Mobility in and out of the top one percent

by on April 21, 2014 at 12:29 am in Data Source, Economics | Permalink

From Mark R. Rank:

…Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking.

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution.

Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.

It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. (This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60).

A further example of such fluidity can be found in an analysis by the tax-policy expert Robert Carroll. Using data from the Internal Revenue Service, Mr. Carroll showed that between 1999 and 2007, half of those who earned over $1 million a year did so just once during this period, while only 6 percent reported millionaire status across all nine years.

There is more here, via Greg Mankiw.

TD April 21, 2014 at 12:54 am

What percentage of Americans are in the 0.1% of Americans for at least a year in their lifetimes, considering that this smaller slice accounts for a very large share of the “1%’s rising share” since 1980?

dan1111 April 21, 2014 at 2:29 am

The very top people tend to have wildly fluctuating incomes year to year, because their compensation is tied to investments, corporate performance, etc. So, it is very much likely to be a similar story.

Steve Sailer April 21, 2014 at 4:04 am

Right, most members of the Forbes 400 didn’t get there just by cashing a paycheck every two weeks for 40 years, they typically got there in a small number of leaps and bounds.

Colin April 21, 2014 at 2:04 pm

Yeah, but it’s frequently “wildly fluctuating” between their income being very lucrative, extremely lucrative, and wow that is incredibly lucrative. The Waltons’ worst year is better than anyone else’s best.

If I can make $10 million one year, $50 million the next, then $20M, then $100M, one could rightly say my income was “wildly fluctuating” but that’s not meaningful, distributionally.

TallDave April 21, 2014 at 10:01 pm

The Waltons can also lose billions in wealth in a week, though.

Steve Sailer April 22, 2014 at 1:44 am

Yeah, but the Waltons have $150 billion, so, apparently, they’ve had more good weeks than bad weeks.

ed April 21, 2014 at 1:00 am

Someone needs to tell Mankiw that the cool kids are all talking about *wealth* inequality now.

Michael G. Heller April 21, 2014 at 6:36 am

Mankiw knows. But the cool kids you hang around with are wrong, therefore they are – by definition -uncool. The real problem is inequality of opportunity, for all the usual reasons – market collusion and monopolisation subject to rent seeking, aided by a morass of discretionary state regulation subject to lobbying, which rewards the privileged. Just now I read about a tiny example involving big names. http://t.co/gwZUgofnZe
Adam Smith and Joseph Schumpeter would not recognise the company names, but they were familiar with the problem, which is as old as the pyramids. Really cool kids know what clogs the market.

TallDave April 21, 2014 at 9:47 am

Income is the acquisition of wealth.

Colin April 21, 2014 at 2:05 pm

Eh, that only applies when you don’t look intergenerationally or consider one time boons.

TallDave April 21, 2014 at 10:02 pm

No, I mean literally, by definition.

TallDave April 21, 2014 at 9:49 am

Also consumption inequality is what people should care about. But consumption inequality is always getting lower in terms of utility, so it’s one those things like the rise in crop yields that goes largely ignored since it doesn’t sell leftism.

Jared April 21, 2014 at 10:45 am

Bullshit.

Think about the professions that land you in the top 1%. The majority of the ranks are filled by doctors, lawyers, top executives, and finance people. Leave execs for the moment and consider the other three. Don’t doctors and lawyers operate under the auspices of legally favored cartels? Don’t financiers labor under the shade of massive explicit and implicit public subsidies?

The top of the income distribution is constituted by entrepreneurs and inventors sure, but the majority of the rank and file can thank political windfalls for their gains in income that routinely lap those made in the middle.

mpowell April 21, 2014 at 11:44 am

Check the BLS data. Doctors/surgeons and lawyers – none of them have average income in the 1% range. You get to that level by being excellent within the field, which a cartel doesn’t get you. And the idea of law being a cartel to limit # of lawyers is a joke. You could argue that doctor’s are paid too much (and that their education costs too much). But that’s not a 1 versus 99 percenter issue. It’s just an issue of healthcare costing a lot in the US.

TallDave April 21, 2014 at 9:36 pm

I’m not sure what that has to with my argument that consumption inequality is both a better measure of inequality and decreasing on a scale of utility disparity, but in order: yes, generally not, and generally not because the government is mostly transfer payments and defense so the damage they do to the economy via corruption is still relatively small in this country, at least for now.

Thomas April 22, 2014 at 5:01 am

Income is understood to have diminishing returns. The income inequality debate seems to be shifting public opinion to the point where income inequality itself is decreasing utility by generating discontent and envy. That’s what I perceive.

