of greater incentives for
bargaining into a One can also weave this notion of greater
incentives for bargaining into a
broader scenario, in which the improved information and
communications tech-broader scenario, in which the improved
information and communications tech-
nology and globalization were increasing the demand for high-

skilled labor, and the nology and globalization were increasing
the demand for high-skilled labor, and the
deregulation of fi nance and of other industries was both raising
the demand for skill deregulation of fi nance and of other
industries was both raising the demand for skill
at the top and changing the rules under which compensation had
been calculated at the top and changing the rules under which
compensation had been calculated
in the past. In this perspective, high marginal tax rates had
served as a brake on the in the past. In this perspective, high
marginal tax rates had served as a brake on the
level of surplus extraction in the past, but then this brake was
released at the same level of surplus extraction in the past, but
then this brake was released at the same
time that economic and institutional conditions allowed for
higher compensation time that economic and institutional
conditions allowed for higher compensation
at the top of the income distribution (Piketty, Saez, and
Stantcheva 2011).at the top of the income distribution (Piketty,
Saez, and Stantcheva 2011).
In this scenario, the higher share of income going to the top
1 percent does In this scenario, the higher share of income
going to the top 1 percent does
not refl ect higher economic growth—which is a key difference
with the supply-not refl ect higher economic growth—which is a
key difference with the supply-
side scenario. It is even possible that reductions in top marginal
tax rates may side scenario. It is even possible that reductions
in top marginal tax rates may
have adverse effects on growth, as may be seen if we go back to
the theories of have adverse effects on growth, as may be seen
if we go back to the theories of
managerial fi rms and the separation of ownership and control
developed by managerial fi rms and the separation of ownership
and control developed by

Oliver E. Williamson, William Baumol, and Robin Marris in the
1960s and 1970s Oliver E. Williamson, William Baumol, and
Robin Marris in the 1960s and 1970s
(for discussion, see Solow 1971). In these models, managers are
concerned with (for discussion, see Solow 1971). In these
models, managers are concerned with
their remuneration (both monetary and nonmonetary) but also
with other dimen-their remuneration (both monetary and
nonmonetary) but also with other dimen-
sions such as the scale or rate of growth of their fi rms, and
allocate their effort sions such as the scale or rate of growth of
their fi rms, and allocate their effort
accordingly. Where top tax rates were high, there was a low
return to effort spent accordingly. Where top tax rates were
high, there was a low return to effort spent
on negotiating higher pay. Top corporate executives may have
concentrated on on negotiating higher pay. Top corporate
executives may have concentrated on
securing alternative sources of utility, such as unproductive
corporate expenses, securing alternative sources of utility, such
as unproductive corporate expenses,
but they may also have ploughed back profi ts into securing
faster expansion than but they may also have ploughed back
profi ts into securing faster expansion than
in the traditional stock market valuation-maximizing fi rm. Cuts
in top tax rates, in the traditional stock market valuation-
maximizing fi rm. Cuts in top tax rates,
however, meant that top executives switched efforts back to
securing a larger share however, meant that top executives
switched efforts back to securing a larger share
of the profi ts, in which case increases in remuneration, or
bonuses, may have come of the profi ts, in which case increases
in remuneration, or bonuses, may have come
at the expense of employment and growth.at the expense of
employment and growth.

The correlation shown in Figure 4 between top marginal tax
rates and changes in The correlation shown in Figure 4 between
top marginal tax rates and changes in
top income shares may of course refl ect in part coincidence
rather than causality. The top income shares may of course refl
ect in part coincidence rather than causality. The
political factors that led to top tax rate cuts —such as those by
Reagan and Thatcher political factors that led to top tax rate
cuts —such as those by Reagan and Thatcher
3 Kleven, Landais, Saez, and Schultz (2013) fi nd evidence of
such bargaining effects in the pay determi-
nation of high earners, using the Danish preferential tax scheme
for highly paid immigrants.
11
in the 1980s in the United States and the United Kingdom—
were accompanied by in the 1980s in the United States and the
United Kingdom—were accompanied by
other legislative changes, such as deregulation, which may have
caused top incomes other legislative changes, such as
deregulation, which may have caused top incomes
to rise, not least on account of the impetus they gave to the
growth of the fi nancial to rise, not least on account of the
impetus they gave to the growth of the fi nancial
services (Philippon and Reshef 2012) and legal services sectors.
More generally, the services (Philippon and Reshef 2012) and
legal services sectors. More generally, the
effects of taxation may interact with other changes, such as
those in remuneration effects of taxation may interact with other
changes, such as those in remuneration
practices. Where there is a surplus to be shared, the division

