Top Income Inequality
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Greg Warren Kaplan, University of Chicago
Top Income Inequality in the 21st Century: Some Cautionary Notes
AbstractWe revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to four key issues that we believe are critical for an informed discussion about changing inequality since 1980. Our goal is to inform researchers, policy makers, and journalists who are interested in top income inequality. Our analysis is based on a reexamination of publicly available detailed statistics from two administrative data sources: (i) Internal Revenue Service (IRS) data on total incomes (labor income plus capital income), reported in Saez (2012), and (ii) individual-level micro data on labor income (wage plus self-employment income) from the U.S. Social Security Administration (SSA), reported in Guvenen et al. (2014). Reexamining these statistics reveals four findings:
In the final two decades of the 20th century (1981–2000):
1. The rise in top income inequality revealed in SSA and IRS data track each other very closely, except for the two-year period between 1986 and 1988 (see point 2). This is despite non-trivial differences between the two data sources in the definition of income (labor vs total) and the unit of analysis (individual vs. tax unit).
2. Between 1986 and 1988, IRS data show a large jump in top income shares, which is not evident in SSA data. This jump has been previously noted by researchers and is likely a consequence of income shifting from the corporate sectors to pass-through entities in the wake of the Tax Reform Act of 1986.
So far in the 21st century (2001–2012):
3. IRS and SSA data reveal diverging patterns in top income shares – the IRS data show a steady increase, whereas the SSA data show no increase at all. The difference is due to the increasing importance of income accruing to pass-through entities (partnerships and S-corporations), which is included in the IRS measure of total income but not in either the IRS or SSA measure of labor income.
4. Moreover, the bulk of this growth in income from pass-through entities was concentrated at the very top of the distribution – above the 99.99th percentile, a group that contains only about 12,000 households. The share of incomes above the 99th percentile (around $372,000 in 2012) but below the 99.99th percentile (around $7.2 million in 2012) has barely changed in the last two decades.
Capitalists in the Twenty-first Century
AbstractThis paper uses the universe of linked business-owner data from U.S. Treasury tax files to characterize the rise in top incomes since 2000. We present five facts. First, business income growth, as opposed to labor and passive capital income, accounts for the entire rise in U.S. top income inequality. Second, S-corporation income, which accounts for the majority of business income, is broad-based across industries and not especially concentrated among a few large firms. Third, firm profitability differs greatly across business owners. Fourth, superior profitability of top owners is explained by diverging profitability of top firms, not risk. Fifth, business income and profitability are more strongly associated with human capital intensity than with physical capital intensity, international income, industry concentration, firm scale, or labor share. To quantify the importance of human capital, we estimate that profit falls substantially after premature owner deaths. Overall, the human capital of entrepreneurial owner- managers plays a leading role in driving top inequality in the twenty-first century.
- D3 - Distribution
- J2 - Demand and Supply of Labor