I engage in quite a few Facebook debates about politics, I love the debating, but I hate doing it on Facebook. I can only type so many words and I can’t insert awesome graphs and charts. So I’ve decided from now on, if the situation warrants it, I’m going to respond to all Facebook debates on my blog. That way everyone else can take part in the discussion and I can insert geeky charts and graphs.
The article in question is “The Rich Aren’t Getting Richer” from the National Review.
In the article, the author uses information from a Treasury department study on income mobility from 1996 to 2005. That document can be viewed here, and unless otherwise noted my quotes will come from that study.
The person on Facebook takes issue with the following statement from the article…
Of those who were in the poorest fifth in 1979, 85.8 percent had moved to a higher bracket by 1988, and 14.7 percent of them moved to the top bracket — which is to say, the poor of 1979 were more likely to be the rich of 1988 than to be the poor of 1988.
That information comes directly from page five of the Treasury Department study, which states…
The Treasury data showed that 86 percent of taxpayers in the lowest income quintile in 1979 had moved to a higher quintile by 1988 and 15 percent of them had moved all the way to
the top quintile. Among those who were in the top quintile in 1979, 65 percent remained in the top quintile in 1988, and only 1 percent had dropped to the lowest quintile.
So, that is verified by the Treasury Department. However, I will admit to one slight issue with that statement. It includes taxpayers under the age of 25, so when you limit it only to taxpayers age 25-64, you get the following…
When the sample was limited to taxpayers age 25 to 64 and compared to taxpayers in the panel, rather than to all taxpayers aged 25 to 64, the Treasury study showed that 50 percent of the lowest income quintile had moved to a higher quintile after 10 years.
So, still half of the lowest earners age 25-64 made it out of the lowest bracket in a ten year span, which is probably more than most people would have assumed. The Treasury study claims that economic mobility is about 50%, which is to say in any given decade about 50% of individuals are in a different income quintile.
This claim is backed up by a prior Treasury Study as well as a study by Sawhill & Condon (1992) which the Treasury study claims…
Using a measure of relative mobility that compares households within their sample, they found that over 60 percent of individuals were in a different family income quintile a decade later. Among individuals initially in the lowest income quintile, 44 percent moved to a higher quintile between 1967 and 1976.
So it seems that most people have about a 50% chance of moving out of their quintile in a given decade. And the study also showed that downward mobility from the top quintile is about the same percent (47-50%). Which is to say, once you’ve reached the top quintile, that doesn’t guarantee your safety in it, you have about a 50% chance of moving down out of it. Which is weird considering we’re told we give special treatment to the wealthy to make sure they stay wealthy.
The following graph can be seen on page seven of the Treasury Department study (click the image to view a larger size)…
This is interesting data. For starters unlike the previous Treasury study that I mentioned earlier, this data is only individuals over the age of 25. But it shows that if you were in the lower quintile in 1996 you had a better chance of moving upward than staying in the same quintile. In fact you had a slightly better chance at moving into one of the top three quintiles than moving up only one quintile (28.6% to 29.1%).
Furthermore those in the second quintile had a better chance of moving up as well (33.3% to 49.7%). The other important item to notice is the mobility within the highest quintile. Those in the top 1% had a greater chance of moving downward, only 42% of them stayed in the top 1%. We can characterize these people as the “super-rich” and they are almost just as mobile as any other income group. It’s also important to note that the middle class had a better chance of moving up as well (33.3% to 42.1%).
However, I want to focus in on the top 1% again. The Treasury study concludes that…
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
That’s an important analysis to note. We always talk about share of the wealth in terms of income group, where the top 1% owns about 34% of all wealth in the country (also note the difference between wealth and income). For starters that share has remained relatively the same for the last 24 years. It dipped to about 19% in 1976, but that’s the lowest it’s ever gotten, and it quickly bounced back up.
However, the treasury study seems to prove that the income group is owning the wealth, not necessarily the same people. If over half of the people in the top 1% of income earners actually went downward between 1996 and 2005, one of the most booming economic times in recent memory, than it shows that the same people aren’t owning that money, they’re just being replaced by other people, who might move out of that group and are replaced by other people. That is to say, the stability of earners in that group is no more stable than earners in any other group.
