FOCUS on

Top Incomes and Taxation in OECD Countries:

Was the crisis a game changer? Directorate for
Employment, Labour
and Social Affairs
May 2014

The share of the richest 1% in total pre-tax income have increased in most OECD countries in the past three
decades, particularly in some English-speaking countries but also in some Nordic (from low levels) and Southern
European countries. Today, they range between 7% in Denmark and the Netherlands up to almost 20% in the
United States. This increase is the result of the top 1% capturing a disproportionate share of overall income
growth over the past three decades: up to 37% in Canada and even 47% in the United States. This explains why the
majority of the population cannot reconcile the aggregate income growth figures with the performance of their
incomes. At the same time, tax reforms in almost all OECD countries reduced top personal income tax rates as
well as rates of other taxes affecting the highest income earners. The crisis did put a temporary halt to these
trends – but it did not undo the previous surge in top incomes. In some countries, top incomes had already largely
recovered in 2010. To respond to these trends, governments have several options at hand to increase effective
taxation paid by top income recipients without necessarily raising their marginal rates, to improve tax compliance
and to reduce tax avoidance.

Inequality and policies to restore equal opportunities Income shares have soared at the very top
have moved to the forefront of the political debate in
In many countries, income inequality has been growing
many countries. Topping the bestseller lists is Thomas
because rich households have been doing much better
Piketty’s 700-page study of how the very richest in
than both low- and middle-income families. The share
society are accumulating an ever-increasing proportion
of top-income recipients in total gross income
of national incomes (Capital in the Twenty-first
increased significantly in most countries over the past
Century). After the OECD’s flagship publications
three decades. The rise was most spectacular in the
Growing Unequal? in 2008 and Divided we Stand in
United States, where the share of the richest 1% in all
2011, new analysis by the OECD uses data developed
pre-tax income has more than doubled since 1980,
by Piketty and collaborators on top incomes to look at
reaching almost 20% in 2012. Top earners also fared
trends across countries, and identify concrete policy
very well in several other English-speaking countries
options to ensure a fairer distribution of resources and
including Australia, Canada, Ireland and the United
promote more inclusive growth.
Kingdom (Figure 1).

1 Top incomes surged

Shares of top 1% incomes in total pre-tax income, 1981-2012 (or closest)
2012 1981

20%

15%

10%

5%

0%

Note: Incomes refer to pre-tax incomes, excluding capital gains, except Germany (which includes capital gains). Latest year refers to 2012 for the Netherlands,
Sweden and the United States; 2011 for Norway and the United Kingdom; 2009 for Finland, France, Italy and Switzerland; 2007 for Germany; 2005 for
Portugal; and 2010 for the remaining countries.
Source: OECD calculations based on the World Top Income Database.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 1
A striking change is also observed in countries which The crisis put a halt to the surge of top income
have a history of a more equal income distribution. shares, but only temporarily
Between 1980 and the late 2000s, the share of the top
Top earnings are more sensitive to changes in the business
1% increased by 70% in Finland, Norway and Sweden,
cycle than the incomes of other groups: the average
reaching around 7-8%. By contrast, top earners saw
income of the top 1% moves up and down faster than the
their share grow much less in some of the continental
incomes of the rest of the population when the economy
European countries, including France, the Netherlands
expands or contracts. Therefore, during the first two years
and Spain.
of the Great Recession, the richest 1% saw their real
incomes fall significantly : by 3% in 2008 and a further
Even within the group of top-income earners, incomes
6.6% in 2009 on average across the nine OECD countries
became more concentrated, tilting towards the richest
for which data are available (Figure 2). The Great
of the rich. In the United States, the share of the top
Recession thus put an end, at least temporarily, to the
0.1% grew from 2% to over 8% of total pre-tax incomes
increase in the share of income flowing to the richest
from 1980 to 2010. By comparison, the top 0.1%
groups – it did, however, not undo the rise in top income
account for 4-5% of total pre-tax incomes in Canada,
shares recorded over the past decades. Further, in 2010,
the United Kingdom and Switzerland, and close to 3% in
top incomes had already started to recover in many
Australia, New Zealand and France.
countries. On average, real incomes of the top 1%
Moreover, not much movement is observed at the top increased by 4% in 2010, while the lower 90% of the
of the income distribution: from one year to the next, population saw their real incomes stagnate.
not more than 30% leave the group of the richest 1% in
But is the crisis likely to permanently affect the income
the United States, Canada and France, compared to
distribution? Financial crises seem to have no clear-cut
around 40% in Australia and Norway, for instance.
permanent effect on top incomes. Saez (2013) examined
These exit rates tend to be stable over time; the
the impact of past recessions and found that “falls in
probability of staying in the top 1% group in the United
income concentration due to economic downturns are
States, for example, has remained more or less at the
temporary unless drastic regulation and tax policy changes
same level since the 1970s (Kopczuk et al., 2010).
are implemented and prevent income concentration from
bouncing back”, as witnessed in the period following the
Great Depression of the 1930s. In any event, even at the
deepest point of the crisis, top 1% shares were at historic
highs in almost all countries.