Steve Sailer April 21, 2014 at 1:04 am

It seems like there is a lot of confusion about

Income v. consumption v. wealth

Similarly, there is much confusion engendered by what percentage of the population is being discussed. Most people don’t deal well with numbers, so phrases like “top 1 percent” just means Whomever I Don’t Like. We should insist that people denouncing some percentage should multiply it by 300,000,000 and then say the number, such as “the top 3,000,000 people in America.)

Combine these two sources of uncertainty and they allow any pundit to shuffle the deck to make whatever point he wants to make.

Rahul April 21, 2014 at 2:24 am

What fraction of the top 1% income individuals are also top 1% wealth? That’d be an interesting statistic.

In short, how does the income-wealth correlation look?

Steve Sailer April 21, 2014 at 4:07 am

Most billionaires have gotten there by a rise in the market valuation of their businesses and other holdings (or by inheritance), rather than by income.

TallDave April 21, 2014 at 9:59 am

Not by taxable income, certainly. In the broadest sense though, an increase in asset values is actually income, i..e. a consumption and savings opportunity gained by an entity within a specified timeframe (quoth Wiki).

That said, most comparisons seem to use the tax data. Wealth is much harder to estimate.

Fred April 21, 2014 at 11:55 am

Wealth and income are not the same thing. Just as position and velocity are not the same thing.

If physicists conflated velocity with position the way people conflate income with wealth, where do you think technology would be today?

Wealth is net assets i.e. assets minus liabilities. Income is a change in wealth.

TallDave April 21, 2014 at 9:37 pm

Income is a change in wealth.

Yes, this. Unfortunately income as reported to the IRS seems to be only thing we have clear data on.

fwiw April 21, 2014 at 12:31 pm

I never thought I’d say this, but…

Good point, Steve Sailer.

msgkings April 21, 2014 at 1:24 pm

+1

Mike April 21, 2014 at 9:10 pm

Of course there is also the issue of people who don’t understand how to use these stats. Only about 150,000,000 are actually full-time earners. Your point is still has merit, but 1.5m people, in a world of 7+ billion isn’t really that many.

Mike April 21, 2014 at 9:16 pm

And about 210 million filed tax returns

Thomas April 22, 2014 at 5:02 am

Not just “the top 3,000,000 people in America”, Steve, but “the top X income earners and their spouses and children.”

Zander April 21, 2014 at 1:05 am

This article is tagged ‘Data Source’ – I’d like to see the data and play with it, replication and all that. I, however, did not find the source either in the excerpt or the nyt full piece. Did I miss it?

david April 21, 2014 at 3:14 am

Hirschl and Rank use the PSID, I believe.

OP April 21, 2014 at 8:15 am

Thanks

Mesa April 21, 2014 at 1:12 am

Well the percentages are much less than random chance of 45 draws. That would be 36% chance of ever being in the top 1% once, 90% chance of being in the top 5% once, and 99.99% of being in the top 20% once. And virtually zero of being in the top 1% 10 yrs in a row by chance. So there are some returns to skill and autocorrelation here.

Thomas April 22, 2014 at 5:08 am

If we pretend that the income distribution is a series of random draws with some an incumbent bias function, then those statistics would be concerning. The reality of the situation is that there are a number of things an individual can do to increase his or her odds such as get married, delay children, do well in high school => do well in college, work full time, save money, relocate to high income centers, etc.

Admittedly, I am not an impartial judge, however, it seems that these sort of actions are seldom mentioned by the pro increased-redistribution side.

joan April 21, 2014 at 1:25 am

What percent of people sell their house for more than they paid for it at least once in their lifetime

Dan Weber April 21, 2014 at 9:32 am

In modern tax law, the first $250K ($500K for married filing jointly) is tax-free after meeting certain easy conditions for a primary home.

Prior to that, the capital gain could be deferred if you “rolled over” the gain into the purchase of another home.

(It’s a point that should be addressed in the data analysis, though.)

Jared April 21, 2014 at 10:33 am

On the other hand, the percentage of people that inherit the modest home of their parents, I suspect, might explain a depressing amount of “upward mobility.”

joan April 21, 2014 at 1:35 pm

It counts as income even if you do not owe taxes on the sale. The amount of your loan you are forgiven it you do a short sale is also counted as income.

Thomas April 22, 2014 at 5:14 am

Joan, I inferred that you believe home sales might be a major driver of these statistics and that this diminishes their value. I’d challenge that. Primary home ownership, while a poor substitute for index funds, is an investment. That investment, a responsible decision, can or will result in higher income comes as no surprise to some of us. Delaying utility today for a greater amount of utility tomorrow, especially through investment in assets which produce income, is a quintessential two-marshmallow behavior and socially desirable.

