How can one defend the 1%?

By Guillaume Allègre

In a forthcoming article in the Journal of Economic Perspectives[1], Harvard Professor and bestselling textbook author Greg Mankiw defends the income earned by the richest 1% and denounces the idea of taxing them at a marginal rate of 75%. For Mankiw, people should receive compensation in proportion to their contributions. If the economy were described by a classical competitive equilibrium, then every individual would earn the value of his or her own marginal productivity, and it would be neither necessary nor desirable for the government to redistribute income. The government would limit itself to correcting market distortions (externalities, rent-seeking).

In a OFCE’s Note (no. 4, 19 July 2013), we show that the economy in which the 1% live is very different from a classic competitive equilibrium in ways that Mankiw does not discuss, which seems to us to be a significant limitation in his argument. It is because the 1% do not live in a world of perfect competition that they are able to secure astronomical incomes. The incomes received on the market by the 1% do not therefore correspond to their marginal social contribution. This does not mean that their social contribution is null, but rather that the market is unable to measure this contribution. These astronomical incomes cannot therefore be defended on the basis of “merit measured by marginal contribution”, as proposed by Mankiw.

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See the following OFCE blogs on the same subject: “Superstars and equity: Let the sky fall” and “Pigeons: how to tax capital gains”.


[1] G. Mankiw, 2013, “Defending the one percent”, forthcoming Journal of Economic Perspectives. http://scholar.harvard.edu/files/mankiw/files/defending_the_one_percent_0.pdf

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