2 Real incomes at the top fell during the crisis but recovered quickly

Percentage changes in real incomes across income groups, average of nine OECD countries, 2008 to 2010

Note: Incomes refer to pre-tax incomes, excluding capital gains. Nine OECD countries for which data are available for these years are Australia, Canada,
Denmark, Japan, New Zealand, Norway, Spain, Sweden and the United States,
Source: OECD calculations based on the World Top Income Database.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 2
 Data on top incomes
Conventional household income surveys do not accurately capture incomes of top earners because of limits in
coverage and/or statistical significance. Data from tax files are better suited to achieve this goal. This report makes
extensive use of data from the World Top Income Database (http://topincomes.parisschoolofeconomics.eu/) prepared by
Facundo Alvaredo, Tony Atkinson, Thomas Piketty, Emmanuel Saez and various collaborators. It includes data on top
incomes, income distribution and, where possible, on wealth derived from tax files from 28 countries (18 OECD countries).
Estimating income shares from tax files involves a number of steps and combination with external data sources: the
number of tax payers needs to be related to the size of the adult population (individuals or families); the income of
taxpayers needs to be related to comparable total household income; and interpolation is needed to derive percentile
shares from grouped tabulations (usually Pareto imputation).
Tax data are not without limitations, however. First, many countries face problems of tax evasion and tax avoidance,
leading to under-declaration of income. Second, tax-exempt income such as fringe benefits or imputed rent is left out of the
analysis as the data report only income that is potentially taxable. If a growing share of capital income is tax exempt or a
withholding tax is levied, this can affect the analysis of top income shares. Third, the tax unit – individuals or couples –
varies between countries and over time, though this can bias the estimates of the income share in both directions
depending on the joint distribution of incomes of husbands and wives. For all these reasons, considerable care is needed
when comparing top income shares across countries and over time.

Over the long run, top earners captured a The “bottom 99%” obviously is a very large and
sizeable share of the pie heterogeneous group; therefore, a closer look needs to
be taken at the evolution of incomes in different sub-
Taking a dynamic view shows that from 1975 up to the groups. For example, Figure 3 splits this group into the
crisis, the top percentile managed to “capture” a very upper-middle class (top 10-1%) and the bottom 90%.
large fraction of the growth in pre-tax incomes, About 80% of total income growth has been captured
especially in English-speaking countries: around 47% of by the top 10% in the United States, and around two
total growth went to the top 1% in the United States, thirds in Canada. In Australia and the United Kingdom,
37% in Canada and above 20% in Australia and the the top 10% benefited from about half of the income
United Kingdom. By contrast, in Nordic countries, but growth. Income growth was shared more equally in
also in France, Italy, Portugal and Spain it was the other OECD countries for which data are available, but
bottom 99% of the population which benefited more in all cases the top of the distribution benefited from
growth, receiving about 90% of the increase in total growth proportionally more than the rest of the
pre-tax income between 1975 and 2007 (Figure 3). population.