BC April 21, 2014 at 1:42 am

This understanding of Americans’ year-to-year income variation would seem to be a strong argument for a flat tax. Why should someone that is in the top 5% one year and bottom 5% the next pay a different amount of tax than someone at, say, the 50th percentile both years if both people earn the same pre-tax amount over two years? (I’m not sure who would pay more; it depends on whether the tax rate curve is convex or concave.)

Income variation would also seem to argue against taxing interest and investment income. Suppose person A has a risky income, and she earns 200 one year and 0 the next. Person B earns a predictable income: 100 in year 1 and 110 in year 2. Interest rate is 10%. Person A knows that her income fluctuates so she consumes 100 in year 1 and saves 100 to consume 110 in year 2. B consumes all of his income each year. A and B are equally well off pre-tax. If there is a wage tax of 20% with no tax on interest, then they will each consume 80 in year 1 and 88 in year 2, again equally well off after tax. If we levy a tax on interest, however, A will be short-changed in year 2. Person A is already disadvantaged somewhat relative to B because she has a risky income stream that fluctuates year-to-year. It just seems unfair to further penalize her by levying the double-tax on interest.

Steve Sailer April 21, 2014 at 1:55 am

I find more puzzling the opposite: why do marginal income tax rates stop progressing upwards at $457,000?

Tax Rate Schedule Y-1, Married, Filing Jointly:

10% on taxable income from $0 to $18,150, plus
15% on taxable income over $18,150 to $73,800, plus
25% on taxable income over $73,800 to $148,850, plus
28% on taxable income over $148,850 to $226,850, plus
33% on taxable income over $226,850 to $405,100, plus
35% on taxable income over $405,100 to $457,600, plus
39.6% on taxable income over $457,600.

Why not keep going up, say, 3 percentage points with each order of magnitude? If somebody makes over, say, $457,600,000 in one year, why not charge them 48.6% on the income they make over $457,600,000?

Rahul April 21, 2014 at 2:20 am

Where do you want to stop.

Steve Sailer April 21, 2014 at 4:11 am

Why ever stop? I used to think that, “Well, of course, it would be ridiculous that marginal tax rates keep getting higher forever,” but I can’t remember why I thought that. Three additional zeros equal three additional percentage points now strikes me as perfectly reasonable. If somebody makes over $4.57 billion in one year, why not have him pay a 51.6% marginal tax rate? And 54.6% over $45.7 billion.

Marian Kechlibar April 21, 2014 at 6:00 am

This sounds like a perverse incentive to intoduce hyperinflation. Everyone a multi-billionaire, and pays 75% tax.

Frank K April 21, 2014 at 2:24 pm

Marian, tax brackets are indexed to inflation…

Dan Weber April 21, 2014 at 9:35 am

Who cares? Congress can make a +1% surtax on people with wages over a billion a year, and then Steve Sailer’s point goes away, even though the actual change to anyone’s tax bill is exactly nothing.

He’s made essentially this same comment on two different posts so something must have triggered it.

Alexei Sadeski April 21, 2014 at 3:08 am

Since most gov’t benefits go to the poor & middle class, perhaps a regressive tax makes more sense.

Steve Sailer April 21, 2014 at 4:12 am

But extremely high income people can better afford to shoulder a somewhat larger share of the tax burden.

Shane M April 21, 2014 at 4:26 am

Let’s at least admit that much of the rule of law is designed to sustain/maintain what the upper class has accumulated/created. The upper class has a dog in the hunt.

jody April 21, 2014 at 4:42 am

Let’s at least admit that the upper class has alternatives to the state for protecting what it has accumulated / created (see drug lords, body guards, or Perot’s tank).

No, rather than anarchy, what you would see if the current arrangement is removed is a feudal society. The rich will do well, as they would under any arrangement (see Clark- the Son Also Rises), but the lower classes would be much much worse off.

So when I think about the relative value of who benefits the most from state provided law and order instead of warlord order, it is not the Medicis that I think of, it is the average shlub like me who does not have the power or money to make and enforce his own law and order bubble.

Steve Sailer April 21, 2014 at 4:53 am

A couple of decades ago, I knew a guy who got a multi-million contract to pitch for the Yankees for a season. He and his wife decided that, sure, they wanted to live in Manhattan, even though they’d have to pay 3 or 4% municipal income tax on home games. Heck, to be young, rich, and the toast of Broadway is fun, right?

That seems like common sense today. Yet, at that point, at the tail the end of Crack Era, he was the only Yankee to live in New York City that season. You can’t blame the other Yankees — they had stressful jobs and they felt they didn’t need the stress of living in a high crime city and paying municipal income tax to do it.

But since then Giuliani and Bloomberg have provided rich people with remarkable amounts of public order, and the rich have flocked to live in New York City despite its municipal income tax. They see that as a fair bargain.

