The Evolution of Top Incomes in the United States
(Updated with 2009 and 2010 estimates)
March 2, 2012
Great Recession 2007-2009
During the Great Recession, from 2007 to 2009, average real income per family declined dramatically by 17.4% (Table 1), the largest two year drop since the Great Depression. Average real income for the top percentile fell even faster (36.3 percent decline, Table 1), which lead to a decrease in the top percentile income share from 23.5 to 18.1 percent (Figure 2). Average real income for the bottom 99% also fell sharply by 11.6%, also by far the largest two year decline since the Great Depression. This drop of 11.6% more than erases the 6.8% income gain from 2002 to 2007 for the bottom 99%.
Computations based on family market income including realized capital gains (before individual taxes).
Incomes exclude government transfers (such as unemployment insurance and social security) and non-taxable fringe benefits.
Incomes are deflated using the Consumer Price Index.
Column (4) reports the fraction of total real family income growth (or loss) captured by the top 1%.
For example, from 2002 to 2007, average real family incomes grew by 16.1% but 65% of that growth
accrued to the top 1% while only 35% of that growth accrued to the bottom 99% of US families.
From 2009 to 2010, average real family incomes increased by 2.3% and the top 1% captured 93% of those gains.
Source: Piketty and Saez (2003), series updated to 2010 in March 2012 using IRS tax statistics.
The fall in top decile income share from 2007 to 2009 is actually less than during the 2001 recession from 2000 to 2002, in part because the Great recession has hit bottom 90% incomes much harder than the 2001 recession (Table 1), and in part because upper incomes excluding realized capital gains have resisted relatively well during the Great Recession. The top 1% absorbed 49% of income losses from 2007 to 2009 while they absorbed a bigger 57% share of the income losses from 2000 to 2002.
The Top Decile Income Share, 1917-2010
Source: Table A1 and Table A3, col. P90-100.2010: Recovering from the Great Recession
Income is defined as market income (and excludes government transfers).
In 2010, top decile includes all families with annual income above $108,000.
This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007 (Figure 1).
Looking further ahead, based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s (Figures 2, 3). In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration (Figures 2, 3).
Decomposing the Top Decile US Income Share into 3 Groups, 1913-2010
Source: Table A3, cols. P90-95, P95-99, P99-100.
Income is defined as market income including capital gains.
Top 1% denotes the top percentile (families with annual income above $352,000 in 2010)
Top 5-1% denotes the next 4% (families with annual income between $150,000 and $352,000 in 2010)
Top 10-5% denotes the next 5% (bottom half of the top decile, families with annual income
between $108,000 and $150,000 in 2010).
The Top 0.01% Income Share, 1913-2010
Source: Table A1 and Table A3, col. P99.99-100.
Income is defined as market income including (or excluding) capital gains.
In 2010, top .01% includes the 15,617 top families with annual income above $7,890,000.
The Statistics of Income, in partnership with academic researchers, is developing methods to produce preliminary distributional statistics significantly earlier. The goal is to use tax return data processed in real time by the IRS to project distributions for the complete year. Preliminary investigations show that it is possible to obtain reliable statistics about one year in advance of the final statistics.
Text of “Striking it Richer” updated with 2010 estimates
broader upper middle class profiting? And are capitalists or salaried managers and professionals the main winners? I explore these questions with a uniquely long-term historical view that allows me to place current developments in deeper context than is typically the case.
Efforts at analyzing long-term trends are often hampered by a lack of good data. In the United States, and most other countries, household income surveys virtually did not exist prior to 1960. The only data source consistently available on a long-run basis is tax data. The U.S. government has published detailed statistics on income reported for tax purposes since 1913, when the modern federal income tax started. These statistics report the number of taxpayers and their total income and tax liability for a large number of income brackets. Combining these data with population census data and aggregate income sources, one can estimate the share of total personal income accruing to various upper-income groups, such as the top 10 percent or top 1 percent.
