US Top Incomes-Saez
US Top Incomes-Saez
US Top Incomes-Saez
•
University of California, Department of Economics, 530 Evans Hall #3880, Berkeley, CA
94720. This is an updated version of “Striking It Richer: The Evolution of Top Incomes in the
United States”, Pathways Magazine, Stanford Center for the Study of Poverty and Inequality,
Winter 2008, 6-7. Much of the discussion in this note is based on previous work joint with
Thomas Piketty. All the series described here are available in excel format at
http://elsa.berkeley.edu/~saez/TabFig2013prel.xls.
1
See Table A-2 in the official report “Income and Poverty in the United States: 2013”, series
P60-249, US Census Bureau Current Population Report at
http://www.census.gov/content/dam/Census/library/publications/2014/demo/p60-249.pdf
2
Top ordinary income marginal tax rates increased from 35 to 39.6% and top income tax
rates on realized capital gains and dividends increased from 15 to 20% in 2013. In addition,
the Affordable Care Act surtax at marginal rate of 3.8% on top capital incomes and 0.9% on
top labor incomes was added in 2013 (the surtax is only 0.9% on labor income due to the
pre-existing Medicare tax of 2.9% on labor income). The Pease limitation on itemized
deductions also increases marginal tax rates by about 1 percentage point for ordinary income
and 0.5 percentage points for realized capital gains and dividends in 2013. These higher
marginal tax rates affect approximately the top 1%.
1
This retiming inflates 2012 top income shares and depresses 2013 top
income shares.3 Hence, it is likely that top income shares will rebound in
2014, although they will probably not be quite as high as in 2012. Even
depressed by income retiming, the top 1% income share in 2013 remains
above 20%, more than twice as high as in the 1970s. Hence, it seems very
unlikely that the current top tax rate increases will be sufficient to curb the
dramatic ascent of top 1% income shares. To cast light on this, we will try to
post preliminary estimates for 2014 in June 2015.
Overall, these results suggest that the Great Recession has only
depressed top income shares temporarily and will not undo any of the
dramatic increase in top income shares that has taken place since the 1970s.
Looking further ahead, based on the US historical record, falls in income
concentration due to economic downturns are temporary unless drastic
regulation and tax policy changes are implemented and prevent income
concentration from bouncing back. Such policy changes took place after the
Great Depression during the New Deal and permanently reduced income
concentration until the 1970s (Figures 2, 3). In contrast, recent downturns,
such as the 2001 recession, lead to only very temporary drops in income
concentration (Figures 2, 3).
The policy changes that took place coming out of the Great Recession
(financial regulation and top tax rate increase in 2013) are not negligible but
they are modest relative to the policy changes that took place coming out of
the Great Depression. Therefore, it seems unlikely that US income
concentration will fall much in the coming years.
3
Indeed, previous expected top tax rate increases (such as in 1993 for ordinary income and
in 1987 for realized capital gains) also produced significant retiming.
4
This decline is much larger than the real official GDP decline of 3.1% from 2007-2009 for
several reasons. First, our income measure includes realized capital gains while realized
capital gains are not included in GDP. Our average real income measure excluding capital
gains decreased by 10.8% (instead of 17.4%). Second, the total number of US families
increased by 2.5% from 2007 to 2009 mechanically reducing income growth per family
relative to aggregate income growth. Third, nominal GDP decreased by 0.6% while the total
market nominal income aggregate we use (when excluding realized capital gains) decreased
by 5.5%. This discrepancy is due to several factors: (a) nominal GDP decreased only by
0.4% while nominal National Income (conceptually closer to our measure) decreased by 2%.
In net, income items included in National Income but excluded from our income measure
grew over the 2007-2009 period. The main items are supplements to wages and salaries
(mostly employer provided benefits), rental income of persons (which imputes rents for
homeowners), and undistributed profits of corporations (see National Income by Type of
Income, Table 1.12, http://www.bea.gov/national/nipaweb/SelectTable.asp).