3 In some countries, one fifth or more of total income growth was captured by the top 1%
Share of income growth going to income groups from 1975 to 2007

Bottom 90% Top 10-1% Top 1%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Denmark Portugal Sweden Spain France Italy Norway New Australia United Canada United
Zealand Kingdom States

Note: Incomes refer to pre-tax incomes, excluding capital gains

Source: OECD calculations based on the World Top Income Database.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 3
The disproportionate surge in top incomes also helps account for shares of 70% in Italy to more than 85% in
explain why so many people have not felt their incomes Canada. But, not surprisingly, the weight of wages falls
rising in line with national GDP growth. From the mid- higher up the income ladder, with the exception of
1970s to the late 2000s, the United States average Canada (Figure 4). In the five countries for which data
income grew at an annual rate of 1%. However, the are available the share of capital income (excluding
vast majority of the population did not see their capital gains) is the largest. The richest rich, the top
incomes rising by anything close to this rate. In fact, if 0.01%, receive about 20% of their income from capital
one strips out the growth that went to the top 1%, the in Canada and almost 60% in France.
annual growth rate of the remaining 99% was only
0.6%. Excluding the top income percentile may also
In addition to the important role played by capital
change considerably the country ranking in terms of
income at the top of the income ladder, higher labour
annual income growth. For instance, average real
compensation has also been driving the rapid rise of
income growth is lower in France than in the United
top incomes. The share of wages in total incomes of the
States over the period, but France performed better
rich has grown especially in Canada and the United
than the United States when considering income
States. That said, income from capital and business
growth of the bottom 99%.
activities has also increased in the more recent years,
especially in the United States.
Further up the ladder, income is increasingly
generated by capital and business income

For the vast majority of people, wages and salaries

make up the most important part of their income; even
among those in the top 10 to 1% earnings from work

4 The share of capital income increases moving up to the very top of the income ladder
Income composition of top income groups

Note: Incomes refer to pre-tax incomes, excluding capital gains. Data refer to 2007 (Italy 2005), latest date available.
Source: OECD calculations based on the World Top Income Database.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 4
What drives the upward trend in top income Trends in income taxation
shares?
Last but not least, institutional factors such as changes
in tax policies have contributed to the rise in top
Several factors are behind the surge in top incomes. incomes and may have also driven the change in
Frequent explanations are related to globalisation, skill-
compensation practices in turn. During the “Golden
biased technological change and the change in
Age” of post-war prosperity, pay norms used to limit
compensation practices for top executives, including large wage gaps; but these norms have been gradually
the use of bonuses and stock options.
eroded. At the same time, progressive income and
inheritance taxes, which drove a large drop of top
The “superstars” theory suggests that globalisation and
income shares between the 1920s and the 1970s, have
rapid progress in information technology have helped
been substantially reduced in recent decades (see
make the market for top performers global. Employers
Atkinson et al., 2011). While top tax rates were equal to
want to hire not only skilled workers but the best of
or above 70% in half of the OECD countries in the mid-
them from the global market, leading to a large wage
1970s, this rate had been halved in many countries by
gap between the very best workers and those who are
the end-2000s.
ranked just below them in terms of skills. However, if
this was the main driver, we should have observed the
OECD countries have seen a general reduction in their
surge in the share of top income across all market
top statutory personal income tax rates (PIT), inclusive
economies, but this is not the case; top income shares of surtaxes and sub-central income taxes. The OECD-
have grown only modestly in countries such as Japan or
wide average top statutory rate declined in each of the
France even though these countries were affected by
last three decades: from 66% in 1981 to 51% in 1990
these global changes as much as the English-speaking and to 41% in 2008, when the crisis started (Figure 5).
countries. While the decline was most pronounced during the
1980s, reforms in the most recent decade prior to the
Another explanation refers to the “financialisation” of
crisis resulted in a further reduction of top statutory
markets. The rise in the income share of top earners in
rates of 6 percentage points or more in 11 countries.
English-speaking countries coincides with the rapid
development of the financial sector where The decline in the top statutory rate was not uniform
compensation has been rising rapidly. However,
across countries in the past decade. Some OECD
financial professionals account for only a small fraction
countries, such as the Czech and the Slovak Republics
of earners in the top percentile and their (rising) wages and Hungary, moved to a single-rate PIT structure with
do not account for a large fraction of the increased top
their top statutory rates dropping from 32% to 15% in
income shares. That said, top earners working in other
the Czech Republic, to 16% in Hungary and from 38% to
industries may be affected by the financial sector 19% in the Slovak Republic.
development, partly through the increasingly important
role of stock options in top executives’ remuneration.

