Capital and Labor

Abstract

This paper finds that capital and labor incomes in the United States have become more closely associated since the 1980s. This contributed to the well-known increase in the top 1 percent's share of total income, exacerbating rising inequality in capital incomes and earnings. The paper shows that the trend in the association is U-shaped, as the recent increase contrasts with a tendency toward a weakening association until the 1980s. The paper uses data derived from tax records, studies the asymmetries in the association, tests for robustness to alternative income definitions, and discusses the potential role of declining top marginal tax rates.