The top 1%: A few facts

There have been protests about the amount of income going to the top 1%.  In of itself, I have never thought we could tell too much about what is the “right” distribution of income with a certain number – after all, we would expect the top 1% to have significantly more income in some sense.

The claim I found more disconcerting was how much it increased in the United States – from around 8% in the 1970s to near 18% now (all data from here, via Paul Krugman).  This led me to ask:

  1. How do these figures look for New Zealand?
  2. What are the drivers of this.

It turns out I discovered a little bit more than I was expecting when I ran through the numbers …

New Zealand

Well it turns out that we haven’t seen the same increase in the proportion of income going to the top 1% in New Zealand.  The numbers suggest it went from around 7% in the 1970s to about 5.5% in the early 1980s – when we had a government that was determined to crush private  investment and try to run the economy centrally.  I would say that this drop was indicative of how much of a poor state the economy was in.  By the time we got to the 90’s the figure got to 9% – which is about where it has stayed.

To me, a small increase in the share going to the top 1% in the past few decades makes sense – due to the aging of the population.  When the population is young, human capital tends to be more evenly spread (homogeneous), however as people get older the individuals that decided to invest in human and physical capital benefit – leading to a dispersal of income.  As a result, these figures in themselves don’t point too an elevated level of injustice, capture by the capital classes, or any such social concern.

Now given that we aren’t concerned about New Zealand anymore, we still have to ask about the huge increase in the United States – and what that implies.

The US and tax data

So there are a few reasons why the income going to the top 1% could have risen in the US – and they may all share a role:

  1. Population demographics,
  2. Increasing concentration of capital
  3. Increasing concentration of skills
  4. Increasing control over intellectual property/property rights
  5. Political capture
  6. Increasing value of the composition of goods/services created by the top 1%
  7. Increasing gains from globalisation accruing to the top 1%
  8. Poor bargaining position for the 99% when negotiating trade with the top 1%

Now I can’t really decipher which of the above is a more important explanation.  However, in my investigations I did discover something interesting about the income figures.  Finally, let me graph the income figures I’ve been discussing above:

Notice the big jump in income going to the top 1% of adults post-1986 in the US?  When I look at a series like that I would normally call that a structural break – and treat the two sides of the series relatively separately – but I don’t just want to ignore the pre-1986 numbers.  [We get a similar, temporary, leap in 1999 – which is curious]

So I had a little look around at where the figures were from – they came from tax statistics.  As the authors say:

It is obvious that those paying tax have a financial incentive to present their affairs in a way that reduces tax liabilities. There is tax avoidance and tax evasion.

So tax evasion impacts upon the result.  And it turns out that there was a huge change to the tax system in the US in 1986 – one that would have lead to a reduction in tax evasion (tax evasion that would have lowered the recorded share of income accruing to the top 1% in all prior periods).

Now there has been an increase in the proportion of income accruing to the top 1% since then – going from 13% to 18% – but this shows us that the low figures of 8% in previous periods are really incomparable … in the “good old days” income looked more equal partially due to tax evasion instead of real equality.

This is an important fact to keep in mind when we discuss what is going on over in the US of A

Update:  Mankiw mentions the data here.  He also mentions that the pattern holds for a number of countries, including NZ and Australia.  I would like to point out that the magnitude of the change in Aussie and NZ was significantly smaller – it was the same shape, but we are talking about a much smaller increase.

Now I am not trying to say that is a bad or good thing – but there are undeniably differences there.  For once I’m doing what I should, and trying relatively hard to be relatively objective and not really push for a “good” or “bad” conclusion from the data.  The point I was initially aiming to get to with this post before discovering the issue regarding tax regimes.

  • Kimble

    How could so many hippies be so wrong?

    • Not so much wrong as mentioning a data point a little inappropriately.

      I doubt the protests are based on measurement – they are more based on a perception of inequity.  I don’t think the data will change this either way right.

