These days the press and politicians talk incessantly about the top 1% in American society. Each day, it seems, as Senator Bernie Sanders delivers his passionate and fiery stump speech, he states “and the top 1% of Americans earn 22% of the national income.” The purpose of this post is not to trash Senator Sanders. It is, rather, to dig a bit deeper in to the top 1%. What I have found will surprise many of you and perhaps shock some as well.
First, let us define terms. Numbers float around and change constantly but as I write, IRS data puts the top 1% of household income at about $394,000. It may be higher the next time the report is released or adjustments are made by an economic forecasting team. For this post, let us simply accept that.
Now, when you read comments about the top 1%, they tend to discuss these fortunate individuals as being a PERMANENT force as locked in as the 19th century British landed gentry (the Downton Abbey crowd, for example). In his thought provoking 2014 book, “Capital in the Twenty-First Century”, French economist Thomas Piketty essentially says the 1% are a world apart and “stand out in society and exert a significant influence on both the social landscape and the political and economic order.” Were he describing the top 1% in WEALTH, I would agree completely. More about that later.
The main issue that startled me about looking at the top 1% in income was how much turnover was in that group. Only half of the people with these nosebleed incomes in a given year are still there a decade later. And, it is even more pronounced among the super earners who have the 400 highest incomes in the country. Only a quarter of the top 400 last for 10 straight years. Part of that is because incomes at the high end are largely from investments which are far more volatile than virtually anyone’s salary base.
Here are some startling (to me) factoids from the Panel on Income Dynamics which is derived from rock hard IRS data:
--Some 45% of Americans will take advantage of food stamps or Medicaid before age 60.
--70% of American workers will be in the top 20% of earnings for at least one year prior to age 60.
--53% of Americans will be in the to 10% for at least a year
--11.1% will be in the top 1% for at least a year
--Only .6% of the population will spend 10 consecutive years in the top 1% of earners
Are these numbers real? I assure you they are. How is it possible? We live in a country with a relatively free market. So, we have what economists may describe as a fluid economic order. People have good years and bad.
Before you say that you will never reach the top 1% in a single year, consider this. If you have owed a house for 10 + years in a suburb of New York, Boston, Washington, San Francisco or just about anywhere in Hawaii and sell the place this year, the odds are overwhelming that for, this year, you will be in the top 1%. Do you have an aging parent or aunt or uncle? If they pass away, and leave you a reasonable inheritance you will join the lucky top 1% for 2016 when the inheritance is added to your household income. Next year, you are back in the pack. Ever get lucky with a tech stock that explodes upward like a Roman candle? Same thing. You have a big year.
So each year, many thousands come in and out of the top 1%. A few years back, SPORTS ILLUSTRATED published a stunning and sad piece about how 78% of NFL players declared bankruptcy within two years of retirement. Impossible? Remember, most players do not make it past four years and are ineligible for an NFL pension. Their income plummets and they fall from the 1% abruptly. Some may wind up on food stamps or some kind of assistance.
How about the top 400? Why the turnover? Well, some 40 people made over $1billion last year. Many were hedge fund managers. This year, some may lose money so they will have a negative income despite significant passive income (dividends and interest). Their net worth may be just great and they may still be billionaires in net worth. Yet they have fallen from the top .01% to the bottom with zero net income.
So the real issue for the reformers, politicians and even some Nobel laureates who should know better is to look at the concentration of wealth and not at income stats which I hope to have shown are very erratic at the top end. If a confiscatory income tax were put in to effect against the top 1% in the United States it would hurt many who were striving for accumulation of wealth (many of you younger readers). Those who already had significant wealth via an enormous asset base might find higher taxes an annoyance but it would not hamper their lifestyle or influence much at all.
If you would like to contact Don Cole directly, you may reach him at firstname.lastname@example.org