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Taxing the Super-Rich, Ctd.

Yesterday, my friend Reihan Salam and I recorded a Bloggingheads video, where we talked mostly in broad terms about taxes, fairness and economic growth. You can watch the whole thing here:

In the diavlog, I argue again that we should impose a millionaire’s tax, because income inequality has increased so egregiously over the course of the past decade. But I also note that it might not be a bad idea to tax extraordinary wealth since its accumulation through the financial sector has proven economically destructive to the middle class.

That argument gives me occasion to cite this paper by Steven N. Kaplan and Joshua Rauh, “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?,” via Matt Yglesias. The authors try to determine who is really rich. And they find our country’s billionaires come not from railroads, or tech companies, or manufacturing, but from finance.

We estimate that the professionals in hedge, VC, and PE funds include roughly the same number of individuals in the top 0.1% of the AGI income distribution as the top nonfinancial executives. While we do not estimate precise distributional changes over time for this sector, we show that these industries are significantly larger today than ten and twenty years ago and, therefore, that their employees must represent a larger fraction of the top brackets than before.

We also find that hedge fund investors and other “Wall Street” type individuals comprise a larger fraction of the very highest end of the AGI distribution (the top 0.0001%) than CEOs and top executives. In 2004, nine times as many Wall Street investors earned in excess of $100 million as public company CEOs. In fact, the top twenty-five hedge fund managers combined appear to have earned more than all five hundred S&P 500 CEOs combined (both realized and ex ante). This trend accelerated after 2004. In 2007, it is likely that the top five hedge fund managers earned more than all five hundred S&P 500 CEOs combined.

The problem is: A lot of Wall Street types themselves argue that the sector shifted from productively allocating risk and free capital, to destructively concentrating risk and soaking up capital. Consider an argument recently made by the founder of Vanguard, a huge mutual fund. John Bogle said: “The innovation in the productive part of our economy adds value to our society. The financial sector, by definition, subtracts value.”

Then, there is Paul Volcker, former chair of the Federal Reserve. “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” he argued last year. He then said the biggest innovation in the industry over the past 20 years had been the ATM.

Taxes are an easy corrective — a financial transactions tax being the most obvious fix, but a high tax on excessive income seeming like it might help too.

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