Jody April 21, 2014 at 5:27 am

Don’t get me wrong – everyone benefits from a public good (such as the law and order environment). Pretty much by definition.

I’m reinforcing Alexei’s point that the relative benefit from state provisioning of a public good is greatest for those that can’t afford to privately secure that good. (the existence of alternatives being a natural limit to the price one is willing to pay)

mpowell April 21, 2014 at 11:47 am

Jody, that shit costs way more and induces way more stress and concern. The rich are way better off living in a society where the gov’t is perceived to have legitimacy by the middle and lower classes and where rule of law is maintained by the state. Even if it costs them a higher tax rate.

mpowell April 21, 2014 at 11:50 am

Jody the Medici’s are the bullshit example that demonstrate you don’t know what the fuck you’re talking about. Think about the other dominant families in Florence at the time. Oh wait, you don’t know their names. Because they lost the power battle with the Medici’s and disappeared, many of them in poverty or killed. Does the top 0.1% really want to battle out to the death with the other 0.1 percenters, winner-take-all style? I really doubt it.

Jody April 21, 2014 at 1:12 pm

mpowell: When being incredibly rude, the power of your argument is diminished even further when you accuse someone of ignorance on the basis of your own ignorance.

For the sake of argument, I will note that I can name many Florentine families from the Medici period, having read a handful of histories on the city and of the families and been there a few times.

There were the Albertis (allies of the Medici), the Albizzis (enemies of the Medicis), the Puccis (I’ve been to the Pucci Palace…), the Pittis (their palace too, though the Medicis bought that one, so maybe you don’t want to count it), the Corsinis (they weren’t exactly pals with the Medicis but did alright), the Salviatis, the Strozzis (enemies, but they intermarried into the Medicis, so …)

These were all quite rich. 0.1%-ers as such. That I chose to name only the best-known family was merely to illustrate my point (which you so rudely missed). More generally, lots of families did well in trade (e.g., wool) and banking in Florence. In fact, you would’ve been better off making the opposite point from the one that you did, i.e., you would’ve been more correct to say that Florence was not lawless, indeed it was a Republic, though it came with the occasional banishment when you crossed the city leaders. (How much more civilized we are now that our leaders can order drone strike and no-knock raids).

So to make my point again, I first repeat myself:

a) “everyone benefits from a public good”

b) “the relative benefit from state provisioning of a public good is greatest for those that can’t afford to privately secure that good”

Then I note that it is a common justification of the progressive income tax that the rich benefit disproportionately more (proportionately more would justify a flat tax) from law and order. But I am asserting that the opposite is true as it is the poor that lack recourse to establishing their own law and order and thus it is the poor that benefit disproportionately from state-provided law and order.

Now would they prefer that the cost be borne at least partially by others? Certainly. See point a). But that’s not unique to public goods nor law and order as illustrated by the fact that I would also prefer that you paid some percentage of the cost for the hot fudge sundae I think I will have for lunch.

To buttress my argument, I gave the Medicis as an example of the rich doing pretty well at provisioning their own law and order.

Now I await a counter-example from you of a poor person as effectively provisioning their own law and order to buttress your claim, such as it is.

BC April 21, 2014 at 2:20 am

Brain freeze in my first paragraph: with a progressive income tax, the one with the variable income pays more tax than the one with the same average but fixed income. Progressive tax means that tax paid is a convex function of income.

Interesting that progressive taxes and taxes on savings inherently penalize those with variable income and favor those with fixed, predictable incomes. Professors with tenure, of course, have very stable, predictable incomes. They also advise policymakers and, my impression is that many or most academic economists tend to favor progressive taxes. My impression may be wrong though.

The frequently unemployed, in contrast, have variable incomes. Even during this period of heightened unemployment, there doesn’t seem to be much movement towards flatter taxes and reducing/eliminating taxes on interest and investment income.

To answer Steve’s question, presumably the reason that tax rates stop progressing upwards is that we don’t believe that tax rates should go to 100%.

Steve Sailer April 21, 2014 at 4:14 am

“presumably the reason that tax rates stop progressing upwards is that we don’t believe that tax rates should go to 100%.”

My idea is that the marginal income tax rate should go up one percentage for every order of magnitude. That takes over 60 zeroes to get to 100%

Steve Sailer April 21, 2014 at 4:32 am

Obviously my idea of “an extra percentage point for every zero” isn’t going to wipe out the deficit. On the other hand, it’s not terribly painful for the super high-income taxpayers. For example, California-born golfers Tiger Woods and Phil Mickelson typically make $50 to $100 million per year over the last decade (mostly from endorsements). Tiger is a cheapskate, so he legally moved to income tax-free Florida on the day he turned pro in 1996. Phil is a huge tipper, and he’s been paying about 9% California income tax for the privilege of living in his native state. He moaned about Jerry Brown adding a couple of percentage points to his marginal tax rate, but, yeah, he likes his life in his life so he probably won’t move to Texas or Florida.