5 Until the crisis, top income tax rates were falling rapidly
Top statutory personal income tax rates in the OECD area, maximum, minimum and average, 1981 to 2013

Source: OECD (2012), Taxing Wages, and OECD CTPA tax statistics.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 5
 Are top income shares a good predictor for overall inequality?
How do top income shares relate to overall income inequality? Top income shares measure the concentration of pre-tax
income at the top of the distribution but do not provide any information on the shape of the remaining parts of the income
distribution. A commonly used summary indicator of overall inequality is the Gini coefficient which is 0 when everybody has the
same income and 1 when one person has all the income.The Gini coefficient before taxes and transfers and the share of pre-tax
income in the top percentile are positively related, albeit rather loosely (Figure 6). Some countries, as France and the United
States display similar pre-tax Gini coefficients but very different shares of the top 1 percent income. Likewise, the share of income
flowing to the top 1% of earners is similar in Norway and Portugal while the Gini coefficient is nine points higher in Portugal than in
Norway. Italy, Japan and Portugal have some of the highest pre-tax and transfer Gini coefficients among OECD countries but the
top percentile shares are relatively small compared to the United States or the United Kingdom. The two measures provide
different country rankings in term of inequality.
6 Top percentile income shares and pre-tax Gini coefficients of income inequality

22%

20%
USA
Share of income accruing to the top percentile

18%
GBR
16%
CAN
14%
IRL
12%
AUS PRT
10% ESP FRA JPN
NOR FIN
NLD NZL
ITA
8% SWE
DNK
6%

4%

2%
0.40 0.42 0.44 0.46 0.48 0.50 0.52 0.54
Gini coefficient of pre-tax and transfer incomes
Source: World Top Income Database for top 1% pre-tax income share, OECD Income Distribution Database for Gini coefficient,
http://www.oecd.org/els/soc/income-distribution-database.htm. Data refer to 2007 (Portugal 2005).

The Gini coefficient is more sensitive to income changes at the middle than at the tails of the distribution because it indicates
the spread of the income distribution or deviation from the mean - while top income shares do not tell anything about the middle
and the bottom of the income distribution. While the two indexes in terms of cross-country levels show only a weak correlation,
their trends are more strongly positively associated (e.g. Leigh, 2007), suggesting that to some extent similar factors affect both
the top and the other parts of the income distribution. However, the impact of top income shares on post-tax and transfer
disposable income inequality is far from being mechanical, since the tax and transfer system typically reduces income disparity
significantly. As the redistributive impact of the tax system can change over time, changes in the top income shares do not
systematically reflect changes in overall inequality in terms of disposable income.

