Thank The Financial Sector For Increasing Income Inequality


wallstflagThe spike in income inequality in the U.S. since 1960 likely has more to do with Wall Street deregulation and the ever-increasing reach of the financial sector than it does with tax rates, according to new research.

The research, by economists Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, starts from a simple question: Why does inequality vary so widely among wealthy countries with broadly similar economic systems? Cuts to top tax rates play some role, but as The Atlantic’s Matthew O’Brien explains, it’s not clear exactly what that role is – and it isn’t enough to fully explain the international differences. The U.K. cut top tax rates even more than the U.S. did since 1960, but the top 1 percent of American earners increased their share of national income significantly more than the British.

Rich-friendly tax changes didn’t happen in a vacuum. They were accompanied by deregulation, creating “a perfect storm for Wall Street.” As the top 1 percent of Americans got richer, they also got much more likely to work in finance. Financial professionals made up almost twice as much of the top 1 percent of income distribution in 2005 as they did in 1979, by far the largest jump any profession made in those terms.

Meanwhile, across all industries, executive compensation became more and more tied to stock options, and less and less dependent on cash. Compensation in stock is taxed at an even lower rate than regular salaries thanks to capital gains rates. That means that the richest Americans’ payouts were getting taxed at lower rates at the same time that income taxes were falling. As the dependence on stock values spread beyond boardrooms and companies became more interested in maximizing value for their shareholders than in investing in future business output, broader economic growth sagged below its potential, exacerbating inequality by undermining opportunities for working people.

Policy choices tilted the economic playing field toward the financial industry, producing immense gaps between the richest and the rest, and different policy choices could reshape things again. Earlier this month, Sens. Jack Reed (D-RI) and Richard Blumenthal (D-CT) proposed ending a 20-year-old taxpayer subsidy for companies that pay their executives in stock options. Sen. Elizabeth Warren (D-MA) and others want to re-regulate and shrink the financial industry to check its worst excesses.