AbstractsLaw & Legal Studies

Top Incomes: the Case of Germany

by Katharina Jenderny

Institution: Freie Universität Berlin
Department: FB Wirtschaftswissenschaft
Degree: PhD
Year: 2015
Record ID: 1113901
Full text PDF: http://edocs.fu-berlin.de/diss/receive/FUDISS_thesis_000000099118


Income concentration is a social issue: the more resources are controlled by a small group of persons at the top of the distribution, the more this group may influence collective decisions to a larger extent than their democratic rights would grant them. Furthermore, large fortunes translate into large inheritances, reducing the role of one's own effort in the determination of social position. The driving forces of income concentration are therefore of paramount importance. Long-run time series on income concentration show a heterogeneous pattern across countries and throughout history. As countries with similar economies show very different trends in income concentration, institutional settings such as the top marginal tax rate are likely to play a role. While German income concentration was comparatively stable since WWII, it increased in recent years. The first contribution of this thesis analyzes to what extent annual concentration and the increase therein are offset by income mobility. As annual concentration is assessed on cross sectional data, an increase in income mobility can in theory account for an increase in annual concentration, without any increase of concentration in permanent income. The chapter analyzes the extent to which top income fractile members are mobile in terms of ranks, and to what extent concentration of permanent incomes differs from annual concentration. It finds that income mobility at the top of the German income distribution is particularly low, and cannot account for the previously documented increase in income concentration. In addition, annual concentration is a suitable proxy for permanent concentration. Top income taxation is a plausible driving force for income concentration: if high incomes are taxed less, net income increases and accelerates capital accumulation, which in turn generates capital income. In Germany, the tax rate on capital income was drastically reduced in 2009, most likely reducing the degree of progressivity of personal income taxation. The second contribution analyzes the extent to which the reform changed net incomes across the distribution and within fractiles. A detailed simulation of all tax reform components reveals that the reform effect is regressive and horizontally unequal. The reform most likely induced a high increase in net incomes for few high-income tax units, while the bulk of tax units below the top percentile was hardly affected. The analysis of top income shares crucially depends on the availability of data on income tax records, as these are the only reliable source of the income level at the very top. Since 2001, several reforms of capital income taxation rendered tax statistics less and less suitable for deriving top income shares. In 2009, the data quality for Germany was further reduced by the exclusion of capital income from the personal income tax schedule. Since then, both tax statistics and microdata are missing a significant portion of gross income at the top. The third contribution derives harmonized series on top…