Alexei Sadeski April 21, 2014 at 6:57 pm

Imagine what we can justify using “some people won’t flee the country” as our baseline.

Dan Weber April 21, 2014 at 9:43 am

One idea is a Lifetime Income Tax. You can move current income into prior years, or prior income into the present, at will. The net effect is that you have a cumulative lifetime tax bill and pay the delta each year. If you retire and have years in which you earn $0, you get a refund check for all the dollars you moved from your highest tax-bracket year into the current year’s 0% tax bracket.

It essentially gives tax timing tools that the money managers have to every Joe Sixpack.

(It gets complicated with special deductions that turn on and off at various income levels, although it’s nothing that Turbo Tax or an equivalent couldn’t automatically optimize for you.)

Jared April 21, 2014 at 2:24 am

Static 1% vs. 99% is a straw man, at least when it comes to income. The dynamism of the wealth distribution is almost certainly weaker than in income.

Furthermore, cracking the top 20th percentile earns you around two years worth the median income, while the 5th might bring 3-4x the median. This is not really the kind of thing that sustains lifelong affluence. This would be especially true if, as the evidence suggests, most people don’t spend a very long time at their peak earnings.

dan1111 April 21, 2014 at 2:55 am

It’s not a straw man, since many people are making simplistic arguments based on income percentiles. For example:

http://www.ibtimes.com/us-income-inequality-record-high-top-1-earned-fifth-total-income-2012-1404335

Of course some people really are struggling financially. This post doesn’t prove otherwise. But more sophisticated analysis is needed to understand what is going on.

Dan April 21, 2014 at 2:51 am

“Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.”

0.6% of the population spends 10 consecutive years in the top 1.0% of the income distribution? That sounds like a lot of stability to me. Of course there is going to be some churn, and many people who spike into the top of the distribution with one year’s windfall, but it looks like there is also a sizable group of people who have a steady run at the top (at least, a sizable group relative to the size of the sliver of the distribution that we’re looking at).

Steve Sailer April 21, 2014 at 4:17 am

“0.6% of the population spends 10 consecutive years in the top 1.0% of the income distribution? That sounds like a lot of stability to me.”

Indeed.

Keep in mind that the IRS allows income averaging, so people with up and down incomes get some tax relief.

Jody April 21, 2014 at 5:02 am

Alas, income averaging ended decades ago (1986).

http://vpostrel.com/blog/tax-day-lament

(Excerpt follows)
“The difference between one year and the next wouldn’t matter so much if all income were taxed at the same rate. Before the 1986 tax reform flattened rates, people with fluctuating incomes could in fact average their incomes across years for tax purposes. Abolishing averaging went along with a simpler, less-progressive tax system.

But the tax system has gotten more complex and progressive in recent years, making the arbitrary distinction between this year’s income and last year’s all the more unfair. (Year-to-year fluctuations don’t make a significant tax difference for the relatively few people who are always taxed at the top rate.)

One special class of people still gets to escape the tyranny of the tax calendar. In 1997, Congress restored income averaging for farmers and ranchers. It’s even more galling to be taxed extra for Simon & Schuster’s slow payment knowing that if I were growing corn instead of writing books I’d be able to offset the good years against the bad ones.”

Sebastian H April 21, 2014 at 3:03 am

“Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years.”

Wait. Am I misreading it or does that stat really say that sixty percent of the people in the top 1% are in it for 10 consecutive years?

That’s isn’t a mere anything in this discussion.

Steve Sailer April 21, 2014 at 4:19 am

That’s somewhat exaggerated, but, yeah, there are a not insignificant number of people who enjoy extremely high incomes for quite a large chunk of their careers.

David C April 21, 2014 at 3:05 am

When my father died, I received a small inheritance that probably put us into the top 1% for that year. We had a rather high debt burden at that point, so we used the money to pay down debt. No change in our standard of living.

Somehow, I don’t think we experienced the affluence of the top 1%, even if we briefly met the technical threshold.

