The Impact of Financial Deregulation on Top Incomes

Abstract: This paper investigates the effect of financial deregulation on the share of total incomes going to the top. Using data from the World Top Income Database and a recently created index on financial reform, the effect of financial deregulation on top income shares is estimated in a panel data setting with 18 developed countries over the period 1973-2005. In particular, we explore the share of total incomes going to the richest 10 percent of the population (percentiles 90-100) as well as its decomposition into the top 1 percent (percentile 99-100) and top 10-1 percent (percentiles 90-99). Our findings suggest that financial deregulation has a positive and significant direct effect on the top 10 percent by impacting the top 10-1 percent income share in the full sample as well as a positive and significant effect on the top 1 in Anglo-Saxon countries. Financial deregulation is also associated with rising top income shares for all studied income brackets through a negative effect on top marginal tax rates. Liberalizing interest rate controls, entry barriers and restrictions on banking activities as well as privatization of financial institutions seem to be the driving regulatory dimensions contributing to a rise in top income shares.