"Top marginal tax rates are positively correlated with the pretax income growth of the bottom 90 per cent — those who are not subject to the top rates. To explain this correlation, this paper presents and tests a model in which executives can increase firm profitability by (i) increasing the firm's level of technology and (ii) decreasing labor costs. In the model, higher marginal tax rates may reduce pretax inequality by increasing the average income growth of workers. This hypothesis is tested by examining the effect of top marginal tax rates on (unobserved) relative bargaining power between labor and firms and, therefore, on the income growth of workers in the USA. Bargaining power, in both the theoretical and the empirical models, is proxied by private-sector unionization and use of offshore labor resulting in higher imports."

Support: Digital