Rahul April 21, 2014 at 3:32 am

I’d count paying a substantial debt off as, in itself, a nice increase in standard of living.

dan1111 April 21, 2014 at 4:27 am

It is likely an increase in future standard of living.

prior_approval April 21, 2014 at 4:31 am

Via calculated risk -

‘The amount owed on student loans has tripled in a decade, to nearly $1.1 trillion, according to the Federal Reserve Bank of New York. People in their 20s and 30s — often the best-educated and highest-earning among them — owe most of that tab. That is keeping a crucial segment of home buyers on the sidelines, deferring one of the traditional markers of adult success.’ http://www.latimes.com/business/realestate/la-fi-0420-student-debt-house-2-20140420,0,7975649.story

And student loan debt is not currently dischargeable in bankruptcy -

‘In 1998, the law was changed again, this time ensuring that federally backed student loans would be made completely and permanently nondischargeable through bankruptcy. But for the banks, even this wasn’t enough: In this system, private loans could still be discharged — albeit after a seven-year waiting period and the self-inflicted destruction of one’s credit and assets. Still, the banks continued the push to deregulate: In 2005, the law was changed a final time, shielding private student debt from bankruptcy just like their federally backed kin. Now, eight years after the law has passed, student loan collectors are some of the most predatory in the industry, and will take your car and your house, garnish your wages, and even go after your parents or other co-signers if you try to avoid repayment. If you’re fortunate enough to grow old in a world that offers the elderly Social Security while subsequently unfortunate enough to carry student loan debt all the way into retirement, predatory collection agencies can even garnish your Social Security check.’ http://www.salon.com/2013/07/24/student_loan_debt_should_be_treated_like_detroits/

Emil April 21, 2014 at 4:30 am

yes, this is the point. you just need to acknowledge that you are not as unique as you think you are

Malto Dextrin April 21, 2014 at 11:52 am

Note thought that your inheritance was not counted as part of your income for income tax purposes.

msgkings April 21, 2014 at 2:01 pm

Exactly, the inheritance didn’t put you in anything income-wise. Perhaps the income generated from the inherited assets did but I doubt it. Basically you mentally counted the inheritance as income, but it wasn’t.

Govco April 21, 2014 at 3:25 pm

Which is why I never listen to anyone talking about “income inequality” unless they are using after-tax income inequality. Seems like a useless construct.

If I earned $1,000,000 wages and paid $350,000 tax then
- I’m not the equal of someone who earned $200,000, but sold a personal residence for $800,000 (or inherited $800,000) and paid just $110,000 in taxes (or just $50,000).
- I’m not 10x richer than someone who earned $100,000 and paid no tax.
- I’m not 100x richer than someone who earned $10,000 but received EITC, Medicaid, etc. worth $50,000.

Steve Sailer April 21, 2014 at 4:25 am

Basically, all the hating on “the one percent” is kind of innumerate, the slogan that would appeal to the dopes at Occupy Wall Street. Over three million Americans are in households in the top one percent. The real growth in wealth inequality is in the top few hundreds of thousands, or even tens of thousands. A smarter phrase would be “The Top Ten Thousand.”

It’s also politically stupid — most everybody literate knows somebody in Top 3 Million. They’re typically community leaders whom you respect. You probably sat next to one on an airplane last year.

On the other hand, the Top Ten Thousand typically don’t fly commercial. And, they really have a _lot_ of money.

Rahul April 21, 2014 at 4:31 am

We nobles are just like you. If you want to bring out the pitchforks go for the royal family.

Steve Sailer April 21, 2014 at 4:37 am

Hey, it worked for the Whig (Liberal) Party in Britain from, roughly, 1688 to 1919, so why not here? It’s politically dumb to denounce Three Million people for greed when you can denounce Ten Thousand.

Steve Sailer April 21, 2014 at 4:42 am

For those coming in late, what we’re talking about is how the ultra-rich landowning magnates of the Whig Party in England successfully positioned themselves as the opponents of royal autocracy. That was an extremely successful political position for a long time because everything is kind of relative.

ThomasH April 21, 2014 at 7:33 am

Perhaps I spend too much time on reasonable websites like this one, but I don’t read a lot (any?) of “hating on” the top x%. Surely just thinking that the taxation of high incomes* could be reformed does not count as “hating” does it?

*capital gains are averaged and indexed)

Brandon April 21, 2014 at 3:37 pm

Any argument that the very wealthy should pay higher tax rates is just like the Holocaust.

mavery April 21, 2014 at 3:53 pm

I’ve always thought of it as more of a catchy slogan rather than folks literally thinking the top 1% of wage earners were all in another category from the other 99%. As you point out “Top 0.01%” is probably more what people are thinking, but that’s less politically simple. And while “Top Ten Thousand” is okay, it doesn’t set up the obvious “1% vs. 99%” dichotomy that works so well rhetorically.

Like a lot of political slogans, the whole “Top 1%” thing is a good rally cry that is pretty silly when taken literally.

ThomasH April 21, 2014 at 7:23 am

Capital gains really need to be indexed and averaged over the holding period. I wonder how much of the variation reported relate to timing of nominal gains..

jon April 21, 2014 at 7:42 am

This illustrates the challenge in the usage of any economic statistics, though it does not prove or disprove much about income inequality. Most in the top percentiles started at the bottom as interns, grad students, etc. Generally those groups got support from family or scholarships or grants and loans.

