Public Debt and the Income Share of the Top One Percent: The Italian Case, 1974–2019

Abstract

This paper provides evidence that government debt is associated with increases in the income share of the top 1% in Italy between 1974 and 2019. The main argument of this study is that public debt ownership is highly concentrated at the top and interest payments on sovereign bonds are received by the wealthy bondholders. As the tax burden of financing interest payments falls on the entire population, public debt often entails a redistribution of income within a country. On top of that, modern bondholders rarely keep government bonds until maturity; rather they regularly trade in secondary markets to receive capital gains. This paper explores both historically and econometrically the two mechanisms and highlights the relevant importance of coupon payments on the Italian sovereign bonds for rising income inequality. Finally, this is the first paper to examine the drivers of the income share of the top 1% in Italy.