The crisis stopped this trend of decline. As part of the The substantial reduction in top rates of personal
measures taken since the economic downturn in 2008, income tax that occurred in almost all OECD countries
several countries increased PIT rates, mostly as a over the last three decades has been closely associated
revenue-raising measure. Since 2008, 21 OECD with rising top income shares. The decline in top rates
countries have increased their top PIT rate, while only of income tax leads to a reduction in the tax burden
three countries reduced it during the same period. In carried by high earners and thus increases their post-
Portugal, France and Italy, for example, the increase tax income. Higher disposable income makes it easier
focused on high-income individuals by including a for individuals to save and accumulate capital which
surtax on the rate in the highest income bracket. In eventually increases incomes further. Reducing top
addition, in 2013, ten countries raised their top PIT rates of income tax reduces the incentive to engage in
rates and Japan is planning to increase the rate by tax planning to avoid or evade tax, so leads to more
2015. The United Kingdom, on the other hand, reduced income being declared for income tax purposes.
its top PIT rate from 50% to 45% in 2013, partly
Therefore, it is not surprising that a strong negative
reversing the increase from 40% implemented in 2010.
correlation is found between trends in the top marginal
Some countries have introduced tax base broadening
income tax rate and the share of pre-tax income
measures (Australia, Austria, Denmark, the
accruing to the top percentile in all OECD countries for
Netherlands), or a reduction in tax credits (France,
which data are available. Such strong correlation is also
Greece, the United Kingdom).
apparent when pooling this information across OECD
countries over the last 35 years (Figure 7).

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 6
 7 There is a strong correlation between top tax rates and top pre-tax income shares
Pooled top marginal tax rates and top percentile income shares in 17 OECD countries, 1975-2012
20%

18%

16%
Top percentile income share 14%

12%

10%

8%

6%

4%

2%

0%
20% 30% 40% 50% 60% 70% 80% 90%
Top marginal income tax rate

Note: Incomes refer to pre-tax incomes, excluding capital gains. Countries include Australia, Canada, Denmark, Finland, France, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Source: World Top Income Database for top 1% pre-tax income share, OECD CTPA tax statistics for income tax rates.

Other taxes affecting top earners Wealth taxes are sometimes considered to be a form of
double or triple taxation; but decreasing marginal tax
Top earners and their share in total incomes are not rates for top incomes and tax exemptions for capital
only affected by personal income taxation. Other taxes income may result in top income groups accumulating
which play a role for top incomes were also lowered in more capital and wealth and transmitting this through
past decades. Some countries introduced a system of bequests to younger generations, continually
“dual taxation” whereby taxes on capital incomes were concentrating power and privilege.
lowered relative to taxes on personal labour income.
Realised capital gains are concentrated at the top of
The average statutory corporate income tax rate the income distribution. If one were to include such
declined from 47% in 1981 to 25% in 2013 and taxes on
capital gains in pre-tax income top income shares
dividend income for distributions of domestic source
would rise by up to 5 percentage points, especially in
profits fell from 75% to 42% (Figure 8). periods of economic expansion. Statutory tax rates on
capital gains on shares range from 12% in Belgium to
Several countries abolished or decreased net wealth
more than 55% in Greece and Denmark. In around half
taxes and inheritance taxes. Net wealth is only taxed in
of OECD countries, capital gains made on shares are
a few OECD countries and taxes on immovable property
only subject to corporate income tax but not to
represent a small percentage of overall taxation.
personal income tax.

8 Other taxes affecting top earners have gone down too

Dividend income and corporate income statutory tax rates, OECD average, 1981-2013
Dividend income (domestic profits) tax Corporate income tax
80%
Hundreds

70%

60%

50%

40%

30%

20%

10%

0%
1981 1990 2000 2013
Source: OECD CTPA tax statistics, www.oecd.org/tax/tax-policy/tax-database.htm

