Essays on the economics of top incomes taxation

Thanks to the research efforts by some of the most influential contemporary economists such as Antony Atkinson, Emmanuel Saez and Thomas Piketty, literature on the “economics of top incomes” have flourished in recent years. Newly collected data on top marginal tax rates and top income shares have indeed revived the interest on role of top income taxation in explaining countries’ economic growth and fiscal performances. This Ph.D. thesis aims at contributing to the ongoing and growing debate. The thesis is composed by three independent papers all having as a common denominator taxation on top incomes across main OECD over the last decades. Each contribution aims at adding to the existent literature by providing an original contribution of either the drivers or the effects of taxation on top incomes. The first Chapter explores a wide range of potential determinants of changes in top marginal taxation across 18 OECD countries over the period 1961-2009. Despite top marginal taxation have witnessed dramatic changes over the last fifty years across the majority of OECD countries – on average it fell from over 63% in 1960 to around 40% in 2009 – an assessment of its determinants is virtually unprecedented in the literature. Results show that macroeconomic conditions as well as political factors play a minor role in explaining changes in the top marginal tax rate. Conversely, evidence suggests that governments tend to cut their top tax rate if the inherited top tax rate is high and if contemporaneous cuts to the corporate tax rate occur. Moreover, findings show that countries that are exposed to top tax rates cuts in neighboring countries also lower their own taxation on top incomes, while they do not match other countries’ top tax rate hikes. This result is relevant insofar it is the first reported evidence of potential international competition over top marginal tax rates across advanced countries. After having investigated which factors shape reforms in top incomes taxation, the analysis in Chapter 2 makes a step further and tries to assess the impact of top marginal taxation on economic growth. While the effect of income taxation on economic growth has been extensively investigated, very few papers directly have focused on the growth-relevance of top incomes taxation as in and of itself. Focusing on a sample of 18 OECD countries between 1960 and 2009, evidence in Chapter 2 shows that a quadratic relationship between top marginal income tax rates and economic growth exists. In particular, results suggest that the marginal effect of higher top tax rates becomes negative above a growth maximizing tax rate on the order of 60 percent. Departing from this result, the top tax-growth nexus is further explored over the sub-period 1980-2009, when top marginal tax rates were below the estimated growth maximizing level in most of the countries considered. Not surprisingly, results show that a positive relationship between top marginal tax rates and GDP growth exists after 1980. Leveraging different specifications of the government budget constraint, evidence presented in the chapter suggests that higher top marginal tax rates would have the largest positive impact on growth when the related additional revenues are used to finance productive expenditure, reduce budget deficits or lower some types of distortionary taxation. Finally, Chapter 3 slightly deviates from the direct focus on top marginal tax rates to investigate to what extent countries’ budgetary situation depend on the level of concentration of national income at the top of the income distribution. Yet, as it will be clearer in Chapter 3, taxation on top income remains key within this research questions. In fact, the paper argues that growing concentration of income at the top of the distribution, partially caused by large decline in top marginal tax rates, may have weighted on OECD countries' fiscal performances in recent decades. Using a panel of 17 OECD countries between 1975 and 2005, the paper finds that countries where income is highly concentrated at the top of the distribution run on average larger budget deficits. This is the first reported evidence of a positive relationship between budget deficits and concentration of income at the top. Interestingly, a deeper analysis of the disaggregated budget components suggests that such a result is due to a negative relationship between the concentration of income at the top and budget revenues.