The Very Top of the U.S. Income Distribution

Mark Thoma is wishing he had already found time to read Piketty and Saez (2006), "The Evolution of Top Incomes: A Historical and International Perspective" (Cambridge: NBER WP 11955:

Abstract: This paper summarizes the main findings of the recent studies that have constructed top income and wealth shares series over the century for a number of countries using tax statistics. Most countries experience a dramatic drop in top income shares in the first part of the century due to a precipitous drop in large wealth holdings during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries but not at all in continental Europe countries or Japan. This increase is due to an unprecedented surge in top wage incomes starting in the 1970s and accelerating in the 1990s. As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries. We discuss the proposed explanations and the main questions that remain open.

Thoma reproduces what are by far the most interesting figures in Piketty and Saez, which show that the pretax income share of the top 1% of the American income distribution jumped from 8% in 1980 to 9% in 1985 to 13% in 1990 to 17% in 2000 to 14% today. Over the same period the income share of the next 4% has risen from 13% to 15%, and the income share of the still next 5% has stayed at 12%. The top tenth of the American income distribution increased its share from 33% in 1980 to 41% today--with three-quarters of that increase going to the top 1% and fully one-quarter of that increase going to the top 0.01%.

What skills and assets do the top 1% of America's pretax income distribution have today that lead the market to grant them 14% of total income, when their counterparts back in 1980 were granted only 8% of total income? What skills and assets do the top 0.01% of the American pretax income distribution--that's 12,000 tax units--that led the market to grant them 100 times average income in 1980, and 300 times average income today?

Comments

[John Emerson]

Seemingly the effect of Bush has been to reduce the top share, whereas Clinton increased it. That puzzles me too.

[It shouldn't: the collapse of the NASDAQ bubble shows up in reduced capital gains and other elite tech income flows in Bush's administration. Similarly, the rise of the dot-com billionaires took place on Clinton's watch. Neither of them is responsible for these effects. What each did to (in Clinton's case narrow and in Bush's case widen) income disparities has effects that take a long time to play out.]

[david]

Other questions also come to mind -- what governance failures allowed top management to take this kind of money? What power relationships allowed this kind of class warfare? etc. Obviously you know these, I'm not trolling (though I have a different idea of the market than you, no doubt) -- I'm asking a definitional question: would you include them in your definition of "assets" here?

[spencer]

DAVID -- My understanding of how this surge in CEO pay originated with professional portfolio managers. In the early 1980s a view emerged in the investment community that the reason stock returns had been so poor was that management interest were not aligned with that of shareholders. So they pressured for changes that lead to top management being paid more of their salary in stocks and options. It did not take long for managers to learn how to game the system and the results are what we see here.

The reason the series rose sharply under Clinton and has been flat under Bush is the stock market. With corporate management income much more a function of the stock market it is easy to see how this happens.

The interesting thing is that the thesis that poor stock returns were due to management interest not being alined with
shareholder interest has little basis in fact. The part of stock returns that management strongly influences is earnings.
But since WW II the trend growth rate of EPS
has been 7% and there is absolutely no evidence that the change in corporate compensation caused the trend in EPS growth to shift. The reason stock returns had been poor before 1980 was the impact of inflation and high rates on the PE side of the equation. The reverse of this is that falling rates and inflation caused the stock market boom under Clinton that generated the sharp rise in CEO income.

[Clarence De Tocqueville]

Jes-s, George Bush said tonight he wanted to be remembered as an Alexis de Tocqueville kinda guy! [author "Democracy in America"].

There may be something to that delusional three-cornered hat of George's. After all, when De Tocqueville was writing about the young America in the late 1700's, everyone was printing their own local funny money, Bernanke Script, if you will, and creating their own local toll roads, tithes and taxes, such as continue to plague US today.

I mean, for G-d sakes, we're still paying down your Spanish American War, Congress!!

De Tocqueville observed that nowhere but America was there such emphasis on money, filthy lucre, Connecticult (sic) Yankee trading in bad molasses and lame mules, tooth filings and mercury philters. Ahhh.

Then, keeping slaves and indentured servants was a thing of Pride, a Calvanist proof of purchase that you were the Chosen of G-d.

You only have to look at the DOD-DHS budget drain, now **trillion dollars** in white lab-coat welfare, billions gone MIA in Iraq, more billions gone MIA in New Orleans, and a full trillion simply unaccounted for, enough of our taxes to feed every starving person on *Earth for a whole year, poof, vaporized.
Mr. Milken'd out of existence.

You know, Bush probably read the Reader's Digest, Cliff's Notes "patriotic" version
of 'Democracy in America', papally-abridged.

De Tocqueville observed that the patriotic Americans and Founding Fathers strongly *separated Church from State*, and he noted that the clergy of the time would all have nothing to do with government, almost to the point of being a personal point of Honor.

