Trends in U.S. income distribution
Thursday I posted a figure from an NBER working paper by Thomas Piketty and Emmanuel Saez showing the trend in the proportion of U.S. income earned by the top 10% of income earners. You can get a copy of the figure, and the paper it's a part of, at Emmanuel Saez's webpage.
The figure was striking. In 1917, the top 10% of "tax units" had about 40% of national income. The percent of the income earned by this group rose until about 1929, ranged from about 44% to about 46% until 1940, then plummeted to the area of 32% during the war, and sat there until about 1972. From 1972 to 1998, the share of income received by this group rose almost continuously, ending the period in the area of 42%.
Just for reference, the average income threshold for entry into the top 10% was about $81,000 in 1998.
Here's another figure from a Quarterly Journal of Economics paper based on the NBER working paper. Where the figure on Thursday simply showed the trend for the top decile, this figure breaks the top decile down into the top percentile, the 95 to 99th percentiles, and the 90 to 94th percentiles:
Figure 2 on page 12 of Piketty and Saez, "Income Inequality in the United States, 1913-1998." QJE 118(1):1-39.
This figure is also striking. Look at the radically different patterns followed by the top percentile and the groups in percentiles 90 to 99.
Percentiles 90-99 appear to rise gradually from 1917 to 1940, do the 1940 WWII drop, then, following the war, begin a long sustained increase through 1998.
But the top percentile is all over the place. The authors had enough data to start this series up in 1913, before the start of WWI. It plummets on U.S. entry into the war and during a post-war depression, rises through the boom of the 1920s, peaking in 1929, plummets with the onset of the Great Depression, and again with the onset of WWII, then continues to fall following the war, bottoming out about 1972, and then rising over the period 1972-1998. A large part of this last rise takes place in 1987 and 1988, following the Tax Reform Act of 1986, the authors point out.
What's going on with this top percentile income share? Why do the top percentile and the remaining percentiles in the top 10% move so differently? Piketty and Saez:
"...During the large downturns of the interwar period, capital income sharply fell while wages (especially for those near the top), which are generally rigid nominally, improved in relative terms. On the other hand, during the booms (1923-1929) and the recovery (1933-1936), capital income increased quickly, but as prices rose, top wages lost in relative terms...The negative effect of the wars on top incomes is due in part to the large tax increases enacted to finance them. During both wars, the corporate income tax (as well as the individual income tax) was drastically increased and this mechanically reduced the distributions to stockholders. National Income Accounts show that during World War II, corporate profits surged, but dividend distributions stagnated mostly because of the increase in the corporate tax (that increased from less than 20 percent to over 50 percent) but also because retained earnings increased sharply..."
Just a word about what constitutes income here.
"...We use a gross income definition including all income items reported on tax returns and before all deductions: salaries and wages, small business and farm income, partnership and fiduciary income, dividends, interest, rents, royalties, and other small items reported as other income...we focus mainly on series that exclude capital gains. Income...is computed before individual income taxes and individual payroll taxes, but after employers' payroll taxes and corporate income taxes."
Revised 3-24-04. The paragraph beginning "This figures is also striking." was revised to eliminate text indicating that the top percentile was primarily income from capital while the remaining percentiles were primarily income from labor. The later is true, but the former was only true in the earlier years.