The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes

Abstract

The debate over the extent and causes of rising inequality of American incomes and wages has now raged for at least two decades. In this paper, we will make four arguments. First, the increase in the incomes and wages of the top 1 percent over the last three decades should be interpreted as driven largely by the creation and/or redistribution of economic rents, and not simply as the outcome of well-functioning competitive markets rewarding skills or productivity based on marginal differences. This rise in rents accruing to the top 1 percent could be the result of increased opportunities for rentshifting, increased incentives for rent-shifting, or a combination of both. Second, this rise in incomes at the very top has been the primary impediment to having growth in living standards for low- and moderate-income households approach the growth rate of economy-wide productivity. Third, because this rise in top incomes is largely driven by rents, there is the potential for checking (or even reversing) this rise through policy measures with little to no adverse impact on overall economic growth. Lastly, this analysis suggests two complementary approaches for policymakers wishing to reverse the rise in the top 1 percent's share of income: dismantling the institutional sources of their increased ability to channel rents their way and/or reducing the return to this rent-seeking by significantly increasing marginal rates of taxation on high incomes.