      • Kimble

        Even so, my belief that this group of angst-ridden, socialist emoters with no coherent message or purpose had a sound basis for their self-centred whining about first-world-white-people problems has been shaken to the core.

        TO. THE. VERY. CORE!

        • I am sorry I have caused that.

          I would say I would do my best to try and fix that – but I’m too busy trying to figure out what smartphone to buy

        • Jenny

          Kimble, your language does give the impression that you yourself are quite angst-ridden, or at least emotive… might want to be a bit more objective & lose the prejudiced stereotypes, it’s kinda passe and distracts from the facts.

        • She’s got you man.

          Its nothing personal Jenny – when on blogs people just have fun being a bit sarcastic.  Especially when they are feeling as angst-ridden and emotional as I am now 😀

        • Kimble

          Yep, you’re right Jenny, there arent any hippies at the OWS protest, certainly no socialists, and definitely no people complaining about being in the wealthiest 1% in the world but outside the wealthiest 1% in their neighbourhood.

          Whoa is them, and we should all fall over ourselves giving a damn about all the stupid, ill-thought-out, contradictory, arrogant and absurd things they say.

        • Jenny

          Hippies…. wellll… the times I was there I’m 99% sure I didn’t see a single pair of flared trousers, nor a single large-floral-print shirt; although there were a few people with long hair so I can’t say for certain…

        • Hey hey guys – lets not beat on the long hair.  My hair isn’t exactly short at the moment, and I enjoy wearing by tie-die shirt

        • You also wear toggle coats and fingerless gloves, so I think you hav more of a ‘trendy hobo’/Derelicte style going, Matt.

          More seriously, there are plenty of young professionals in Wellington who I know support the Occupy movement. They can’t accurately be characterised as hippies but they may be our generation’s equivalent of the flower power movement.

        • I think that many of the people like to view themselves in the same vein as the flower power movement – the key thing to remember is the weaknesses of both views as well as the benefits.

          It is easy to bring up empty platitudes of fighting against injustice stemming from people’s actions hurting others – but unless we are really willing to think about the issues, and try to understand how this works, there is a risk that such posturing will lead us down a road where we are determined to reduce people’s liberties.

          In truth, the movement should be about debate and discussion as well as protest.

        • What came first: the protest or the debate and reflection?

        • Kimble

          Hippy is as hippy does.

  • It’s weird that the tax-evasion-driven step in the US data coincides so exactly with the economic-restructuring-driven step in the NZ data. Are you sure there’s no common cause? A change in the measurement practice or something?

    • Potentially, in my brief exploration I couldn’t find anything that said that measurement practices in this data had changed post-1953.

      The increase in New Zealand does come after a change in policy settings – one that involved a significant increase in transparency, and a reduction in income taxes … so it could well have had the same driver.  Add to the fact that businesses and households were willing to invest again and I think we have a clear narrative – and if we were so inclined, we might even be able to find data to support a darker narrative of falling bargaining power for those outside the 1%.

      My key goal here was just to find out whether a similar dispersal of income happened in NZ – which doesn’t appear to have happened.  I was not expecting to find that the figures being mentioned in the US were exaggerating the extent of the issue – but it does appear that this is the case.

      I do want to leave interpretation relatively open though – I don’t feel we can take too much from these figures without looking at other data to form our narrative.

  • deserthead

    I suspect the big spike in NZ around 98/99 may also be tax related.

    The incoming labour govt announced a new, higher top tax rate of 39% which led to a large number of high income individuals manipulating their taxable incomes so as to bring them forward into what was the current tax year so that they would instead face the 33% top rate.

     

    • Ahhh, that makes a lot of sense.  I had a similar thought when I first saw that – but then it fell out of my head afterwards.

      If we take that into consideration, and we feel that tax avoidance has increased, then the underlying % of income going to the top 1% may have risen more strongly during the last decade than the data suggests right?

      It is unlikely to be a big issue in itself, but that is the inference I take from it.

