The Pulse

The New Gilded Age of Income Inequality

It’s not just a story about those on Wall Street, in Hollywood, or in the Silicon Valley

New research from the Economic Policy Institute, in Washington. Reprinted with permission. Read the entire report here.

In 2016, the Center on Budget and Policy Priorities and the Economic Policy Institute released an update (McNichol 2016) to their series Pulling Apart (McNichol et al. 2012), a report focusing on the gap in earnings between the top 5 percent of households and the bottom fifth of households in the United States and each state. In 2018, the Brookings Institute produced similar statistics for the largest 100 metro areas (Berube 2018).

The 2016 update to Pulling Apart found that the richest 5 percent of U.S. households had an average income 14.8 times higher than the poorest 20 percent of households. The Census survey data used in that update do not permit analysis of trends in the top 1 percent of households at the state level: Sample sizes are too small in some states (even when data are pooled across multiple years), and the data are “top coded”—above a certain threshold, the highest incomes are not recorded at the actual income level reported to Census survey takers. Instead, they are reported at a specified top income.

Top coding is used to ensure that small numbers of erroneous outliers do not distort Census data and to ensure the anonymity of particularly high-income survey respondents.

State-Level Trends of the Top 1%

The present report does permit analysis of state-level trends among the top 1 percent of earners. It uses the same methodology employed by Thomas Piketty and Emmanuel Saez (2003) to generate their widely cited findings on the incomes of the top 1 percent in the United States as a whole. (We are contributors to the World Inequality Database.4) This methodology relies on tax data reported by the Internal Revenue Service for states and counties (see the methodological appendix for more details on the construction of our estimates).

Following Piketty and Saez, throughout this report we examine trends in pretax and pretransfer incomes, hereafter referred to simply as “income,” of tax units (single adults or married couples, hereafter referred to as “families”). The best way to think about this measurement of income is that it represents all the taxable income people earn in market transactions, such as the income earned from working for a wage or salary at a job, through interest on a savings account, or from selling a financial asset for more than its purchase cost (a capital gain). What is not included in our analysis is the impact that taxes and transfers (for example, Social Security payments or unemployment benefits) have on these market-derived incomes. While taxes and transfers do tend to reduce inequality by lowering incomes at the top and raising incomes at the bottom, the primary driver of rising inequality, even after taking into account taxes and transfers, is an increasingly unequal distribution of market incomes.

Other forms of compensation excluded from our analysis here are nontaxable compensation such as employer contributions to pensions and health care, which for the bottom 90 percent have grown as a share of pretax income over time.6 While these income sources7 have been growing over time, their exclusion does not materially close the growing gap we observe between the vast majority of working families and the highest earners in our economy.

Piketty and Saez’s groundbreaking 2003 study, now more than 15 years old, increased attention to the body of work compiled since the 1980s documenting rising inequality in the United States. Their work helped inspire the Occupy Wall Street movement of 2011 and continues to resonate in public debates and protests. Growing public concern over rising inequality has also reinvigorated academic debates about whether inequality matters at all (Mankiw 2013) and about the role of finance and top executives in driving the growth of inequality (Bivens and Mishel 2013). It has also spurred interest in how rising inequality limits the number of Americans who actually experience a “rags to riches” story over their lifetime (Corak 2013; Chetty et al. 2017).

Although the Great Recession reduced the income share of the top 1 percent to 18.12 percent by 2009, their income growth surged ahead of the income growth of the bottom 99 percent starting in 2010, with the income share of the top 1 percent reaching a peak of 22.83 percent in 2012. The 2012 peak was in part the result of high-income earners shifting income from 2013 to 2012 to reduce their tax liab

Applying Piketty and Saez’s methods to state-level data provides insight into the rise of incomes among the top 1 percent within each state and over time (a population that significantly overlaps, but is not the same as, the national top 1 percent). This analysis can shed light on the degree to which the growth in income inequality is a widely experienced phenomenon across the individual states. In this version of our report, we also look at where those in the national top 1 percent reside.

Before we begin our analysis of local data, it is useful to briefly summarize Piketty and Saez’s updated (2016) findings with respect to U.S. income inequality overall, focusing specifically on the share of income earned by the top 1 percent of families: They find the share of income captured by the top 1 percent climbed from 9.16 percent in 1973 to 23.50 percent in 2007.10 At 23.50 percent, the share of income earned by the top 1 percent in 2007, on the eve of the Great Recession, was just shy of the 23.94 percent peak they found that the top 1 percent income share reached in 1928 (the year before the start of the Great Depression).

Post-Recession Surge

Although the Great Recession reduced the income share of the top 1 percent to 18.12 percent by 2009, their income growth surged ahead of the income growth of the bottom 99 percent starting in 2010, with the income share of the top 1 percent reaching a peak of 22.83 percent in 2012. The 2012 peak was in part the result of high-income earners shifting income from 2013 to 2012 to reduce their tax liabilities in anticipation of higher top marginal tax rates, which took effect in 2013. This tax planning helped reduce the top 1 percent’s take of all income to 20.01 percent in 2013. Income growth for the top 1 percent returned in 2014. In 2015, the most recent year for which national-level data are available, they also find the top 1 percent took home 22.03 percent of all income in the United States.

In the following sections we present data unique to this study by replicating Piketty and Saez’s method for each of the 50 states plus the District of Columbia and for 916 metropolitan areas and 3,061 counties. Our state data extend from 1917 to 2015, and our county and metropolitan area data are for 2015. All figures are in 2015 dollars.

Key findings

In 2015, the top 1 percent of families in the U.S. earned, on average, 26.3 times as much income as the bottom 99 percent—an increase from 2013, when they earned 25.3 times as much.