2
drop since the Great Depression. Average real income for the top percentile
fell even faster (36.3 percent decline, Table 1), which lead to a decrease in
the top percentile income share from 23.5 to 18.1 percent (Figure 2). Average
real income for the bottom 99% also fell sharply by 11.6%, also by far the
largest two-year decline since the Great Depression. This drop of 11.6% more
than erases the 6.8% income gain from 2002 to 2007 for the bottom 99%.
The fall in top decile income share from 2007 to 2009 is actually less
than during the 2001 recession from 2000 to 2002, in part because the Great
recession has hit bottom 99% incomes much harder than the 2001 recession
(Table 1), and in part because upper incomes excluding realized capital gains
have resisted relatively well during the Great Recession.
5
Taxpayers who request a 6-month filing extension generally do not file until October 15.
Their tax returns are therefore not processed by IRS until the month of November. A
substantial fraction of very high income returns use the filing extension. Hence, estimates
based on filing season statistics are not exactly equal to final statistics.
3
detailed statistics on income reported for tax purposes since 1913, when the
modern federal income tax started. These statistics report the number of
taxpayers and their total income and tax liability for a large number of income
brackets. Combining these data with population census data and aggregate
income sources, one can estimate the share of total personal income
accruing to various upper-income groups, such as the top 10 percent or top 1
percent.
We define income as the sum of all income components reported on
tax returns (wages and salaries, pensions received, profits from businesses,
capital income such as dividends, interest, or rents, and realized capital
gains) before individual income taxes. We exclude government transfers such
as Social Security retirement benefits or unemployment compensation
benefits from our income definition. Non-taxable fringe benefits such as
employer provided health insurance is also excluded from our income
definition. Therefore, our income measure is defined as cash market income
before individual income taxes.
Figure 1 presents the pre-tax income share of the top decile since
1917 in the United States. In 2013, the top decile includes all families with
market income above $116,500. The overall pattern of the top decile share
over the century is U-shaped. The share of the top decile is around 45
percent from the mid-1920s to 1940. It declines substantially to just above
32.5 percent in four years during World War II and stays fairly stable around
33 percent until the 1970s. Such an abrupt decline, concentrated exactly
during the war years, cannot easily be reconciled with slow technological
changes and suggests instead that the shock of the war played a key and
lasting role in shaping income concentration in the United States. After
decades of stability in the post-war period, the top decile share has increased
dramatically over the last twenty-five years and has now regained its pre-war
level. Indeed, the top decile share in 2012 is equal to 50.6 percent, a level
higher than any other year since 1917 and even surpasses 1928, the peak of
stock market bubble in the “roaring” 1920s.
Figure 2 decomposes the top decile into the top percentile (families
with income above $394,000 in 2012) and the next 4 percent (families with
income between $161,000 and $394,000), and the bottom half of the top
decile (families with income between $114,000 and $161,000). Interestingly,
most of the fluctuations of the top decile are due to fluctuations within the top
percentile. The drop in the next two groups during World War II is far less
dramatic, and they recover from the WWII shock relatively quickly. Finally,
their shares do not increase much during the recent decades. In contrast, the
top percentile has gone through enormous fluctuations along the course of
the twentieth century, from about 18 percent before WWI, to a peak to almost
24 percent in the late 1920s, to only about 9 percent during the 1960s-1970s,
and back to almost 23.5 percent by 2007. Those at the very top of the income
distribution therefore play a central role in the evolution of U.S. inequality over
the course of the twentieth century.
The implications of these fluctuations at the very top can also be seen
when we examine trends in real income growth per family between the top 1
4
6
The exact percentage 91% is sensitive to measurement error, especially the growth in the
total number of families from 2009 to 2012, estimated from the Current Population Survey.
However, the conclusion that most of the gains from economic growth was captured by the
top 1% is not in doubt.
5
income from 2013 to 2012 to take advantage of the low top tax rates of 2012
before the top tax rates increase in 2013.
The top percentile share declined during WWI, recovered during the
1920s boom, and declined again during the great depression and WWII. This
very specific timing, together with the fact that very high incomes account for
a disproportionate share of the total decline in inequality, strongly suggests
that the shocks incurred by capital owners during 1914 to 1945 (depression
and wars) played a key role.7 Indeed, from 1913 and up to the 1970s, very
top incomes were mostly composed of capital income (mostly dividend
income) and to a smaller extent business income, the wage income share
being very modest. Therefore, the large decline of top incomes observed
during the 1914-1960 period is predominantly a capital income phenomenon.