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  • Bill

    Thanks for doing the NZ calculations – I’ve been wondering what they looked like.

    • All good – thanks to Krugman for putting up the link!!!

  • Jenny

    Top 1% aside, other sources suggest to me that in general income inequality has increased. For example this paper (which only uses data to 1996 mind you) that “shows that income inequality rose in the 1980s and 1990s in New Zealand. The rate of growth was fastest in the 1980s. New Zealand’s level of income inequality has risen substantially relative to the levels in other OECD countries.” As for the factors you mention (aging popn etc) – it concludes “These factors can explain up to 50-60% of the overall increase in income inequality.” -http://www.treasury.govt.nz/publications/research-policy/wp/2000/00-13

    Another source concludes with this: “So while there is considerable agreement that the income distribution has got more unequal, it would have been less than comprehensive to have implied that there is a unanimous view on the course of poverty. Nevertheless real incomes have fallen at the lower end of the income distribution. Poverty must have risen on any commonsensical definition. ” http://www.eastonbh.ac.nz/?p=333

    Of course this isn’t talking about the top 1%, but it does seem to make it harder to argue that things are all hunky dory in Aotearoa and that the occupiers are just a bunch of “whining hippies”. 

    One more thing, the Occupy Auckland group just yesterday received a letter of support from 12 church groups including Presbyterian Support, Salvation Army & the Methodist Church – citing their personal experiences in helping people on the lowest incomes over recent years. You can read it here if it interests you – http://www.facebook.com/notes/occupy-auckland/dont-dismiss-it-think-about-it-a-message-of-solidarity-from-church-groups-in-nz/319201941423216 

    Question – is that 9% figure for the top 1% *taxable* income? (& if so would that exclude investment income?) I’d be keen to have a look at your data source if you wouldn’t mind. 

    • “Top 1% aside, other sources suggest to me that in general income inequality has increased.”

      Indeed it did during the 1990s, but the gini coefficient tends to suggest that it stabilised during the 2000s.  In so far as rises of inequality stem from investment this is fine after all – as no-one is being left behind.  Our main concern stems from the case when people do not have opportunity, and people cannot afford the fair standard of living society views as fair – which is why I’d personally think that is where our focus should be 😉

      “Question – is that 9% figure for the top 1% *taxable* income? (& if so would that exclude investment income?) I’d be keen to have a look at your data source if you wouldn’t mind. “

      I know the US data excludes capital income – but can’t be sure for the NZ data.  It is just in the link in the post.

      I would point out that capital income is taxed once it comes out as income in New Zealand – we just try to avoid taxing reinvestment (as that would involve double taxation).

      In either case, the data does suggest that the top 1% figure in New Zealand is not one that creates the same concern as it does in the US – and the gini coefficient numbers suggest that inequality is not a growing issue.

      One more thing, it is true that a lot of groups complain about equality and fairness – but any discussion on what should be done should be based on an understanding of how the world works.  I agree with the protesters for expressing that they are unhappy with outcomes at the moment – such a deep recession should lead to society expressing discomfort – however, many of the “solutions” that get put forward often rely on a false interpretation, mainly a belief that the economy is something that is “controlled”.

      My problem in the New Zealand context is that our policies are not transparent enough – even though they are more transparent then across most of the world.  

      You mention the support of churches.  That is nice, I grew up a church boy myself – and was constantly told of our responsibility to those worse off than us, something I agree with.  However, it is our personal responsibility to those worse off – not a burden we should try to move around to other people outside of a defined social contract.

      If I was too protest, it would be that the social contract in New Zealand is not clear enough – that we should have a minimum level of income that everyone in New Zealand receives, that we have a tax on land to represent its social rent, and that we remove arbitrary measures that are hurting people (like minimum wages).  In that case, we can ensure there is income adequacy, and we can make sure that the social will is what our politicians are following whenever they interrupt the voluntary trade of individuals.

  • Mel

    Very interesting. This American thanks you for the additional information.