may refl ect relative practices. Where there is a surplus to be
shared, the division may refl ect relative
bargaining strength, as above, but it may also be infl uenced by
social norms. Notions bargaining strength, as above, but it may
also be infl uenced by social norms. Notions
of fairness, or a “pay code,” may come into play to remove the
indeterminacy where of fairness, or a “pay code,” may come
into play to remove the indeterminacy where
“individual incentives are not by themselves . . . suffi cient to
determine a unique “individual incentives are not by themselves
. . . suffi cient to determine a unique
equilibrium” (MacLeod and Malcomson 1998, p. 400). A “pay
code” limits the extent equilibrium” (MacLeod and Malcomson
1998, p. 400). A “pay code” limits the extent
to which earnings are individually determined, a situation that
both workers and to which earnings are individually determined,
a situation that both workers and
employers accept on reputational grounds. As argued in
Atkinson (2008), there may employers accept on reputational
grounds. As argued in Atkinson (2008), there may
be a tipping-point where there is a switch from a high level of
adherence to such be a tipping-point where there is a switch
from a high level of adherence to such
a code to a situation where pay becomes largely individually
determined. This has a code to a situation where pay becomes
largely individually determined. This has
been documented in the case of the United States by Lemieux,
MacLeod, and Parent been documented in the case of the United
States by Lemieux, MacLeod, and Parent
(2009), who fi nd an increase in the proportion of performance-
pay jobs over the (2009), who fi nd an increase in the
proportion of performance-pay jobs over the
period 1976 to 1998. As they note, the increased extent of
performance-pay may be period 1976 to 1998. As they note, the
increased extent of performance-pay may be
a channel by which other factors are expressed in greater wage

dispersion, and they a channel by which other factors are
expressed in greater wage dispersion, and they
stress the effect at the top end of the wage distribution.stress
the effect at the top end of the wage distribution.
Top Tax Rates and Growth
If we look at the aggregate outcomes, we fi nd no apparent
correlation between If we look at the aggregate outcomes, we fi
nd no apparent correlation between
cuts in top tax rates and growth rates in real per capita GDP
(Piketty, Saez, and cuts in top tax rates and growth rates in real
per capita GDP (Piketty, Saez, and
Stantcheva 2011). Countries that made large cuts in top tax
rates such as the United Stantcheva 2011). Countries that made
large cuts in top tax rates such as the United
Kingdom or the United States have not grown signifi cantly
faster than countries that Kingdom or the United States have not
grown signifi cantly faster than countries that
did not, such as Germany or Switzerland. This lack of
correlation is more consistent did not, such as Germany or
Switzerland. This lack of correlation is more consistent
with a story that the response of pre-tax top incomes to top tax
rates documented in with a story that the response of pre-tax top
incomes to top tax rates documented in
Figure 4 is due to increased bargaining power or more
individualized pay at the top, Figure 4 is due to increased
bargaining power or more individualized pay at the top,
rather than increased productive effort. Naturally, cross-country
comparisons are rather than increased productive effort.
Naturally, cross-country comparisons are
bound to be fragile; exact results vary with the specifi cation,
years, and countries. bound to be fragile; exact results vary with
the specifi cation, years, and countries.
However, the regression analysis by Piketty, Saez, and
Stantcheva (2011), using the However, the regression analysis

by Piketty, Saez, and Stantcheva (2011), using the
complete time-series data since 1960, shows that the absence of
correlation between complete time-series data since 1960,
shows that the absence of correlation between
economic growth and top tax rates is quite robust. By and large,
the bottom line is economic growth and top tax rates is quite
robust. By and large, the bottom line is
that rich countries have all grown at roughly the same rate over
the past 40 years—in that rich countries have all grown at
roughly the same rate over the past 40 years—in
spite of huge variations in tax policies.spite of huge variations
in tax policies.
More specifi cally, international evidence shows that current
pay levels for chief More specifi cally, international evidence
shows that current pay levels for chief
executive offi cers across countries are strongly negatively
correlated with top tax executive offi cers across countries are
strongly negatively correlated with top tax
rates even controlling for fi rm’s characteristics and
performance, and that this rates even controlling for fi rm’s
characteristics and performance, and that this
correlation is stronger in fi rms with poor governance (Piketty,
Saez, and Stantcheva correlation is stronger in fi rms with poor
governance (Piketty, Saez, and Stantcheva
2011).2011).44 This fi nding also suggests that the link between
top tax rates and pay of chief This fi nding also suggests that
the link between top tax rates and pay of chief
4 Governance is measured with an index that combines various
governance measures: insider ownership,
institutional ownership, the ratio of independent board
directors, whether the CEO is also chairman of
the board, and the average number of board positions held by
board members.