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 7
Options for tax reforms
• Considering shifting the tax mix towards a greater
There is renewed interest in changing tax rules for top reliance on recurrent taxes on immovable
income recipients in many OECD countries. But
property;
increasing taxes for top income earners tends to
involve difficult trade-offs. On the one hand, it is often • Reviewing other forms of wealth taxes such as
assumed that higher top marginal tax rates would inheritance taxes;
result in lower economic growth, largely via • Examining ways to harmonise capital and labour
disincentive effects. On the other hand, lower income taxation;
inequality resulting from such tax changes may reduce
persistent differences in income, wealth and power • Increasing transparency and international
between socio-economic groups. cooperation on tax rules to minimise “treaty
shopping” (when high-income individuals and
The historically high levels and the sustained rise in the companies structure their finances to take
share of top income recipients in total income are often account of favourable tax provisions in different
taken as signs that top earners’“capacity to pay” tax countries) and tax optimisation;
has increased. Furthermore, this coincides with a • Broadening the tax base of the income tax, so as
period where public finances are tight and to reduce avoidance opportunities and thereby
governments are seeking new sources of revenue. the elasticity of taxable income;
A most direct way to ensure that top income earners pay • Developing policies to improve transparency and
a higher share of taxes is to raise marginal tax rates on tax compliance, including continued support of
income as well as other taxes which affect them. While the international efforts, led by the OECD, to
there may be some concerns that such measures may not ensure the automatic exchange of information
be as effective as intended with regard to raising tax between tax authorities.
revenues, some recent analysis suggests that there is still
A comprehensive policy strategy is needed to
some scope to increase top tax rates to maximise tax
revenues (see IMF, 2013). There are, however, several
tackle overall inequality
options for tax reforms that increase the average tax rate The tax policy avenues above will help ensure that
paid by top income recipients without necessarily raising wealthier individuals contribute their part towards
their marginal rates, such as: more inclusive growth. However, in many countries,
the rise in overall inequality has also been driven by
• Abolishing or scaling back a wide range of those low-income households falling behind in relative and,
tax deductions, credits and exemptions which sometimes, in real terms. Therefore, a comprehensive
benefit high income recipients disproportionately; policy strategy is needed to tackle overall inequality
• Taxing as ordinary income all remuneration, and promote equality of opportunities, which includes
including fringe benefits, carried interest effective and well-targeted transfer policies and other
arrangements and stock options; social policies, as well as labour market and education
policies.

Follow-up: Further reading:

Social Policy Division Divided We Stand: Why Inequality Keeps Rising, www.oecd.org/social/inequality.htm
Michael.Forster@oecd.org Tel: +33 1 45 24 92 80 Taxing Wages 2014, Special Feature “Changes in structural labour income tax
Ana.Llena-Nozal@oecd.org Tel: +33 1 45 24 85 27 progressivity”, www.oecd.org/tax/tax-policy/taxing-wages.htm
Förster, M., A. Llena-Nozal and V. Nafilyan (2014), “Trends in Top Incomes and their
Centre for Tax Policy & Administration (CTPA)
Taxation in OECD Countries”, OECD SEM Working Paper n°159,
Bert.Brys@oecd.org Tel: +33 1 45 24 19 27 www.oecd.org/els/workingpapers
References:
Atkinson, A.B., T. Piketty and E. Saez (2011), “Top Incomes in the Long Run of History”, Journal of Economic Literature, 49(1), pp. 3-71.
Kopczuk, W., E. Saez and J. Song (2010), “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937”,
Quarterly Journal of Economics, 125(1), pp. 91-128.
IMF (2013), Fiscal Monitor October 2013: Taxing Times.
Leigh, A. (2007), “How Closely Do Top Income Shares Track Other Measures of Inequality?”, The Economic Journal.
Piketty, T. (2014), Capital in the 21st Century, Harvard University Press.
Saez, E. (2013), “Striking it Richer: The Evolution of Top Incomes in the United States (updated with 2012 preliminary estimates)”.
Source:
Please source this note as: OECD (2014), "Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer?".
This note as well as all figures and underlying data can be downloaded via www.oecd.org/social/inequality.htm
This note has been produced with the assistance of the European Union. The contents of this report are the sole responsibility of the OECD and can in
no way be taken to reflect the views of the European Union.

Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? © OECD 2014 8