So while the top 1% might continue to own the same income, it’s not the same people controlling that wealth.
Let’s look at another table from the Treasury study, this can be found on page 10 (again, click for a larger image)…
This shows the change in income between these groups, and the biggest losers are actually the very wealthy.
In terms of mean income (or in other words average income), the top 1% saw their income increase by 12%, the lowest of any group surveyed. The lowest, in terms of quintiles, after the highest quintile was the fourth quintile at 28%. The winners were the lowest quintile occupants, who saw their mean income rise by an astonishing 235% over the ten year period. In terms of median income the top 1% saw their income go down 25%, whereas the lowest quintile saw an increase of 90%.
The study then breaks it down even further, to the top .01%, who only had a 25% stability rate (that is to say only 25% of them stayed in that group of income earners by 2005). It then breaks it down by mean and median income within the microscopic income group. The study finds that the top .01% saw a decrease in both measures. The mean income dropped 17.8% ($17.5 million to $14.3 million), the median income dropped 64.6% ($11.5 million to $4.1 million). So the “super-rich” did not get super richer from 1996 to 2005, they actually lost money.
Reasons for this decline? Probably quite a few, but I would venture to say these income earners invested a lot of money in the dot com business and lost money when the bubble burst in the early 2000′s. And also note that it’s not uncommon, the super-rich tend to lose money through economic downturns just as easily as any other income bracket.
But let’s look at the crux of this issue, the idea that the rich are getting richer. I want to look at this from an individual standpoint, not a tax bracket standpoint. We can sit here and say the top 1% own this much of wealth (again, remember that number has stayed relatively the same for the last 24 years), but I want to see the fluctuation in the number of millionaires over the last ten years. If the number has stayed the same, we can make the argument that the rich are getting richer. Essentially what we want to look for to prove that point is a decreasing number of people reporting between $1 million and $1.5 million, and an increase in the number of people reporting $10 million or more, all while the total number of people reporting $1 million or more stays the same.
The data I used came from the IRS, particularly this site, from the first set of tables on that site, “All Returns: Selected Income and Tax Items.” Inside each document it breaks down the number of returns by income group. I simply added the number of returns from 1998 to 2008 from earners making over $1 million. The compiled statistics can be found here.
Here’s what was found. In 1998 there were 171,000 people that reported an income over one million dollars. In 2008 that number was 321,000. The number peaked in 2007 at around 392,000, and it was below the 300,000 mark until 2005. The most important thing to note is that the number fluctuated, it did not stay the same throughout the ten years, and the number grew every year between 2002 and 2007. It’s also important to note that the number of people making over $10 million never eclipsed the 18,500 mark, and that it was the most fluid of all the income groups looked at (it had a tendency to change the most).
What does this mean? Well it suggests that instead of the same people accumulating more money and leaving everyone else in their dust, more people are becoming millionaires. So are the rich getting richer or are just more people getting rich? I would argue more people are just getting rich. All of the information that I have seen that claims the rich are getting richer isolate it simply by tax bracket, and doesn’t break it down by the actual individual, like this study does.
Furthermore if we use the Treasury study and say that around 50% of taxpayers find themselves in a different quintile in a ten year span, and that most of the people in the top 1% move downward instead of staying in the top 1%, it’s safe to assume that people swiftly move in and out of the highest quintile and that they are replaced by members of other quintiles, in fact the Treasury study proves just that.
Also, looking at the number of people making over $1 million shows a variation of nearly 200,000 over a ten year span, meaning that the same people aren’t just making more money, there’s more people making that level of money.
I’m not going to say that this alone proves the rich aren’t getting richer, but I think it certainly throws a monkey wrench in the common argument from the left that they are. Income mobility is more fluid than we think and it is just as fluid in the top brackets as it is in the lower bracket. Which proves that while the rich still control a large chunk of the wealth, it’s not the same people controlling that wealth.