(Oh, G-d, I used the "H" word! Oh, G-d, I used the word "G-d". Oops, I did it again! BTW, "under G-d" was added to the pledge of allegiance in the 1950's. And when was the last time the White House sousa band played, "America the Beautiful", I ask you citizen?)

Here's the Great Satan himself, lying out his flaming assh-le, saying he wants to be remembered for the *opposite* of the very UN-De Tocqueville Fundamentalist Taliban Church-State the Repug party is creating!

The Founding Fathers h-a-t-e-d the vampire- royals and their thousand popes and bishops!
Our Revolution was all about *getting rid* of their fiscal tyranny, their blood drain!

Now this demonic increase in Federal debt
to the utmost limit of the value of all our national wealth, real estate, plant, equity! Why, he's bled US all flat, busted, broke!

And now George is defending Full Spectrum Dominance, domestic espionage on all of US!
Founding Fathers would have called to arms!
This would have been our Second Revolution!
Mr. Bush, bring down that wall! kinda stuff.

No wonder Soros made that comment of his:

"The markets seem remarkably complacent.
It's rather like dancing on the Titanic."

Indeed. Dancing with goats in the barnyard, like that other cloven-hoof fellow, Mr. Lay.

[Padraig]

Clearly, there's some political component to this story. The increase began with Reagan, but then interestingly the top 1% loses ground under Bush. There's a puzzle here, and no doubt.

[Eric]

Mr. Delong,

Could you respond to Daniel Weintraub here?

Thanks

http://www.sacbee.com/static/weblogs/insider/archives/002625.html

[A. Zarkov]

“Seemingly the effect of Bush has been to reduce the top share, ... “

So how does Bush, or any other president control or influence the salaries of top corporate managers? Do compensation committees call up the White House and ask for guidance? What does a president do to widen income disparities in the long run?

The top salaries of the upper management of large American companies are truly astronomical. The WSJ quoted a figure of nearly 10% of (I think) earnings for the top management of the 1,500 largest companies. Why don’t shareholders scream, as they should be getting the money in dividends or stock buybacks? I can speculate. First they might not have a accurate picture of just how generous the compensation really is. Then many people own shares through mutual funds, and they can’t even find out how the managers of the MF are voting their shares. I called Vanguard to find out how they were voting on the HP acquisition of Compact (or was it Gateway?) and was told that it was none of my business. They get to vote the shares I own in secret. On the other hand, perhaps investors don’t care about executive compensation because they don’t really think of themselves as owners. A share is simply a lottery ticket.

[me]

Stolen pensions = bucks to the top 1% like say Gerstner.

[John Emerson]

Oh, go blow, Zarkov. That post was as close to agreeing with your general point of view as I'll ever get. People like me have been saying all along that his administration was accelerating this process, but the facts seem otherwise. That struck me as interesting.

But apparently the way I expressed myself triggered one of the zombie bots that control your brain.

[Ellen1910]

As "watered stock" and the '29 Crash faded from memory the Equity Premium of "Puzzle" fame was reduced. Managers and their friendly boards learned how to grab a portion of this unearned(?) rent via stock options, buy-out packages, etc.

How much of the 1980-2000 change in income ratios is due, merely, to changing P/E ratios?

[piotr]

Why top management managed to appropriate such high percentage of company profits?

Part of it is that there is no institutional counter-balance, since most of the share ownership is dispersed and indirect. However, I suspect that that may be also true in France, Germany and Japan. So part of the reason is in morality/ideology. In some societies it is unseemly to be too grasping, while in the English speaking world the notion seemed to vanish from vocabulary.

The shapers of public opinion either have very little to say about morality, or they are more interested in the deeds of teenage girls than those of corporate chieftains. The former are, according to the press, in the grips of fellatio epidemic. Is it possible that the girl immitate what the rest of the society does (with top managers, with top politicians etc.)?

40 years ago we had an age of free love. Now we have an age of pleasureless c..k sucking.

[anne]

http://www.nytimes.com/2005/06/06/opinion/06herbert.html?ex=1275710400&en=c03b1056decb6b77&ei=5090&partner=rssuserland&emc=rss

June 6, 2005

The Mobility Myth
By BOB HERBERT

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000."

The social dislocations resulting from this war that nobody mentions have been under way for some time. But the Bush economic policies have accelerated the consequences and intensified the pain....

[anne]

http://www.nytimes.com/2005/10/05/business/05tax.html?ex=1286164800&en=912f752ebdc64a9a&ei=5090&partner=rssuserland&emc=rss

October 5, 2005

At the Very Top, a Surge in Income in '03
By DAVID CAY JOHNSTON

After falling for two years, the share of income going to the richest slice of Americans - the top tenth of 1 percent - grew significantly in 2003 while the share going to 99 percent of Americans fell, tax data released yesterday showed.

