Friday, September 04, 2009

Forget Everything You've Heard in the Media About Income Inequality and Income Mobility

From the study "Income Mobility in the United States: New Evidence from Income Tax Data," by Gerald Auten & Geoffrey Gee (both of the Office of Tax Analysis, U.S. Treasury Department), which was released previously here.

This study examines the income mobility of individuals over the last two decades using large panels of income tax returns that overcome many of the limitations of prior studies. The use of panel data means that the analysis tracks changes in the incomes of the same individual taxpayers over these time periods rather than comparing cross-sections at different points in time. Key findings include:

* There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5% by one measure and 55% by another measure) moved to a different income quintile over this period. About half (56% by one measure and 42% by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.


* Median incomes of taxpayers in the sample increased by 24% after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.

* The composition of the very top income groups changed dramatically over time. Less than half (39% or 42% depending on the measure) of those in the top 1% in 1996 were still in the top 1% in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.

* The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.

* Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.

MP: In other words, almost everything we hear in the media about increasing income inequality, the disappearing middle class, the rich getting richer and the poor getting poorer, and the lack of income mobility is either flawed, deficient, incorrect, incomplete or wrong.

The data show that there is significant income mobility up and down the income quintiles over longer periods of time, e.g. 1996-2005. Many of today's poor are tomorrow's rich, and many of today's rich are tomorrow's middle class or poor. The top income quintiles are not private clubs closed to new members, but are shifting, dynamic quintiles composed of an ever-changing group of different individuals from year to year. Consider that 75% of the individuals in the richest group of Americans in 1996, the top 1/100th percent, moved down into a lower income group by 2005, making room for a completely different group of individuals in that super-rich category.

HT: TaxProf Blog

10 Comments:

At 9/04/2009 10:09 AM, Anonymous morganovich said...

i'd love to see a comparator study done in europe. i would be willing to bet that they have much less income mobility and that their rich stay rich while the poor stay poor.

 
At 9/04/2009 2:07 PM, Blogger OA said...

The NY Times had an article about how some former "super-rich" have taken a big hit. (The article is on Yahoo.)

John McAfee (founder of the software company) is now worth $4 million, down from $100 million when he cashed out. Bet his income is a little different now.

 
At 9/04/2009 2:09 PM, Anonymous Benny The Libertarian said...

I think we are heading into a long-term boom, globally--rising incomes as seen in USA will be duplicated globally.
This study is interesting, but, of course, one must look at details. Anyone who does economics/social studies knows you can obtain results by choosing certain base or end years, or defining middle class in a certain way, and any number of other stunts. One time a very well regarded economist attached a lengthy set of equations to a Social Security study, which was tested by someone, who concluded the original study had come to the exactly wrong result. The original economist conceded the error.
Still, I am happy median incomes are rising (though why not wages?).
For some reason, most people think life was easier economically a generation ago. Was it? Just nostalgia?
In any event, life will get better going forward.

 
At 9/04/2009 3:12 PM, Blogger PeakTrader said...

I wonder what Americans would do with an extra $1,000 a month.

In my case, after I received a roughly $1,000 a month after tax raise at work, I initially used most of it to pay down debt that was costing me $400 a month in interest and fees, while I also increased my consumption and caught-up on bills. Eventually, I paid off the debt and the $1,000 a month raise allowed me to increase my income to $1,400 a month, which was all used for consumption. Later, I saved an average of $300 a month. So, in my case, saving was the last thing I did with the extra income.

 
At 9/04/2009 5:57 PM, Anonymous djaces said...

I recall looking into this a while back as a result of a column by Thomas Sowell. As I recall there have been three or four of these studies done over various twenty year periods with some overlaps going back to the early Seventies or late Sixties. Although the results were not identical, the studies all showed pretty much the same results indicating that this type over overturning in the wealth Quintiles has been basically constant for at least four decades and probably for longer than that.

 
At 9/04/2009 7:21 PM, Blogger Plamen said...

Peak Trader, your repayment of debt is a form of saving. Thus, saving was the first thing you did.

 
At 9/04/2009 7:57 PM, Blogger PeakTrader said...

Plamen, if I saved the money, I could have paid the debt in full faster. However, I gradually paid down the debt to where my interest and fees fell to $300 a month, $200 a month, etc. At the same time, I increased my consumption and caught up on other bills. It would have been more efficient to pay down the debt with 100% of the raise, and continue to stay within my original budget, until the debt was paid off. However, I rewarded myself with a higher level of consumption for making progress on my debt and bills.

I suspect, most Americans would do the same thing if they received a raise at work, a similar tax cut, or a similar government cash benefit. However, creating a new government job, for example, may have done almost nothing to help me pay off my debt, unless perhaps I was hired for that job. I think, a permanant tax cut would have a powerful impact on consumption. However, it's likely the Bush tax cuts will be allowed to expire in 2011.

 
At 9/04/2009 8:58 PM, Anonymous Michael Yonce said...

I'm wondering about the people who were still in the 1st quintile after 10 years. As a former 6-sigma geek, it seems to me that all the social justice types might want to look for common reasons for that outcome, rather than preach confiscation/redistribution. Does anyone know of an academic study that attempts to explain this low economic performance?

 
At 9/05/2009 6:14 AM, Anonymous Chris said...

Income inequality is a red herring and needs to be fully discredited, or more accurately needs to be worn as a national badge of honor. Why? Because income inequality is a measure of progress.

Think back to the days of the cavemen. When one village discovered fire, the income inequality between the fire-using tribes and non-fire tribes soared(as measured by standard of living).

Fast forward to today. We all know people who refuse to "get out of the cave" and make anything happen. If we assume that their standard of living will generally not increase, then any increase in overall societal wealth, which naturally accrues to the movers and shakers, will inevitably lead to an increase in income inequality.

So, as long as their is mobility among quintiles, income inequality should be used as a measure of progress.

 
At 9/05/2009 8:59 PM, Blogger PeakTrader said...

Perhaps, I should have stated I shifted from borrowing to saving :)

 

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