    • Not that there has still been a sizeable increase – it is just important to note that the points in the 60s/70s are probably incomparable to the post 1986 points.

      I am not trying to say one side is right or wrong, just that I ran into that interesting fact when I went to write this post 🙂

  • Jenny

     
    Me again, this paper looks at the top income earners specifically… and concludes: “Our research on the top of the income distribution suggests that this was a period in which (pre-tax) top income shares rose dramatically. From 1986-1993, the share of the top 10% rose from 26.5% to 33%, while the top 1% share rose from under 5% to around 9%.” – looks like the same data as yours, but terming the rise “dramatic” gives quite a different impression!

    http://www.nuff.ox.ac.uk/users/atkinson/AtkinsonLEIGH_NewZealand08.pdf

    /end dorky google research

     

    • It does sound like the same data – interestingly, they seem to have rounded up and down in ways that make the change look bigger, and they have picked a low and high point for comparison.

      Far be it for me to be critical, but I suspect it was in their interest to try and make as much of a case as possible when they wrote the paper 😉

      Also, I could well make the case that the fourth Labour government did change the tax system significantly, which may have driven part of that increase – although I’m not convinced that this was behind the jump, as the tax change was 1985 and the jump was more like 1988 … just following the stock market crash of all things!

      • Has nobody yet investigated the reasons for the spike in 1988? Like you say, Matt, it appears to be a structural break so there’s probably something we can point to causing it. After that, things look pretty stable for the extremely wealthy in NZ.

        I think what Matt’s post is saying, though, is that we just need to be clear about why NZers are protesting. The justifications of the Wall Street protestors don’t really hold for NZ, although there may well be other, similar reasons for the protest that are equally valid.

        • Kimble

          Kind of a pointless protest if everyone can come up with their own reasons for why those people are protesting.

          That dog taking a crap on my lawn is protesting the removal of $1 notes. 

        • Too a degree – but protests don’t have to be proactive.

          Think of it this way, we don’t want people to say what policies to do unless they understand the world, and understand what the policies mean.  To protest for policies, the protesters would require a lot of research and knowledge.

          But you can feel disenfranchised and hurt without this knowledge – that is part of being an individual.  A peaceful protest can be used to show society that this is how this group feels – and that in itself has value.

          This is why I was so angry about the occupation of the RBNZ – but why I said I agree with the idea of peaceful protest to illustrate disenfranchisement.  Protest is part of democracy, it just needs to be done and seen in the right light.

        • Kimble

          My impression has been that the people protesting are doing so on the behalf of others (the whole 99% conceit).

          They arent feeling disenfranchised and hurt themselves, and even if they are they arent protesting that they are.

          They are protesting against some ill-defined thing, that I have little faith they definitely know to actually exist, despite their fury and ululating.

        • That may be the case, that may not be the case, or it may be and not be the case.

          My time with the protesters is too limited, and my discussions with people involved too fleeting, for me to have anywhere near an “objective” view on what that are doing.

          However, given my view of what a protest represents, I can at least articulate bounds for what a good protest ought to represent – and then infer that this is what they should be doing 😉

        • Kimble

          Outside of media coverage my experience with OWS has been being mostly talking to people not protesting but supporting the protesters. Too often those people would find in the OWS a protest against something that very nicely fits their biases (both right and left I should add). 

          First hand, I have read the signs as I walked past a few times. And it is difficult to see specifically what the gripe is, outside of the usual complaints based on misunderstandings of what capitalism is.

          I WAS yelled at by several people trying to get their “message” across. Something about how Marx was right, we should forgive all debt, we have to rise up, and the government should do something about that small group of people who have all the power to control our lives (protip: it isnt government; the small group of people who do have the power to control our lives).

        • All these issues remind me of my family growing up.

          When people are prescribing they have an obligation to know what they are talking about – when they do things like this, I disagree with them and they make me mad.