executive offi cers does not run through fi rm performance but
is likely to be due to executive offi cers does not run through fi
rm performance but is likely to be due to
bargaining effects.bargaining effects.
Such fi ndings have strong implications for top tax rate policies.
The optimal Such fi ndings have strong implications for top tax
rate policies. The optimal
top tax rate rises dramatically if a substantial fraction of the
effect of top tax rates top tax rate rises dramatically if a
substantial fraction of the effect of top tax rates
on pre-tax top incomes documented in Figure 4 above is due to
wage-bargaining on pre-tax top incomes documented in Figure
4 above is due to wage-bargaining
effects instead of supply-side effects. Using mid-range
parameter values where effects instead of supply-side effects.
Using mid-range parameter values where
the response of top earners to top tax rate cuts is three-fi fths
due to increased the response of top earners to top tax rate cuts
is three-fi fths due to increased
bargaining behavior and two-fi fths due to increased productive
work, Piketty, Saez, bargaining behavior and two-fi fths due to
increased productive work, Piketty, Saez,
and Stantcheva (2011) fi nd that the top tax rate could
potentially be set as high as and Stantcheva (2011) fi nd that the
top tax rate could potentially be set as high as
83 percent—as opposed to 57 percent in the pure supply-side
model.83 percent—as opposed to 57 percent in the pure supply-
side model.55
Capital Income and Inheritance

The analysis just cited focused—like much of the literature—
on what is The analysis just cited focused—like much of the
literature— on what is
commonly called “earned incomes,” referring to income
received in return for work. commonly called “earned incomes,”
referring to income received in return for work.
But capital income is also an important part of the story. Of
course, the distinction But capital income is also an important
part of the story. Of course, the distinction
between the two types of income can become blurry in some
cases—notably, entre-between the two types of income can
become blurry in some cases—notably, entre-
preneurial income can have elements of both compensation for
work and a return preneurial income can have elements of both
compensation for work and a return
to capital investment. Here, we defi ne “capital income” as
rents, dividends, interest, to capital investment. Here, we defi
ne “capital income” as rents, dividends, interest,
and realized capital gains. The decline of top capital incomes is
the main driver of and realized capital gains. The decline of top
capital incomes is the main driver of
the falls in top income shares that occurred in many countries
early in the twentieth the falls in top income shares that
occurred in many countries early in the twentieth
century. For example, from 1916 to 1939, capital income
represented 50 percent of century. For example, from 1916 to
1939, capital income represented 50 percent of
US top 1 percent incomes, whereas by the end of the century
from 1987 to 2010, US top 1 percent incomes, whereas by the
end of the century from 1987 to 2010,
the share had fallen to one-third (Piketty and Saez 2003,
tables A7 and A8). In the the share had fallen to one-third
(Piketty and Saez 2003, tables A7 and A8). In the
United Kingdom, the corresponding share fell from 60 percent
in 1937 to under United Kingdom, the corresponding share fell
from 60 percent in 1937 to under

20 percent by the end of the century (Atkinson 2007, fi gure
4.11). At the same 20 percent by the end of the century
(Atkinson 2007, fi gure 4.11). At the same
time, it should be borne in mind that these calculations depend
on the defi nition of time, it should be borne in mind that these
calculations depend on the defi nition of
taxable incomes. In times past, a number of income tax systems
like those in France taxable incomes. In times past, a number of
income tax systems like those in France
and the United Kingdom included imputed rents of homeowners
in the income tax and the United Kingdom included imputed
rents of homeowners in the income tax
base, but today imputed rents are typically excluded. Where the
tax base has been base, but today imputed rents are typically
excluded. Where the tax base has been
extended, this has in some cases taken the form of separate
taxation (as with real-extended, this has in some cases taken the
form of separate taxation (as with real-
ized capital gains in the United Kingdom), so that this element
of capital income ized capital gains in the United Kingdom), so
that this element of capital income
is not covered in the income tax data. As a result of these
developments, the share is not covered in the income tax data.
As a result of these developments, the share
of capital income that is reportable on income tax returns has
often signifi cantly of capital income that is reportable on
income tax returns has often signifi cantly
decreased over time.decreased over time.
Earlier we referred to the cumulative effect of progressive
taxation. A long Earlier we referred to the cumulative effect of
progressive taxation. A long
period of high top rates of income taxation, coupled with high
top rates of taxation period of high top rates of income taxation,
coupled with high top rates of taxation
on the transmission of wealth by inheritance and gift, reduced