At the same time, the effective income tax rates paid by the top tenth of 1 percent fell sharply, declining at more than 10 times the rate reduction for middle-class taxpayers, the new report, by the Internal Revenue Service, showed.

Overall incomes rose by 2.7 percent in 2003, compared with the previous year, the I.R.S. said. A quarter of this increase went to the top tenth of 1 percent, the 129,000 taxpayers with reported incomes of $1.3 million or more, an analysis of the data showed.

Prof. Edward N. Wolff, a New York University economist who studies wealth, contended that the data could be tied to stock market gains in 2003 and a sharp rise in the pay of chief executives while most workers' pay was barely keeping up with inflation.

The top 10th of 1 percent paid almost 23.6 percent of their reported income in income taxes in 2003, down from just under 27 percent in 2002. That is a decline of 3.4 percentage points. For taxpayers in the bottom 80 percent, the effective tax rates fall by three-tenths of a percentage point or less.

Only for those Americans in the top 1 percent, the nearly 1.3 million taxpayers who made at least $327,000, did incomes increase significantly more in 2003 than the rate of inflation. And this increase was concentrated within the top tenth of 1 percent. The income of that group grew by 9.5 percent in 2003 over the previous year while the rest of the top 1 percent had a gain of 3.7 percent.

For the bottom 99 percent of taxpayers, income rose by slightly less than 2 percent, which was below the inflation rate of 2.3 percent....

[anne]

http://www.nytimes.com/2005/06/05/national/class/HYPER-FINAL.html?ex=1275624000&en=f1af44c9cec8c79e&ei=5090&partner=rssuserland&emc=rss

June 5, 2005

Richest Are Leaving Even the Rich Far Behind
By DAVID CAY JOHNSTON

When F. Scott Fitzgerald pronounced that the very rich "are different from you and me," Ernest Hemingway's famously dismissive response was: "Yes, they have more money." Today he might well add: much, much, much more money.

The people at the top of America's money pyramid have so prospered in recent years that they have pulled far ahead of the rest of the population, an analysis of tax records and other government data by The New York Times shows. They have even left behind people making hundreds of thousands of dollars a year.

Call them the hyper-rich.

They are not just a few Croesus-like rarities. Draw a line under the top 0.1 percent of income earners - the top one-thousandth. Above that line are about 145,000 taxpayers, each with at least $1.6 million in income and often much more.

The average income for the top 0.1 percent was $3 million in 2002, the latest year for which averages are available. That number is two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980. No other income group rose nearly as fast.

The share of the nation's income earned by those in this uppermost category has more than doubled since 1980, to 7.4 percent in 2002. The share of income earned by the rest of the top 10 percent rose far less, and the share earned by the bottom 90 percent fell.

Next, examine the net worth of American households. The group with homes, investments and other assets worth more than $10 million comprised 338,400 households in 2001, the last year for which data are available. The number has grown more than 400 percent since 1980, after adjusting for inflation, while the total number of households has grown only 27 percent.

The Bush administration tax cuts stand to widen the gap between the hyper-rich and the rest of America. The merely rich, making hundreds of thousands of dollars a year, will shoulder a disproportionate share of the tax burden.

President Bush said during the third election debate last October that most of the tax cuts went to low- and middle-income Americans. In fact, most - 53 percent - will go to people with incomes in the top 10 percent over the first 15 years of the cuts, which began in 2001 and would have to be reauthorized in 2010. And more than 15 percent will go just to the top 0.1 percent, those 145,000 taxpayers....

[anne]

The tax structure changes of this Administration are still playing out, and those who are wealthy enough are adjusting investments and "income" flows to take account of the changes. The simplest example is to have switched from bonds which are taxed at you marginal rate to dividends which are taxed at no more than 15%. Capital gains are not taxed till realized and then at no more than 15%.

[monkyboy]

Some anecdotal data...I used Google and my county's new online property tax database to see who lived on the richest street in my town:

2 pro athletes
1 software company founder
1 shopping mall developer
1 trial lawyer
1 discount retail chain founder
1 Russian immigrant
1 scion of old money

[anne]

Then, for quite some time we could trade a long term Treasury interest rate of below 4.3% to 4.5%, for say the Vanguard utility index with a dividend of 3.3% to 3.5%. The chance of making more than 1% a year in capital gains in utilities over the coming decade are rather high, and the trade is easily made thereby reducing the tax liability. There have been many similar conservative trades to be made.

[anne]

Income and wealth data take some time to accumulate, and I strongly expect we will find continuing income and wealth concentration for these 5 years, simply for the tax changes and investment adjustments made. Also, we know that the median income level has fallen now for 5 years and this is decidedly not promising as Benjamin Friedman has been telling us.