          When people are saying they are disenfranchised I see protest as part of their democrat right, and important part.

          As a result, my implied view on the protests depends on where they fit according to these criterion – which I currently can’t observe.

          I would note that we can be annoyed at individuals (such as the ones going on about Marx in your comment) – but that doesn’t automatically invalidate the entire protest.  I wonder how many of the people screaming “Marx is right” have actually, genuinely, read Marx – or thought about the incentive problems that convinced him to frame things a certain way 😉

        • Kimble

          Interesting you bring up your family, but then dont explain the comment. Why dont you lie down on the couch and tell us how that makes you feel.

          For me, I am sympathetic to feelings of disenfranchisement, but I also have an aversion to people protesting about disenfranchisement they are really really sure must exist.

          No Nukes – dont put us all in mortal risk
          Save the Whales – they are going extinct and we like them
          Bring Back Buck – he was treated unfairly and we think he deserves to be in the team
          Reduce inequality – Why? Is it really a problem? Can it actually be done? Even if it can would that solve the problem? Is Wall St really to blame?

          It is a problem that might not exist, may not need solving, may not have a solution, and even if it did the solution may not any better than the problem.

        • “Interesting you bring up your family, but then dont explain the comment. Why dont you lie down on the couch and tell us how that makes you feel.”

          My family is great, they were just social credit type people … enough said right 😀

          “It is a problem that might not exist, may not need solving, may not have a solution, and even if it did the solution may not any better than the problem.”

          My impression is that we could be at the optimal solution given scarcity – but expression of disenfranchisement provides information, so I think it can still be worthwhile in that case.

          Of course, maybe we could just frame it as an externality and shoot people to solve it – my concern is that some of the protesters might feel this way 🙁

        • Kimble

          Ah, social credit people. Indeed.

          And how does that make you feel? 

        • It makes me “feel” as if they are willing to make policy conclusions without trying to fully article why or how things happen in society.

          This leads to me responding with long winded descriptions of how to describe things in the economic framework, and the way we could achieve their stated equity judgments more efficiently and fairly through other means – means that make obvious some of the trade-offs they would have to face and have decided to ignore.

          They usually respond by calling me argumentative.  Luckily my older brother is also an orthodox economist – so now the family just doesn’t talk to us about important issues.  Apart from saying that they don’t understand why we are paid, when people like us add no value 😉

  • Kimble

    Uhuh, so there is distance and difficult relating. Go on.

    • Huh.  We are Irish, we just like to argue and drink.  I can’t see the problem.  Apart from the social credit business of course.

      I wonder if any social credit people are in the protests?

      • Kimble

        How would you feel if there were?

        • Confused

        • Kimble

          Thats good. We have made great progress for your first session. Settle the bill with my receptionist on the way out.

          See you next week. 

        • I was under the impression I would get beer for this

        • Kimble

          I told you that coupon had expired.

  • Kimble

    Just for fun, lets see some of the things OWSers are saying.

    “The rich get richer, and the poor get poorer, and the average person has no choice about it. No matter how much study they do, they’re still going to stay on the bottom rung.”

    The poor arent getting poorer. And there is still a large amount of social mobility. Maybe this guy is demanding that there be no diminishing returns to education?

    “The goals are to eventually eliminate the use of money and bring in a resource based economy.”

    Yay for barter!

    “The main reason for this is there is a lot of technological unemployment these days. We’re still within a system which is monetary and market driven but those jobs are never coming back.”

    Down with technology!

    “The collapse of the financial system and the millions of people starving all over the world while there’s still so much waste.”

    Yep, those things are totally related.

    “We need to look at the resources we have and how we can distribute them more evenly. In the future, we need to start growing more of our own food, getting into things like permaculture and living more sustainably.”

    Brilliant. The people doing the distributing should be doing a better job. More inefficient use of resources. Yay for waste!

    “The politicians could make things more equal for everybody. The rich are getting richer, and the poor are getting poorer, and I think that’s unfair.”