the capacity of large on the transmission of wealth by
inheritance and gift, reduced the capacity of large
5 With wage-bargaining effects, the optimal top tax rate
formula becomes τ = (1 + s · a · e)/(1 + a · e)
where s is the fraction of the total behavioral elasticity due to
bargaining effects. With a = 1.5, e = 0.5
(as above), and s = 3/5, we obtain τ = 83 percent. In the
standard model with no wage-bargaining
effects, we had s = 0 and τ = 57 percent.
Emmanuel Saez 13
wealth-holders to sustain their preeminence. The key factor in
determining the wealth-holders to sustain their preeminence.
The key factor in determining the
capacity to transmit wealth is the difference between the
“internal rate of accumula-capacity to transmit wealth is the
difference between the “internal rate of accumula-
tion” (the savings rate times the rate of return net of taxes) and
the rate of growth tion” (the savings rate times the rate of return
net of taxes) and the rate of growth
of the economy. This means that the taxation of income and
wealth transfers can of the economy. This means that the
taxation of income and wealth transfers can
cause the share of top wealth-holders to fall, as in the United
Kingdom over the fi rst cause the share of top wealth-holders to
fall, as in the United Kingdom over the fi rst
three-quarters of the twentieth century (Atkinson and Harrison
1978), contributing three-quarters of the twentieth century
(Atkinson and Harrison 1978), contributing
to the downward trajectory of top income shares. Alongside this
was the growth to the downward trajectory of top income

shares. Alongside this was the growth
of “popular wealth” owned by the bottom 99 percent. Back in
1908 in the United of “popular wealth” owned by the bottom
99 percent. Back in 1908 in the United
Kingdom, the 17th Earl of Derby had a rent roll of some
£100,000, which was more Kingdom, the 17th Earl of Derby had
a rent roll of some £100,000, which was more
than 1,000 times the average income at the time. Many of these
houses are now than 1,000 times the average income at the
time. Many of these houses are now
owned by their occupiers.owned by their occupiers.
In recent decades, however, the relation between the internal
rate of accumula-In recent decades, however, the relation
between the internal rate of accumula-
tion of wealth holdings and the rate of growth of capital has
now been reversed as a tion of wealth holdings and the rate of
growth of capital has now been reversed as a
result of the cuts in capital taxation and the decline in the
macroeconomic growth result of the cuts in capital taxation and
the decline in the macroeconomic growth
rate (Piketty 2011). As a result, a number of countries are
witnessing a return of rate (Piketty 2011). As a result, a number
of countries are witnessing a return of
inheritance as a major factor. Figure 5 shows the estimates of
Piketty (2011) for inheritance as a major factor. Figure 5 shows
the estimates of Piketty (2011) for
France for the period 1820 to 2008 of the annual inheritance fl
ow (the amount France for the period 1820 to 2008 of the
annual inheritance fl ow (the amount
passed on through bequests and gifts passed on through
bequests and gifts inter vivos), expressed as percentage of ),
expressed as percentage of
Figure 5
Annual Inheritance Flow as a Fraction of Disposable Income,

France 1820 –2008
Source: Piketty (2011).
Notes: The annual inheritance fl ow is defi ned as the total
market value of all assets (tangible and fi nancial
assets, net of fi nancial liabilities) transmitted at death or
through inter vivos gifts. Disposable income was
as high as 90–95 percent of national income during the 19th
century and early 20th century (when taxes
and transfers were almost nonexistent), while it is now about
70 percent of national income.
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
1820
1840