  • Eight states plus the District of Columbia had gaps wider than the national gap. In the most unequal—New York, Florida, and Connecticut—the top 1 percent earned average incomes more than 35 times those of the bottom 99 percent.
  • Forty-five of 916 metropolitan areas had gaps wider than the national gap. In the 17 most unequal metropolitan areas, the average income of the top 1 percent was at least 35 times greater than the average income of the bottom 99 percent. Most unequal was the Jackson metropolitan area, which spans Wyoming and Idaho; there the top 1 percent in 2015 earned on average 132.0 times the average income of the bottom 99 percent of families. The next 16 metropolitan areas with the largest top-to-bottom ratios were Naples-Immokalee-Marco Island, Florida (90.1); Key West, Florida (81.3); Sebastian-Vero Beach, Florida (67.2); Bridgeport-Stamford-Norwalk, Connecticut (62.2); Miami-Fort Lauderdale-West Palm Beach, Florida (55.4); Port St. Lucie, Florida (45.5); Glenwood Springs, Colorado (45.0); Hailey, Idaho (44.9); Gardnerville Ranchos, Nevada (44.3); Summit Park, Utah (43.5); North Port-Sarasota-Bradenton, Florida (43.1); New York-Newark-Jersey City, New York-New Jersey-Pennsylvania (39.4); Cape Coral-Fort Myers, Florida (38.8); Fayetteville-Springdale-Rogers, Arkansas-Missouri (37.2); Midland, Texas (35.7); and Steamboat Springs, Colorado (35.3).
  • Of 3,061 counties, 139 had gaps wider than the national gap. The average income of the top 1 percent was at least 35 times greater than the average income of the bottom 99 percent in 50 counties. In Teton County, Wyoming (which is one of two counties in the Jackson metropolitan area), the top 1 percent in 2015 earned on average 142.2 times the average income of the bottom 99 percent of families.

There is a wide spread in what it means to be in the top 1 percent by state, metro area, and county.

  • To be in the top 1 percent nationally in 2015, a family needed an income of $421,926. Thirteen states plus the District of Columbia, 107 metro areas, and 317 counties had local top 1 percent income thresholds above that level.
  • For states (including the District of Columbia), the highest thresholds were in Connecticut ($700,800), District of Columbia ($598,155), New Jersey ($588,575), Massachusetts ($582,774), New York ($550,174), and California ($514,694).
  • Thresholds above $1 million could be found in five metro areas (Jackson, Wyoming-Idaho; Bridgeport-Stamford-Norwalk, Connecticut; Summit Park, Utah; San Jose-Sunnyvale-Santa Clara, California; Naples-Immokalee-Marco Island, Florida) and 17 counties.

Looking at the residence of families with incomes above the 2015 national threshold of $421,926 for entering the top 1 percent, we find:

  • Of all the income received by the national top 1 percent in 2015, half accrued to families in five states: California, New York, Texas, Florida, and Illinois. These five states accounted for about 40 percent of all income in the U.S. (the sum of all incomes including the bottom 99 percent and top 1 percent).
  • We find the largest concentrations of national top 1 percent income in New York, Connecticut, Florida, Massachusetts, District of Columbia, California, New Jersey, Nevada, Wyoming, and Illinois.
  • We find the largest concentrations (relative to each metropolitan area’s share of all income) of national top 1 percent income in the following 10 metropolitan areas: Jackson, Wyoming-Idaho; Naples-Immokalee-Marco Island, Florida; Bridgeport-Stamford-Norwalk, Connecticut; Key West, Florida; Summit Park, Utah; Sebastian-Vero Beach, Florida; San Jose-Sunnyvale-Santa Clara, California; Miami-Fort Lauderdale-West Palm Beach, Florida; Hailey, Idaho; and San Francisco-Oakland-Hayward, California.
  • At the county level, we find the largest concentrations (relative to each county’s share of all income) of national top 1 percent income in Teton County, Wyoming; New York County, New York; Collier County, Florida; Pitkin County, Colorado; Fairfield County, Connecticut; Monroe County, Florida; Westchester County, New York; Palm Beach County, Florida; Marin County, California; San Mateo County, California.

Examining the growth of income over the past century, we find growth was broadly shared from 1945 to 1973 and highly unequal from 1973 to 2007, with the latter pattern persisting in the recovery from the Great Recession since 2009:

  • Faster income growth for the bottom 99 percent of families between 1945 and 1973 meant that the top 1 percent captured just 4.9 percent of all income growth over that period.
  • The pattern in the distribution of income growth reversed itself from 1973 to 2007, with over half (58.7 percent) of all income growth concentrated in the hands of the top 1 percent of families.
  • So far during the recovery from the Great Recession, the top 1 percent of families have captured 41.8 percent of all income growth. The distribution of income growth has improved since our last report, when we found that the top 1 percent had captured 85.1 percent of income growth between 2009 and 2013.
  • From our 2016 report to this one, cumulative income growth during the recovery for the top 1 percent increased from 17.4 percent (looking at changes from 2009 to 2013) to 33.9 percent (2009 to 2015)—almost doubling. Among the bottom 99 percent, cumulative growth increased from 0.7 percent to 10.3 percent—growing to nearly 15 times what it was. The bigger relative improvement in growth for the bottom 99 percent (reflecting a strengthening economy) is why the top 1 percent captured a smaller share of income growth from 2009 to 2015 than from 2009 to 2013. Nevertheless, the average income of the top 1 percent still grew faster than the average income of the bottom 99 percent, thus the top-to-bottom ratio continued to increase.

 

Read the entire report here.