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Essays on Top Income Inequality PDF
By:Jihee Kim
Published on 2013 by

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Top income inequality, defined as the income gap within the top 1% income group, has been rising in the United States since the 1980s but remained low and stable in economies like France and Japan. Why? This dissertation studies what might have affected the widening income gap in the United States as well as the cross-country differences. The first chapter considers the most natural candidate: the effect of the top marginal tax rate on the high-income taxpayers. Identifying endogenous human capital accumulation as a link between top marginal tax rates and top incomes, this chapter shows that a decline in the top marginal tax rate can increase top income inequality as well as top incomes. We develop an infinite-horizon, heterogeneous agent model, where human capital accumulation is endogenously characterized by a proportional random growth process. If the top marginal tax rate declines, the benefit of human capital investment will increase, thereby increasing the growth rate of human capital. Since this growth rate pins down the Pareto inequality measure of the top income distribution, a decrease in the top marginal tax rate will lead to a more unequal Pareto income distribution, while simultaneously increasing every top income. When calibrated to the U.S. income data, the model finds that the reduction of the top marginal tax rate from 60% to 35% can account for 46.6% of the increase in top income inequality and 41.0% of the increase in the top 1% income share between 1980 and 2010. The second chapter theoretically examines three other candidates: the rise in the rate of top income growth, the direction of technological change, and misallocation of top talents to firms. The first model shows that if the growth rate of top incomes increases either by the rise in the returns to experience or by the rise in human capital accumulation effort, the top income inequality increases. The second model studies the direction of technological change and shows why the technological changes can be |talent-biased| at least along a transition path. The last model shows that top income inequality can increase when the matching between firms and talent becomes more efficient. This suggests that the rise in top income inequality in the United States may reflect an improvement in the allocation of talent.

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