Tuesday, November 23, 2010

Income Inequality: Who Are The Rich in the Top x%?

It's easy to find liberal pundits who make statements like the following: "the richest 1 percent possessed about 15 percent of the nation's income."1 or "Income inequality between the classes is the greatest it's ever been since they first introduced the metrics (to measure same) in this country."2

The big flaw in this argument is that, as is so often the case, the argument confuses income with wealth. Being "rich" is more about having wealth than it is about earning a high income. When a person earns a high income over time, he can eventually become wealthy or rich. Income inequailty is a different story than wealth inequality.

The statistics that are cited to refer to growing income inequality are always income statistics (duh). The assumption buried so deep that it takes a jackhammer to uncover it, though, is that the "the richest 1 percent" that's earning 15 percent of the nation's income is the same 1 percent year after year after year. If one year, it's one group of people in that 1 percent, and the next year it's a mostly different group of people, and the next year, it's a mostly different group of people again, then we don't have the same issue.

The liberals who cite the fact that "the richest 1 percent possessed about 15 percent of the nation's income" are trying to make the point that "the rich are getting richer." But if it's a different 1 percent every year, then that doesn't prove the rich are getting richer. It's more like different people are taking turns winning the lottery, and a lot of people are becoming better off. Only in reality it is probably more like different people taking turns cashing in on IPOs, receiving huge investment fund bonuses, and so on.

The IRS Publication "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2007"4 sheds a little light on this topic. Table 4 on the last page of the report contains the data of interest.

In the 16 years from 1992-2007, 72% of the people who appeared in the top 400 appeared only one time in 16 years. 90% appeared three times or less in a 16 year period. Only 0.2% of people appeared all 16 years.

So among people with the very highest incomes, the group composition is highly volatile and does not support the claim that "the rich are getting richer." It says rather that Americans are taking turns having extremely high incomes, which actually seems very positive.

While income inequality might be increasing, wealth inequality has been decreasing since the mid 1970s,3  which is what you would expect to see when high incomes are being spread around to different people from year to year rather than concentrated on the same people every year.


Note: I need to find data on how stable the composition of the group of top 1% and top 0.1% of wage earners really is. [I know I saw this in an IRS publication once, but I can't find it again.]

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