1860
1880
1900
1920
1940
1960
1980
2000
Economic flow (computed from national wealth estimates,
mortality tables and observed age-wealth profiles)
Fiscal flow (computed from observed bequest and gift tax data,
including tax exempt assets)
disposable income.disposable income.66 Two methods are
employed: a constructive calculation from Two methods are
employed: a constructive calculation from
national wealth fi gures, mortality rates, and observed age-
wealth profi les, and an national wealth fi gures, mortality rates,
and observed age-wealth profi les, and an
estimate based on the estate and gift tax records. The two
methods differ in levels estimate based on the estate and gift tax
records. The two methods differ in levels
(the fi scal fl ows are lower), but the time-paths are very
similar.(the fi scal fl ows are lower), but the time-paths are very
similar.
The inheritance fl ow in France was relatively stable around 20–

25 percent The inheritance fl ow in France was relatively stable
around 20–25 percent
of disposable income throughout the 1820 –1910 period (with a
slight upward of disposable income throughout the 1820 –1910
period (with a slight upward
trend), before being divided by a factor of about 5 to 6 between
1910 and the trend), before being divided by a factor of about 5
to 6 between 1910 and the
1950s. Since then, it has been rising regularly, with an
acceleration of the trend 1950s. Since then, it has been rising
regularly, with an acceleration of the trend
during the past 30 years. These truly enormous historical
variations bring France during the past 30 years. These truly
enormous historical variations bring France
back to a situation similar to that of 100 years ago. An annual
inheritance fl ow back to a situation similar to that of 100 years
ago. An annual inheritance fl ow
around 20 percent of disposable income is very large. It is
typically much larger around 20 percent of disposable income is
very large. It is typically much larger
than the annual fl ow of new savings and almost as big as the
annual fl ow of than the annual fl ow of new savings and almost
as big as the annual fl ow of
capital income. This implies that inheritance is again becoming
a very important capital income. This implies that inheritance is
again becoming a very important
factor of lifetime economic inequality. As shown in Piketty and
Saez (2012), in a factor of lifetime economic inequality. As
shown in Piketty and Saez (2012), in a
world where inheritance is quantitatively signifi cant, those
receiving no bequests world where inheritance is quantitatively
signifi cant, those receiving no bequests
will leave smaller-than-average bequests themselves and hence
should support will leave smaller-than-average bequests
themselves and hence should support
shifting labor taxation toward bequest taxation. In this situation,

inheritance taxa-shifting labor taxation toward bequest taxation.
In this situation, inheritance taxa-
tion (and more generally capital taxation, given capital market
imperfections) tion (and more generally capital taxation, given
capital market imperfections)
becomes a powerful and desirable tool for redistribution toward
those receiving becomes a powerful and desirable tool for
redistribution toward those receiving
no inheritance.no inheritance.
The return of inherited wealth may well differ in magnitude
across coun-The return of inherited wealth may well differ in
magnitude across coun-
tries. The historical series available so far regarding the
inheritance fl ows are tries. The historical series available so far
regarding the inheritance fl ows are
too scarce to reach fi rm conclusions. Existing estimates suggest
that the French too scarce to reach fi rm conclusions. Existing
estimates suggest that the French
U-shaped pattern also applies to Germany, and to a lesser extent
to the United U-shaped pattern also applies to Germany, and to
a lesser extent to the United
Kingdom and the United States (Atkinson 2013; Schinke 2012;
see Piketty and Kingdom and the United States (Atkinson 2013;
Schinke 2012; see Piketty and
Zucman, forthcoming, for a survey). Such variations could be
due to differences Zucman, forthcoming, for a survey). Such
variations could be due to differences
in pension systems and the share of private wealth that is
annuitized (and there-in pension systems and the share of
private wealth that is annuitized (and there-
fore nontransmissible). From a theoretical perspective, it is
unclear however why fore nontransmissible). From a theoretical
perspective, it is unclear however why
there should be much crowding out between lifecycle wealth
and transmissible there should be much crowding out between

