We Are the 99.5%: The Real Inequality Jump Is in the Top Half-Percentile

Scott Winship, Brookings Institution. Follow him on Twitter: @swinshi

Thanks in part to Occupy Wall Street, when people talk about inequality these days, they're typically referring to the extent to which the top 1 percent have pulled away from the bottom 99 percent.  I have previously expressed skepticism not about whether this has happened but about the magnitude of the increase in high-end inequality.  Over time, my skepticism has eroded, though I still believe that interpreting the figures that are commonly cited is complicated.  I'll use this post to start taking you behind the numbers you see all over the place about the top 1 percent.

The first thing to point out is that if marketing were no issue, a case could be made that Occupy Wall Street's slogan should be, "We Are the 99.5%!" The following chart shows that if you are in the top 10 percent of incomes, you command more of the income received in the U.S. today than your counterparts in the past.  But unless you are in the top one-half of one percent, the increase has not been startling.  If you look at the actual income shares that are behind the numbers in the chart, tax returns in the top one percent but not in the top one-half of the top one percent accounted for 3 percent of income in 1960 and 4 percent in 2010.  If you were in the top five percent but not the top one percent, your share increased from 12.5 percent of income to 16 percent.  These are not increases to inspire urban camping.

If you are in the top one-half of one percent, however, your peeps take home over twice the share of income that they would have in 1960--16 percent of all income received instead of 7 percent.  It gets more and more striking as you look at more stratospherically rich groups, but the trends tend to follow a similar pattern once you leave the bottom 99.5 percent behind.

These figures come from the research of Thomas Piketty and Emmanuel Saez and are based on IRS tax return data.  The Congressional Budget Office puts out its own estimates that are partly based on IRS data, combined with data from the household survey used for official unemployment figures (the "Current Population Survey," or CPS).  Like the Piketty and Saez figures I cite above, capital gains are included in their income estimates.  CBO, however, includes other sources of income that they cannot and estimates taxes for each household.  It also ranks people based on household income (adjusted to account for household size differences) rather than ranking tax returns based on the income they report.

CBO finds that the share of income received by the top one percent rose from 8 percent to 17 percent from 1979 to 2007 (the Piketty/Saez increase is from 10 percent to 24 percent).  It also finds that this "share" was taken from each of the four bottom fifths of the income distribution (but not from the other people in the top fifth).  When one sees the share of income received by the top rising and the share received by the bottom 80 percent falling, it is natural to think in zero-sum terms and to assume that the gains at the top must have come at the expense of the bottom.  This is a complicated issue, but what is not complicated is that if the economic pie grows enough, the top can take a bigger piece of it even as everyone gets more pie.  That is what has happened.  CBO reports that the bottom fifth of households saw their incomes increase by nearly 20 percent over this period, while the rest of the bottom 80 percent saw its income rise by nearly 40 percent.  To be sure, the income of the top one percent nearly quadrupled.  But it is still the case that everyone else is a lot better off in 2007 than in 1979.  (Hold your fire if you want to tell me that incomes haven't risen by much relative to the postwar era--which is true--or that they've not kept up with productivity gains--which is not.  I'll address these topics in future posts.)

There are several potentially important issues with these numbers, which is why I was skeptical of them for a while.  I remain somewhat wary of using them in certain ways, but in my next post I'll describe the analyses that have convinced me that skyrocketing inequality at the top is as real as these numbers indicate.