[Mary]

One data point that has been ignored here is that the upward spiral began at the same time as the personal computer and spreadsheet were introduced. People could sit in their office, play with the budget numbers and see how cutting salaries to workers meant more money for them. Before it would have meant requesting a report to be run on the mainframe and the approval of others in the company. But if you could run the numbers in secret...

[liberal]

A. Zarkov wrote, "So how does Bush, or any other president control or influence the salaries of top corporate managers?"

Through (a) proposing statutes, (b) appointments to the SEC, etc.

[Oskar Shapley]

Zarkov's got a good point. Bush is not deciding CEO compensation. Shareholders should be doing it, but they are too fragmented to have anything to say, or have been silenced and sidelined by their mutual fund intermediaries.

There's a quiet 'tragedy of the shareholders' going on here...

[A. Zarkov]

“Through (a) proposing statutes, (b) appointments to the SEC, etc.”

I don’t know what statutes Bush (or any other president) has proposed that would determine or influence corporate salaries. Remember we are talking about pretax compensation. As for the SEC, it does not determine corporate governance. SEC rules have mostly to do disclosures. You can do what you want; you simply have to disclose it. The current SEC chairman has proposed that the full compensation of top executives be disclosed in their filings. This would include retirement benefits, including severance packages, stock options, personal use of corporate assets etc. I suppose the SEC thinks if the stockholders really know the full extent of executive compensation they will pressure corporate directors to hold it down. This might help, but only time will tell.

[derek]

Thank you, that picture of the graphs is much better. I thought the low-quality version before was deliberate!

[scottynx]

Brad Delong asks:
[.....What skills and assets do the top 0.01% of the American pretax income distribution--that's 12,000 tax units--that led the market to grant them 100 times average income in 1980, and 300 times average income today?]

It is not just what skills and assets you have, it is how much the market values those skills and assets. The astounding technological changes of the last 30 years have probably caused skills to change in market value at varying rates. Recent globalization and the spread of free markets also benefit the rich relatively more because the skills (or lack therof) of most the people around the world mostly complement the skills of the U.S. rich and more directly compete with the skills of the U.S. poor. As Asia rises I expect the U.S. rich to get more competition but that is still in the process of happening.

Massive unskilled immigration (in force since 1965, a period largely overlaping with Brad's 30 year time frame) also increases income distribution because thier skills are also complementary with those of the U.S. rich and competitive with those of the U.S. poor.

Tax cuts are partially responsible as well, but don't ignore the factors above.

[Mr. Econotarian]

I know one "millionaire", someone worth somewhere between $10 and $100 million.

His skills were an incredible combination of technological knowledge to start an Internet service provider, combined with incredible charisma to grow that company to one employing 100 people, then to get venture backing to take it to over 300 employees and have an IPO.

In the process, he gave the opportunity for hundreds of people to have careers that they really otherwise would not have had (college droupouts and high school grads becoming Internetworking experts, programmers, systems administrators). The network this company built has been a major part of the Internetwork for a long-distance company and now a former RBOC (aka telephone company).

This ISP also made it possible for thousands of companies to carry out their business on the Internet, from underwear companies, airlines, all the way to VOIP long-distance carriers in Arfica.

I owe my opportunity to have previously tried entrepreneurship (not successful) and my current career (very successful) to his vision.

[Jay Denari]

hi, all,

Mr. Econotarian -- While I'd agree the millionaire you know is talented and probably a little lucky, and his vision should be rewarded, is it fair for him to get a substantially bigger slice of the pie?

He COULD NOT have built that company by himself, no matter how skillful he is. He convinced OTHERS to do key parts of it, and their skills are no less crucial to the firm's success than his. You are one of those people-- although you prospered in his firm, you don't owe your success to him, you owe it to your own skills.

That's exactly why the culture of near-hero-worship we have toward business success and the upper income folks, the golden parachutes, and the political influence the wealthy have really bothers me. It is inherently undemocratic. Just because someone's skills & interests make it much easier for them to fit the corporate/entrepreneurial mold does NOT make that person worth more than someone who has no head for (or interest in) business but has good physical skills, is a skilled farmer, teaches well, or writes well.

If anything, corporate leaders owe more of their success to other people than most other occupations, but very few companies truly recognize that and grant employees equal say. Usually, the people that directly contribute to and depend on the firm have less influence than anonymous investors whose only input is money. Stockholders deserve a say, but no more than the customer service folks or managers or janitors. Under our system, however, they get multiple votes (sometimes thousands or millions of them, one per stock certificate) while many of the employees get none (or, as someone above noted, get no say in how "their" vote is cast).

When our economy is built in such an undemocratic way, it's not really surprising that our political system is becoming undemocratic, too.