The real problems are with people who stay in the lower earning brackets at later stages of their lives.

Also one has to be careful about saying that dynamism always solves inequality.
If 5% of the population earns at least 250k every year except one in which they earn 500k and 95% earn 50k in all but one year in which they earn 300k then the inequality really isn’t reduced vs the static case.

BenK April 21, 2014 at 8:16 am

This paints a remarkably different portrait of the benefits given, for example, military officers. They do not (with the exception of some physicians…) experience very high earnings. However, they are consistently in ‘favorable’ percentiles in their local communities for an extended period of time, plus the pensions that do not permit true retirement but instead elevate their percentile considerably, after the fact (in some cases, there is a revolving door into various other well paid positions after the fact). My main point is that the sustained nature of the income, the security in fact, is actually more of a benefit than many would think.

Kyle C April 21, 2014 at 12:35 pm

+1, I have started campaigning in comment threads for economists to try to measure risk-adjusted personal income–which I think is a big element of class status. Someone with tenure or civil-service protections and a defined-benefit pension could arguably have a higher risk-adjusted income and greater wealth than a small-business owner or salesperson with twice the nominal salary. By the same token, relying on inheritance or the value of your house can be flukey.

m_g_s April 21, 2014 at 9:58 am

“Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years”

A mere 0.6 percent? That means 60% of those in the top 1 percent find themselves in the top 1 percent for 10 consecutive years. 0.6 is not a small number compared to the maximum possible value of 1.

TallDave April 21, 2014 at 10:14 am

The maximum possible value isn’t 1 because this data covers 44 years or “their lives” (article is unclear), not 10. Obviously 2% of the population could be in the top 1% for ten years of their lives (or 10 of 44).

Your chances of being in the top 1% for one year is 12%. Your chances of doing it for ten consecutive years is 0.06%.

Your chance of staying in the 1% for ten consecutive years after joining the 1% is much less than 60%. In the ballpark of 0.5% I think.

TallDave April 21, 2014 at 10:15 am

Sorry, should be 0.6% not 0.06%. And 5%, not .5%

Steve J April 21, 2014 at 10:59 am

Realizing you are correct and my comment below is wrong. If you reach the 1% in income you are very unlikely to stay there. The fact that 0.6% of people do manage to stay there for 10 consecutive years still seems like a remarkably large percentage but I cannot figure out what it implies.

TallDave April 21, 2014 at 9:41 pm

The thing to realize is that .6% is 20 times smaller than 12%.

So when you get to the 1%, they say “Welcome to the club! There’s a a one in twenty chance of you still being here in ten years.”

Another way to think about it is that your odds of getting to the 1% for one year (1 in 8.5) is actually much larger than your odds of staying in the 1% ten years once you make it there (1 in 20).

Steve J April 21, 2014 at 10:28 am

It appears once you get there it is likely you will stay there. The first number I found for top 1% income in the US was about $400k. That is low enough to think many people would reach that level of income from liquidating investments at some point in their lives. For those who are getting that income from their profession it seems likely they would continue making that amount of money longer term.

Brandon April 21, 2014 at 3:44 pm

It’s probably more likely that, once you crack into the .5% or the .1%, you’re likely to stay there than just cracking into the 1%. The top 1% starts at $388k, which is a very nice chunk of money, but that same range includes someone who might make anywhere from $100M to $1B or more a year.

If you earned $1B in one year and stuck all of it in a CD or any other safe investment at 1%, you’d get $1M/year in perpetuity. As long as you could ‘manage’ to live on $1M a year, you’d never, ever risk slipping out of the 1% ever again.

A.West April 21, 2014 at 10:03 am

I find it fascinating that so many people believe it’s now ethical to imagine themselves little economic czars and can appropriately decide how much of someone else’s earnings or wealth they should be allowed to keep. Apparently the principles of natural or individual rights, including life, liberty, and property, are considered outdated, and everyone is entitled to opine on how much property we should have the state confiscate from each and every citizen, according to his or her pet theory of justice, economic optimization, or petty envy.

Steve J April 21, 2014 at 10:50 am

It may be fascinating to consider how we’ve arrived at this point but it is not at all fascinating why people feel it is ethical to debate taxation. Most of us live with a central government. Someone has to pay for it so we argue about how to do that. Pretty simple actually…

Moebius Street April 21, 2014 at 1:00 pm

Agreed. And also fascinating how so many take it as a fundamental postulate that, because of inequality (of some unspecified dimension), America is teetering on the brink of a cliff.

Brandon April 21, 2014 at 3:46 pm

What do you mean by “now”? It’s been ethical to debate appropriate taxation levels for quite a long time. Hell, it even predates Enlightenment-era natural rights philosophy.

