Taxes on top incomes and financialisation

Financialisation is one of the most prominent economic developments of the past half century in the advanced democracies. While the existing literature focuses on financial deregulation and liberalisation as the key policy changes driving financialisation, this paper contends that tax policy also plays a crucial role. More specifically, we argue that cuts to taxes on top incomes disproportionately benefit the financial sector, as it pays unusually high salaries and employs a highly mobile labour force, both domestically and internationally. As a consequence, the finance industry gains more from top income tax cuts than other industries. A difference-in-differences analysis covering 20 countries in the Organisation for Economic Co-operation and Development (OECD) from 1970 to 2019 provides strong evidence that cuts in top income tax rates increase the (relative) size of the financial sector. A complementary time-series cross-sectional analysis finds that these effects are even greater in more financially globalised economies.