The politics of oligarchy: Taxation, financial regulation, and the super-rich in the U.S.A

The rising income share of the super-rich since the early 1980s has been of concern to social scientists and policymakers. We use political scientist Jeffrey Winters' (2011) theory of oligarchy (the politics of income and wealth defense) to devise a set of hypotheses that link the pre-tax income share of the super-rich (top 0.1% share), tax rates on the the rich, financial regulation, labor unions, and the strength of Democrats in Congress. Our examination of top tax rates includes the Top Marginal Rate, the Top Capital Gains rate, and the Top Estate Tax rate.

The data used in the study are multiple annual time-series ranging from 1918 to 2011 for the United States. The method of analysis is an unrestricted Vector Autogression (VAR-2) with the Dow entered as an exogenous variable. We use Impulse Response Functions (IRFs) with Baysian error bands to assess the hypotheses derived from Winters' oligarchy theory.

We find that the pre-tax income share of the super-rich responds in expected ways to increases in tax rates. Also, the pre-tax income share of the super-rich increases with financial deregulation and decreases in response to Democratic strength in Congress and union membership. While Top Marginal and Top Capital Gains rates do not respond to an increase in the Top 0.1%, Top Estate Tax Rates and Financial Deregulation both increase in response to a shock to the super-rich. All top tax rates and Financial Deregulation increase in response to a shock to Democrats in Congress and partially to labor union membership. The results suggest that the super-rich, following a windfall, may pressure policymakers to reduce estate top tax rates and financial regulations (as a means of income and wealth defense). We also discuss the role of tax avoidance/evasion.