lifecycle wealth and transmissible
wealth in an open economy (that is, the fact that individuals
save more for their wealth in an open economy (that is, the fact
that individuals save more for their
pension should not make them save less for their children; the
extra pension pension should not make them save less for their
children; the extra pension
wealth coming from the lifecycle motive should be invested
abroad). It could wealth coming from the lifecycle motive
should be invested abroad). It could
be that there are differences in tastes for wealth transmission.
Maybe wealthy be that there are differences in tastes for wealth
transmission. Maybe wealthy
individuals in the United Kingdom and in the United States have
less taste for individuals in the United Kingdom and in the
United States have less taste for
bequest than their French and German counterparts. However it
should be kept bequest than their French and German
counterparts. However it should be kept
in mind that there are important data problems (in particular,
wealth surveys tend in mind that there are important data
problems (in particular, wealth surveys tend
to vastly underestimate inheritance receipts), which could partly
explain why the to vastly underestimate inheritance receipts),
which could partly explain why the
rise of inheritance fl ows in the recent period appears to be
more limited in some rise of inheritance fl ows in the recent
period appears to be more limited in some
6 It is critical to include both bequests (wealth transmitted at
death) and gifts (wealth transmitted inter
vivos) in our defi nition of inheritance, fi rst because gifts have
always represented a large fraction of total
wealth transmission, and second because this fraction has
changed a lot over time.

15
countries than in others.countries than in others.77 Another
source of difference between countries could Another source of
difference between countries could
come from variations in the total magnitude of wealth
accumulation. There may come from variations in the total
magnitude of wealth accumulation. There may
in this respect be an important difference between the United
States and Europe, in this respect be an important difference
between the United States and Europe,
as is indeed suggested when we look at total private wealth
(expressed as a ratio to as is indeed suggested when we look at
total private wealth (expressed as a ratio to
national income), shown in Figure 6 (see Piketty and Zucman,
2013, for a discus-national income), shown in Figure 6 (see
Piketty and Zucman, 2013, for a discus-
sion on the differences between private and
national wealth).sion on the differences between private and
national wealth).
As may be seen from Figure 6, the twentieth century has seen a
U-shaped As may be seen from Figure 6, the twentieth century
has seen a U-shaped
time-path in the ratio of private wealth to national income that
is more marked in time-path in the ratio of private wealth to
national income that is more marked in
Europe than in the United States. Private wealth in Europe was
around six times Europe than in the United States. Private
wealth in Europe was around six times
7 In particular, the smaller rise of the UK inheritance fl ow (as
compared to France and Germany) is entirely

due to the much smaller rise of recorded inter vivos gifts, which
according to fi scal data barely rose in the
United Kingdom during recent decades, while they have become
almost as large as bequests in France and
Germany. This might simply be due to the fact that gifts are not
properly recorded by the UK tax adminis-
tration (Atkinson 2013). In the United States, due to the
limitations of federal fi scal data on bequests and
gifts, scholars often use retrospective wealth survey data. The
problem is that in countries with exhaustive
administrative data on bequests and gifts (such as France, and to
some extent Germany), survey-based
self-reported fl ows appear to be less than 50 percent of fi scal
fl ows. This probably contributes to explaining
the low level of inheritance receipts found in a number of US
studies. An example of such a study is Wolff
and Gittleman (2011); one additional bias in this study is that
inherited assets are valued using asset prices
at the time these assets were transmitted, and no capital gain or
income is included.
Figure 6
Private Wealth/National Income Ratios, 1870 – 2010
Source: Piketty and Zucman (2013).
Notes: Europe is the (unweighted) average of France, Germany,
and the United Kingdom. Private wealth
is defi ned as the sum of nonfi nancial assets, fi nancial assets,
minus fi nancial liabilities in the household
and nonprofi t sectors.
100%
200%
300%

400%
500%
600%
700%
800%
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
United States
Europe

national income in 1910, and then fell after the World Wars to
less than two and national income in 1910, and then fell after
the World Wars to less than two and
a half times in 1950. In the past 60 years, it has risen sharply to
reach more than a half times in 1950. In the past 60 years, it
has risen sharply to reach more than
fi ve times national income. This pattern suggests that capital is
“back” and that the fi ve times national income. This pattern
suggests that capital is “back” and that the
low wealth–income ratios observed in Europe from the 1950s to
the 1970s were low wealth–income ratios observed in Europe
from the 1950s to the 1970s were
an anomaly. This can be well accounted for by the long-run
wealth accumulation an anomaly. This can be well accounted
for by the long-run wealth accumulation
formula formula ββ == s//g, where , where ββ is the Harrod–
Domar–Solow wealth/income ratio, is the Harrod–Domar–
Solow wealth/income ratio, s is the is the
saving rate, and saving rate, and g is the growth rate including
both real per capita and population is the growth rate including
both real per capita and population
growth. For a given saving rate (say growth. For a given saving
rate (say s == 10 percent), you accumulate a lot more 10
percent), you accumulate a lot more
wealth relative to income in the long run when the growth rate
is 1.5 to 2 percent wealth relative to income in the long run
when the growth rate is 1.5 to 2 percent
than if the growth rate is 2.5 to 3 percent. Given the large and
continuing differ-than if the growth rate is 2.5 to 3 percent.
Given the large and continuing differ-
ence in population growth rates between Old Europe and the