Evidence on U.S. top income shares Figure 1 presents the income share of the top decile from 1917 to 2010 in the United States. In 2010, the top decile includes all families with market income above $108,000. The overall pattern of the top decile share over the century is U-shaped. The share of the top decile is around 45 percent from the mid-1920s to 1940. It declines substantially to just above 32.5 percent in four years during World War II and stays fairly stable around 33 percent until the 1970s. Such an abrupt decline, concentrated exactly during the war years, cannot easily be reconciled with slow technological changes and suggests instead that the shock of the war played a key and lasting role in shaping income concentration in the United States. After decades of stability in the post-war period, the top decile share has increased dramatically over the last twenty-five years and has now regained its pre-war level. Indeed, the top decile share in 2007 is equal to 49.7 percent, a level higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the “roaring” 1920s. In 2010, the top decile share is equal to 47.9 percent.
Figure 2 decomposes the top decile into the top percentile (families with income above $352,000 in 2010) and the next 4 percent (families with income between $150,000 and $352,000 in 2010), and the bottom half of the top decile (families with income between $108,000 and $150,000 in 2010). Interestingly, most of the fluctuations of the top decile are due to fluctuations within the top percentile. The drop in the next two groups during World War II is far less dramatic, and they recover from the WWII shock relatively quickly. Finally, their shares do not increase much during the recent decades. In contrast, the top percentile has gone through enormous fluctuations along the course of the twentieth century, from about 18 percent before WWI, to a peak to almost 24 percent in the late 1920s, to only about 9 percent during the 1960s-1970s, and back to almost 23.5 percent by 2007. Those at the very top of the income distribution therefore play a central role in the evolution of U.S. inequality over the course of the twentieth century. The implications of these fluctuations at the very top can also be seen when we examine trends in real income growth per family between the top 1 percent and the bottom 99 percent in recent years as illustrated on Table 1. From 1993 to 2010, for example, average real incomes per family grew by only 13.8% over this 17 year period (implying an annual growth rate of .76%). However, if one excludes the top 1 percent, average real incomes of the bottom 99% grew only by 6.4% from 1993 to 2010 (implying an annual growth rate of .37%). Top 1 percent incomes grew by 58% from 1993 to 2010 (implying a 2.7% annual growth rate). This implies that top 1 percent incomes captured slightly more than half of the overall economic growth of real incomes per family over the period 1993-2010.
During both recessions, the top 1 percent incomes fell sharply, by 30.8% from 2000 to 2002, and by 36.3% from 2007 to 2009. The primary driver of the fall in top incomes during those recessions is the stock market crash which reduces dramatically realized capital gains, and, especially in the 2000-2002 period, the value of executive stock-options. However, bottom 99 percent incomes fell by 11.6% from 2007 to 2009 while they fell only by 6.5 percent from 2000 to 2002. Therefore, the top 1 percent absorbed a larger fraction of losses in the 2000-2002 recession (57%) than in the Great recession (49%). The 11.6 percent fall in bottom 99 percent incomes is the largest fall on record in any two year period since the Great Depression of 1929-1933.
From 2009 to 2010, average real income per family grew by 2.3%(Table 1) but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can possibly explain the recent public demonstrations against inequality. The top percentile share declined during WWI, recovered during the 1920s boom, and declined again during the great depression and WWII. This very specific timing, together with the fact that very high incomes account for a disproportionate share of the total decline in inequality, strongly suggests that the shocks incurred by capital owners during 1914 to 1945 (depression and wars) played a key role. Indeed, from 1913 and up to the 1970s, very top incomes were mostly composed of capital income (mostly dividend income) and to a smaller extent business income, the wage income share being very modest. Therefore, the large decline of top incomes observed during the 1914-1960 period is predominantly a capital income phenomenon. Interestingly, the income composition pattern at the very top has changed considerably over the century. The share of wage and salary income has increased sharply from the 1920s to the present, and especially since the 1970s. Therefore, a significant fraction of the surge in top incomes since 1970 is due to an explosion of top wages and salaries. Indeed, estimates based purely on wages and salaries show that the share of total wages and salaries earned by the top 1 percent wage income earners has jumped from 5.1 percent in 1970 to 12.4 percent in 2007.
The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II - such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality. We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.
Thomas Piketty. All the series described here are available in excel format at http://elsa.berkeley.edu/~saez/TabFig2010.xls
and undistributed profits of corporations (see National Income by Type of Income, Table 1.12,
 Interestingly, this dramatic increase in top wage incomes has not been mitigated by an increase in mobility at the top of the wage distribution. As Wojciech Kopczuk, myself, and Jae Song have shown in a separate paper, the probability of staying in the top 1 percent wage income group from one year to the next has remained remarkably stable since the 1970s.