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Norway’s dual income tax system achieves high levels of revenue collection and income redistribution, without overly undermining economic performance and while paying attention to environmental externalities. It treats capital and labour income in different ways: capital income is taxed at a single low rate, while labour income is taxed at progressive rates. However, effective tax rates on savings vary widely across asset classes. The favourable treatment of owner-occupied housing relative to financial savings should be reduced, preferably by taxing imputed rents at the standard 28% statutory rate. The wealth tax implies very high effective tax rates on savings, indicating that it either gives rise to tax avoidance or significantly inhibits growth. The government should investigate the issue and, if the growth-equity trade-off is too unfavourable to growth, phase out or lower the wealth tax. To restrain tax avoidance by the wealthy, the base of the gift and inheritance tax should be broadened. Overall, the reform package recommended in this paper would improve the allocation of capital and increase work and investment incentives. It could be designed to be broadly neutral in regard to income redistribution and public revenue.

Economics --- Norway

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Public questioning about the role of finance has been fuelled by the perception that financial sector pay is an important factor behind high economic inequalities. This paper is the first to provide a comprehensive look at the level of earnings in finance and the implications for labour income inequality for European countries. Financial sector workers are shown to make up 19% among the top 1% earners, although the overall employment share of finance is only 4%. Nonetheless, the relatively small size of the sector limits the contribution that financial sector pay has on income inequality to a small, but noticeable amount. Simulations indicate that most of this contribution is explained by financial institutions paying salaries and bonuses which are above what employees with similar profiles get in other sectors. Estimations that allow for heterogeneity across workers reveal that this wage premium is more than twice as high for financial sector workers at the top of the distribution than at the bottom. The labour market in finance displays other symptoms of imperfection, with, for example, male financial sector workers earning a large wage premium over female financial sector workers, again especially at the top.

Economics

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Italy’s policy of fiscal consolidation and growth-friendly structural reforms has substantially improved its economic prospects, but the adverse sentiment that the country has faced in the sovereign bond market over the past years has deep roots. It reflects lingering anxieties over the euro area’s future, as well as persistent economic and financial difficulties, in particular the high level of public debt and low potential growth. The government has rightly aimed to halt the rise in the public debt-to-GDP ratio and put it on a downward path. This could be achieved with either a balanced government budget or a small fiscal surplus. While additional fiscal tightening would have negative effects on output in the short term, it would be rewarded by faster debt reduction and lower risk of renewed financial-market reactions. In any case, the automatic stabilisers should be allowed to work. Concerns about fiscal sustainability and the prolonged recession have spilled over to the financial sector. Lending conditions are tight, non-performing loans are high and rising, and capital has flowed out of Italy to the core countries of the euro area. The Bank of Italy should continue to ensure that banks increase provisions against losses, and strengthen their capital asset position by raising new equity from private sources, including from foreign stakeholders, by retaining earnings and by disposing of non-core assets. Resolution of the fiscal, economic and financial crisis in Italy depends in part on action at the euro area level. As a member of the euro area, Italy has benefited from the establishment of the European Stability Mechanism, the announcement by the European Central Bank of the Outright Monetary Transactions scheme and the plans for a euro-area banking union.

Finance and Investment --- Economics --- Italy

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Top earners have become the subject of intense public and scholarly debate. This is the first paper that comprehensively documents the profiles of the 1% highest paid employees across 18 European countries. The data come from the largest harmonised source available, an employer-based survey that covers the labour income of 10 million employees, excluding the self-employed. The patterns that emerge are broadly common across countries. Workers in the top 1% tend to be 40 to 60 years old, be men, have tertiary education, work in finance or manufacturing, and be senior managers. The analysis also uncovers several cross-country differences. For example, top earners are younger in Eastern Europe, and they include more women in countries with higher overall female employment. The new estimates in this paper are similar to related ones based on administrative records in the few countries for which such studies exist, indicating that the sample is broadly representative of the characteristics of top earners.

Economics --- European Union

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This paper shows that finance has been a key ingredient of long-term economic growth in OECD and G20 countries over the past half-century, but that there can be too much finance. The evidence indicates that at current levels of household and business credit further expansion slows rather than boosts growth. Causality from more credit to slower growth is supported by a novel empirical methodology which exploits changes in financial regulation across countries and time as a source of exogenous variation in financial size. The empirical analyses point to five factors that link more credit to slower growth: i) excessive financial deregulation, ii) a more pronounced increase in credit issuance by banks than other intermediaries, iii) too-big-to-fail guarantees by the public authorities for large financial institutions, iv) a lower quality of credit and v) a disproportionate rise of household compared with business credit. By contrast, expansions in stock market funding in general boost growth.

Economics