New World, this can ence in population growth rates between
Old Europe and the New World, this can
explain not only the long-run changes but also the difference in
levels between explain not only the long-run changes but also
the difference in levels between
Europe and the United States (Piketty 2011; Piketty and Zucman
2013).Europe and the United States (Piketty 2011; Piketty and
Zucman 2013).88
On the other hand, it should be noted that On the other hand, it
should be noted that wealth concentration (as opposed to (as
opposed to
wealth accumulation) is signifi cantly greater in the United
States, where the top wealth accumulation) is signifi cantly
greater in the United States, where the top
1 percent owns about 35 percent of aggregate wealth (for
comparison, the share is 1 percent owns about 35 percent of
aggregate wealth (for comparison, the share is
about 20 –25 percent in Europe). So far, existing studies have
found that the increase about 20 –25 percent in Europe). So far,
existing studies have found that the increase
in US wealth concentration since the 1970s and 1980s has been
relatively moderate in US wealth concentration since the 1970s
and 1980s has been relatively moderate
in contrast to the huge increase in US income concentration
documented above in contrast to the huge increase in US income
concentration documented above
(Kennickell 2009; Kopczuk and Saez 2004). However, we
should be modest about (Kennickell 2009; Kopczuk and Saez
2004). However, we should be modest about
our ability to measure the trends in top billionaire wealth. With
low and diminishing our ability to measure the trends in top
billionaire wealth. With low and diminishing
growth rates and high global returns to capital, the potential for
divergence of the growth rates and high global returns to
capital, the potential for divergence of the

wealth distribution is naturally quite large.wealth distribution is
naturally quite large.
Joint Distribution of Earned and Capital Income
We have discussed earned income and capital income. The last
piece of the We have discussed earned income and capital
income. The last piece of the
puzzle concerns the puzzle concerns the joint distribution of
earned and capital incomes—an aspect that distribution of
earned and capital incomes—an aspect that
is rarely given explicit consideration. Yet it is important to
know whether the same is rarely given explicit consideration.
Yet it is important to know whether the same
people are at the top of both the distribution of capital income
and the distribution people are at the top of both the distribution
of capital income and the distribution
of earned income. Suppose that we imagine asking the
population fi rst to line up of earned income. Suppose that we
imagine asking the population fi rst to line up
along one side of a room in increasing order of their earned
income and then to along one side of a room in increasing order
of their earned income and then to
go to the other side of the room and line up in increasing order
of their capital go to the other side of the room and line up in
increasing order of their capital
income. How much will they cross over? In the Ricardian class
model, the crossing is income. How much will they cross over?
In the Ricardian class model, the crossing is
complete: the capitalists come at the top in one case and at the
bottom in the other. complete: the capitalists come at the top in
one case and at the bottom in the other.
Has a negative correlation in the nineteenth century been
replaced today by a zero Has a negative correlation in the
nineteenth century been replaced today by a zero
correlation? Or is there a perfect correlation, so that people

cross straight over? The correlation? Or is there a perfect
correlation, so that people cross straight over? The
pattern of crossing is given by the copula, which represents the
joint distribution pattern of crossing is given by the copula,
which represents the joint distribution
in terms of a function of the ranks in the two distributions of
earnings and capital in terms of a function of the ranks in the
two distributions of earnings and capital
income. Because the copula compares ranks, it is not affected
by whether the distri-income. Because the copula compares
ranks, it is not affected by whether the distri-
butions themselves are widening or narrowing.butions
themselves are widening or narrowing.
8 In a way, this is equivalent to the explanation based upon
lower bequest taste: with higher population
growth and the same bequest taste (per children), the United
States should save more. However a signifi cant
part of US population growth historically comes from
migration, so this interpretation is not fully accurate.
Emmanuel Saez 17
What can be learned by considering the copula? Table 1 shows
results for the What can be learned by considering the copula?
Table 1 shows results for the
United States in 2000 and in 1980 based on tax return data
analysis from Aaberge, United States in 2000 and in 1980 based
on tax return data analysis from Aaberge,
Atkinson, Königs, and Lakner (forthcoming). Three conclusions
may be drawn. Atkinson, Königs, and Lakner (forthcoming).
Three conclusions may be drawn.
First, the joint distribution is asymmetric. In 2000, of those in

