The Top 0.1 Percent Responds to Incentives
By David Henderson
Alan Reynolds writes:
One affluent member of the Top One Percent club, Paul Krugman, has narrowed his sights to the even more affluent top 0.1 percent in his new book, End This Depression Now! He claims that, “Recent work by the economists Jon Bakija, Adam Cole and Bradley Heim gives us a good sense of who the top 0.1 percent are. The short answer is that they’re basically corporate executives or financial wheeler-dealers.”
The phrase “corporate executives” clearly suggests CEOs and other top executives of publicly-traded corporations. Unfortunately, the paper Krugman refers to (“Jobs and Income Growth of Top Earners and the causes of Changing Income Inequality”) shows that corporate executives account for a small and declining share of the income reported by the top 0.1%.
This table [Reynolds’s post], adapted from that paper, shows that corporate executives in public companies accounted for only 15.5% of the very highest incomes in 2005, down from 21.1% in 1997. If we include capital gains, corporate executives accounted for 16.8% of top 0.1 percent incomes in 2005, down from 23.9% in 1997.
Reynolds points out that the authors of the paper reach an interesting bottom line that accords with other things Reynolds has been writing:
Bakija, Cole and Heim find an elasticity of about 0.72 for the top 0.1 percent “suggesting a high degree of responsiveness to incentives for income-earning efforts (or income reporting) among those with the highest incomes, and a correspondingly large deadweight loss from imposing highly progressive tax rates on these taxpayers.”