Interestingly, the income composition pattern at the very top has
changed considerably over the century. The share of wage and salary income
has increased sharply from the 1920s to the present, and especially since the
1970s. Therefore, a significant fraction of the surge in top incomes since 1970
is due to an explosion of top wages and salaries. Indeed, estimates based
purely on wages and salaries show that the share of total wages and salaries
earned by the top 1 percent wage income earners has jumped from 5.1
percent in 1970 to 12.4 percent in 2007.8
Evidence based on the wealth distribution is consistent with those
facts. Estimates of wealth concentration, measured by the share of total
wealth accruing to top 1 percent wealth holders, constructed by Wojciech
Kopczuk and myself from estate tax returns for the 1916-2000 period in the
United States show a precipitous decline in the first part of the century with
only fairly modest increases in recent decades. The evidence suggests that
top incomes earners today are not “rentiers” deriving their incomes from past
wealth but rather are “working rich,” highly paid employees or new
entrepreneurs who have not yet accumulated fortunes comparable to those
accumulated during the Gilded Age. Such a pattern might not last for very
long. The drastic cuts of the federal tax on large estates could certainly
accelerate the path toward the reconstitution of the great wealth concentration
that existed in the U.S. economy before the Great Depression.
The labor market has been creating much more inequality over the
last thirty years, with the very top earners capturing a large fraction of
macroeconomic productivity gains. A number of factors may help explain this
increase in inequality, not only underlying technological changes but also the
retreat of institutions developed during the New Deal and World War II - such
as progressive tax policies, powerful unions, corporate provision of health and
retirement benefits, and changing social norms regarding pay inequality. We
need to decide as a society whether this increase in income inequality is
efficient and acceptable and, if not, what mix of institutional and tax reforms
should be developed to counter it.
7
The negative effect of the wars on top incomes can be explained in part by the large tax
increases enacted to finance the wars. During both wars, the corporate income tax was
drastically increased and this reduced mechanically the distributions to stockholders.
8
Interestingly, this dramatic increase in top wage incomes has not been mitigated by an
increase in mobility at the top of the wage distribution. As Wojciech Kopczuk, myself, and Jae
Song have shown in a separate paper, the probability of staying in the top 1 percent wage
income group from one year to the next has remained remarkably stable since the 1970s.
Table 1. Real Income Growth by Groups
Full period
1993-2013 15.1% 62.4% 7.3% 59%
Clinton Expansion
1993-2000 31.5% 98.7% 20.3% 45%
2001 Recession
2000-2002 -11.7% -30.8% -6.5% 57%
Bush Expansion
2002-2007 16.1% 61.8% 6.8% 65%
Great Recession 2007-
2009 -17.4% -36.3% -11.6% 49%
Recovery
2009-2012 6.9% 34.7% 0.8% 91%
Top tax increase
2012-2013 -3.2% -14.9% 0.2% 106%
Computations based on family market income including realized capital gains (before individual taxes).
Incomes exclude government transfers (such as unemployment insurance and social security) and non-taxable fringe benefits.
Incomes are deflated using the Consumer Price Index.
Column (4) reports the fraction of total real family income growth (or loss) captured by the top 1%.
For example, from 2002 to 2007, average real family incomes grew by 16.1% but 65% of that growth
accrued to the top 1% while only 35% of that growth accrued to the bottom 99% of US families.
Source: Piketty and Saez (2003), series updated to 2013.
50%
45%
Top 10% Income Share
40%
35%
20%
15%
10%
4%
3%
2%
1%
0%
1913
1918
1923
1928
1933
1938
1943
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
FIGURE 3
The Top 0.01% Income Share, 1913-2013
Source: Table A1 and Table A3, col. P99.99-100.
Income is defined as market income including (or excluding) capital gains.
In 2013, top .01% includes the 16,300 top families with annual income above $8.5m.