The share of income earned by the “top 1%” can be misleading. When it comes to the income distribution, the “top 1%” consists of the 1.4 million tax returns with the greatest amount of adjusted gross income reported in a given year. Data on single-year income distributions are a lot less meaningful than commonly supposed because it’s not clear who those 1.4 million returns belong to, or what share of households remain in the top 1% from year to year. As a result, the statement that “most of the income growth over the past 30 years has gone to the top 1%” is really confusing because the households in the top 1% in 1981 were not the same as the households in the top 1% in 2011. All we know is that the income of today’s top 1% of taxpayers is higher than the income earned by the top 1% a generation ago.
The shift in income in the top 1% should not be ignored or treated as an irrelevant, however. The challenge is to analyze and interpret the data in a way that makes sense and does not depend on the mistaken assumption that “the 1%” is a fixed category of households over time. For example, Senate Majority Leader Harry Reid recently argued that those who “benefited from Bush tax cuts” should now pay higher taxes to reduce the deficit. But households currently in the top 1% differ from households that benefitted from passage of the 2001 and 2003 tax cuts. For every 5 households in the top 1% in a given year, only 2 remain in the top 1% a decade later. As the U.S. Treasury explains:
This statistic illustrates that the top income groups as measured by a single year of income (i.e., cross-sectional analysis) often include a large share of individuals or households whose income is only temporarily high. Put differently, more than half of the households in the top 1 percent in 2005 were not there nine years earlier. Thus, while the share of income of the top 1 percent is higher than in prior years, it is not a fixed group of households receiving this larger share of income.
There is an obvious divergence between what the data mean and what proponents of tax increases interpret them to mean so as to make the case for higher taxes. If the “top 1%” is thought to be a fixed category of households, then single-year income tables leave the impression that this small number of households collects more and more in national income each year. If 20% of taxpayers were expected to be in the top 1% of the income distribution in any given year, increasing tax rates on the “top 1%” would impact one-in-every five households rather than one in every 100.
That said, what should be crystal clear is that the confusing data in this area is often conveyed in the context of a political agenda that promotes class warfare. At minimum, policymakers and economic analysts would be smart to tone down the rhetoric and focus in on arguments and conclusions that are truly supported by the data.
There’s much more, with graphs.
This needs to get into the hands of those who belong to the 99% and who actually have sense. Unfortunately, I suspect that would only be about a handful of people.