the top 1 percent of First, the joint distribution is asymmetric.
In 2000, of those in the top 1 percent of
capital income, 61 percent were in the top 20 percent of earned
income. However, capital income, 61 percent were in the top
20 percent of earned income. However,
turning things round, of those in the top 1 percent of earned
income, a larger turning things round, of those in the top 1
percent of earned income, a larger
proportion of 80 percent were in the top 20 percent of capital
income. In fact, proportion of 80 percent were in the top 20
percent of capital income. In fact,
63 percent of the top 1 percent of earners were in the top 63
percent of the top 1 percent of earners were in the top 10
percent of capital percent of capital
income. Such asymmetry could easily be missed by the use of a
measure such as income. Such asymmetry could easily be
missed by the use of a measure such as
the correlation coeffi cient or a parametric form for the copula
function. Second, the correlation coeffi cient or a parametric
form for the copula function. Second,
the degree of association appears strong. Even for capital
income, over half of the the degree of association appears
strong. Even for capital income, over half of the
top 1 percent fi nd themselves in the top tenth of earners. A
quarter are in the top top 1 percent fi nd themselves in the top
tenth of earners. A quarter are in the top
1 percent for both. Third, the numbers for 1980 are all smaller
than their coun-1 percent for both. Third, the numbers for 1980
are all smaller than their coun-
terparts for 2000. The degree of association increased between
1980 and 2000: in terparts for 2000. The degree of association
increased between 1980 and 2000: in
1980 only 17 percent were in the top 1 percent for both. The
proportion of the top 1980 only 17 percent were in the top
1 percent for both. The proportion of the top
1 percent of earners who were in the top 5 percent of capital

income rose from one-1 percent of earners who were in the top
5 percent of capital income rose from one-
third to one-half, and the reverse proportion rose from 27 to
45 percent.third to one-half, and the reverse proportion rose
from 27 to 45 percent.
Table 1
Relation between Top Labor Incomes and Top Capital
Incomes in the United States
Year
1980 2000
A: Percent of top 1% capital incomes in various top labor
income groups
Labor income groups:
Top 1% 17% 27%
Top 5% 27% 45%
Top 10% 32% 52%
Top 20% 38% 61%
B: Percent of top 1% labor incomes in various top capital
income groups
Capital income groups:
Top 1% 17% 27%
Top 5% 36% 50%
Top 10% 47% 63%
Top 20% 68% 80%
Source: Aaberge, Atkinson, Königs, and Lakner (forthcoming).
Notes: Panel A reports the percent of top 1 percent capital
income earners in
various top labor income groups in 1980 (column 1) and 2000
(column 2).
In 2000, 27 percent of top 1 percent capital income earners were

also in the
top 1 percent of labor incomes, 45 percent were in the top
5 percent of labor
incomes, etc. Panel B reports the percent of top 1 percent labor
income
earners in various top capital income groups in 2000 (column 1)
and 1980
(column 2). The computations are based on the public use US
tax return
micro-datafi les (see Aaberge et al., forthcoming, for complete
details).
To understand the changing relationship between earned and
capital incomes, To understand the changing relationship
between earned and capital incomes,
we need to consider the mechanisms that link the two sources.
In one direction, we need to consider the mechanisms that link
the two sources. In one direction,
there is the accumulation of wealth out of earned income. Here
the opportuni-there is the accumulation of wealth out of earned
income. Here the opportuni-
ties have changed in Anglo-Saxon countries. A third of a
century ago, Kay and ties have changed in Anglo-Saxon
countries. A third of a century ago, Kay and
King (1980, p. 59) described the hypothetical position of a
senior executive with King (1980, p. 59) described the
hypothetical position of a senior executive with
a large corporation in the United Kingdom who had saved a
quarter of his after-a large corporation in the United Kingdom
who had saved a quarter of his after-
tax earnings: “[F]eeling . . . that he has been unusually
fortunate in his career and tax earnings: “[F]eeling . . . that he

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