Mesa April 21, 2014 at 11:16 am

Doesn’t log utility imply a flat tax?

derek April 21, 2014 at 11:35 am

This is a really shallow look at the data. I don’t really care whether someone inherited a couple hundred thousand dollars once; spread over a lifetime, this is not a significant change in earnings, exacerbated by the high taxes that they will pay in that year. I’d be much more interested in how many people have had X years of high income.

msgkings April 21, 2014 at 2:13 pm

Plus, inheritances aren’t income, no one pays any taxes on inheritance, and they don’t bump you into the 1% or anywhere else income-wise

FE April 21, 2014 at 11:50 am

The 1% (or maybe just the .1 or .01%) have so many strategies for controlling the timing of income that you have to wonder how useful IRS data is. Remember how records in the McCourt divorce showed how the owners of the Los Angeles Dodgers hadn’t owed income tax in years? They financed their lifestyle by borrowing against assets. John Carney wrote a piece showing how Mark Zuckerberg could do the same thing by borrowing against his stock for the rest of his life. Except for the handful of years where income recognition cannot be avoided (like the year Zuckerberg exercised his options), these guys would show up in the bottom 1% of income for most of their lives. (Maybe the referenced studies take this into account, but you can’t tell from the article.)

msgkings April 21, 2014 at 2:14 pm

Very good point

TallDave April 21, 2014 at 9:58 pm

Borrowing doesn’t eliminate the tax event though, it just moves some of it to whoever he borrowed from (interest income to them) and the rest to his estate. Eventually he dies, and the stock has to be sold to pay the debt, and there’s a taxable event. I don’t know why anyone would advise that as a tax management strategy though.

In any case Zuckerberg wouldn’t need to do that anyway, as Carney pointed out he’ll probably never spend the income he’s already earned.

This does point up the fact again that income inequality is sort of a useless measure if you use taxes and not change in wealth. Of course, then you have to deal with the fact that many of the 1% often experience gigantic negative incomes…

Fred April 21, 2014 at 11:56 am

Wealth and income are not the same thing. Just as position and velocity are not the same thing.

If physicists conflated velocity with position the way people conflate income with wealth, where do you think technology would be today?

Wealth is net assets i.e. assets minus liabilities. Income is a change in wealth.

The Anti-Gnostic April 21, 2014 at 11:58 am

I don’t have a problem with wealth inequality. Zuckerberg can keep every penny of his billion dollars so long as he’s pulling his weight. It’s when Zuck lobbies government to import a cheaper workforce, or the executives of a few Wall Street IB’s enlist the Fed and Treasury to prevent them from becoming poor that I have a problem. I’d like to think these people don’t need to be threatened with confiscatory taxation to stop their meddling, but apparently they can’t help themselves.

MPS April 21, 2014 at 12:44 pm

I would guess these fluctuations are due to people selling property. When someone sells their $300k home, they are likely to be a 1 percenter that year. We can argue about whether that “counts” or not but the point is it’s not really reflective of wildly fluctuating income, insofar as either that sum is going to be put right back into another house (i.e. spend is also unusually high that year) or it will be set aside to pay for future rent (which is really just a change in asset type, not an increase in income per se).

TallDave April 21, 2014 at 9:47 pm

Having thought about this all day, I think a major factor is the declining utility of money. Think of the professional athletes who forego millions of dollars to play for better teams. How can that be a rational decision? Well, the first million is really, really useful. The second million is very nice. Beyond that wealth becomes a positional good that you trade for other positional goods. This is even more true for people who make $400K working 100 hours a week — at some point, the value of the time you’re giving up becomes too high.

Jay April 22, 2014 at 11:53 am

First, few athletes forgo millions to play on a good team. The ones that do are almost always superstars, and it is is perfectly rational if you remember that most of their income comes from endorsements and not the team’s salary.

budyglass April 22, 2014 at 12:45 am

Thinking of my own situation, the combination of my salary and my wife’s salary is unlikely to ever places us in the top 5%. Top 10% maybe. Right now we’re around the top 15% and it’s feasible that after our children are older she might start working full-time again. That said, I expect to have at least one or two years where we punch up into the top 5%. Which years would those be? The year the last of my wife’s parents dies and the year the last of my parents dies, because those are the years in which we’ll receive inheritances. Not huge by any means, but probably enough to double or triple our income for that particular year.

What I wonder, then, is what percentage of the folks who managed to make it into each income bracket “at least once” during their lifetimes did so due to a one-time windfall like an inheritance or sale of a business?

clayton April 22, 2014 at 9:04 am

So, there’s some volatility in income? It took a Ph.D from Harvard to figure that out?

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