Does globalization affect top income inequality?

Working Paper 2015-372

Abstract

We re-examine in this paper the role of globalization on top income shares (five classes from top 0.1% to top 10% of the income distribution) for a sample of 15 economies over the period 1970-2004. We build on previous works by investigating financial globalization measures that complement trade openness. Our system GMM (SGMM) estimations allow for a robust treatment of the endogeneity between income concentration and GDP per capita (as well as with taxation or government size). We find three interesting new results. First, the financial integration measure based on portfolio equity and FDI stocks (GEQ) turns out to have a large impact on top income shares, suggesting that the channel through which globalization affects income concentration is through FDI/equity flows. Second, we find strong support for the progressivity of taxation: there is an almost one to one negative effect of higher tax on top income (top 0.1%), which declines monotonically until the top 10% class. Finally, partitioning the sample into GEQ below and above (panel) averages, for relatively low levels of financial globalization increases in GEQ lead to positive effects on income of the extremely rich households. No such result is found for more financially integrated economies, with only an indirect impact through higher domestic taxation on capital and labor income.

Authors: Rene Cabral , Rocio Garcia-Diaz, Andre Varella Mollick.