    Again false. But I love the faith in big brother. The government can make everything better. We just need the right people in charge? Maybe we just need the right rules? Scarcity can be solved with rules.

    “Everyone is becoming so individualistic and are keeping to themselves more and more. It’s just becoming this consumer driven, individualistic world.”

    Yeah, nobody cares about the collective any more. And that’s sad.

    “There is a huge disparity in New Zealand. There are big businesses growing and a lot of them are offshore, they don’t care about the people here.”

    Surely if rich businesses go overseas it will reduce inequality?

    “You get lots of people who are just interested in that individualist drive to get to the top. They want to make more and more profit and that can only happen by exploiting the workers and people at the bottom of the chain.”

    How many more centuries will people keep believing this lie?

    “Corporations are getting to a point where they’re bigger than some governments and to some degree they have too much control over governments. …”

    OK, so this guy can at least see…

    “People don’t really have a chance to have their say every time we sign up to a new free trade deal.”

    … there we go.

     “The way globalisation works is governments dictate how countries interact with each other.”

    Yep, because governments never dictated how countries interacted with each other before globalisation came along.

    Oh, except for for ever. 

    See Jenny, I actually listen to what these guys are saying, and have from the beginning. And thats why I hold the opinions I do.

  • So I’m a month late to the party. I blame the election.

    I agree with you that the spike in this dataset is probably due to tax reporting issues, but that doesn’t mean there is no spike. The Reagan cuts was a massive flattening of the tax system and had equally massive distributional consequences – this is, in fact, the core of the OWS case – but its direct impact was not captured by this dataset because this is pre-tax data.

    All we can draw from this is OWS shouldn’t be using reported pre-tax income as a measure of distributional equity – and I don’t even know if they are doing that.

    And I wonder if you’re overstating the case of its impact on tax avoidance. The Reagan cuts lowered individual rates and raised corporate rates. This would have reduced the incentives to shelter income in companies. For the purpose of this dataset, this may have caused the spike because this is personal income data, but for revenue purposes, it’s just reported corporate income being changed to reported personal income.

    • Not that, in the case of the US I’m just saying that comparing points pre-86 and post-86 is a bit dodgy given tax changes – there was undeniably a step-change due to that.

      However, even if we corrected for the step change there would be a significant upward trend which we would have to explain.

      • Fair enough. But that significant upward trend would still be missing the direct impact of the Reagan/Bush tax cuts, which is fundamentally material to the question we’re asking.

        • Agreed – the tax change is a step change, the trend is genuine changes in inequality.

          However, people were taking a point from pre-1986 and a point post Bush cuts and comparing them – which exaggerates the size of the change.

          And size is important in this context, as there is a range of potential explanations that need to be taken into account (I mention 8 above) – as after all, there is no reason to expect that the distribution of income should be some magical constant throughout time. 

          We cannot say whether it is bad or good unless we can decompose the changes – and by exaggerating the size, we make the idea that some of it is due to “bad bargaining positions” seem a little more convincing than it is.

    • Wait, am I disagreeing with Krugman here? Uh oh.

    • None of us are disagreeing with Krugman – we are just trying to tease some of the intricacies out of the data.

      Also, I was trying to point out that the NZ context doesn’t seem as extreme – it seems mostly explainable by changes in population demographics (older populations have a greater dispersal of human capital, and thereby wages).  The only person that mentioned NZ was Mankiw – when he was saying that all us anglo-saxon countries had an upward trend in inequality.  However, I’d say that the degree of change is pretty different …

      • When I have time (uh, March-ish) I’m going to have a look at the MSD’s Household Income Report, which I think uses microdata from the Household Income Survey, and is pretty longitudinal. Will be interesting to see how the survey data varies from the tax data.

        • Yar.

          It would be cool to use IRD time series data to track income changes through time.

          Add to this a variety of CPI’s for different income deciles, and we can compare inequality over lifetimes in real resources.  Awesome.