For Richer and for Poorer: Millionaires Get Poorer While the Poor Get Richer. So What's All This Talk about the Income Gap?

Article excerpt

THE RICH GET RICHER and the poor get poorer, or so the saying goes. Thousands of people have been sleeping outside in tents for months as part of the Occupy Wall Street movement in large part because they believe this statement is both accurate and important. But while there is a nugget of truth there, this critique obscures the great news that income mobility is actually alive and well in the United States of America.

There is plenty of evidence that the richest Americans are richer than the richest Americans of the past. For instance, the top I percent of income earners in 1990 made 14 percent of Adjusted Gross Income (AGI), or pre-tax income, versus 23 percent in 2007--the second highest figure on record. The top x percent of households in 2007 made 275 percent more money adjusted for inflation than the top t percent in 1979, according to an October report from the Congressional Budget Office, while incomes in the bottom 20 percent increased by just 18 percent.

But ending the data in 2007 obscures the fact that the wealthiest I percent took a sizeable hit after the financial crisis, reducing their share of Adjusted Gross Income to 17 percent in 2009. As economist Steven Kaplan of the University of Chicago explained to George Mason University economist Russ Roberts in a recent EconTalk podcast, "Recessions are bad for the rich. If you care about inequality per se, recessions are great." Kaplan also noted that in 2009, the rich had a smaller share of income than they did at any point during Bill Clinton's second term, often cited as a period of significantly greater income equality.

But even if the top I percent were still pulling down one-fifth of national income, this doesn't mean that the remaining 99 percent are worse off, contrary to popular belief. Rather, as Kaplan correctly observed, "income is not a zero-sum game. Somebody else's income does not come at your expense. It could ... but in general these numbers don't have automatic implications for the 99 percent." These kinds of comparisons don't tell us anything about the absolute conditions of lower income earners.

For instance, even though the lower earners have a smaller share of income today than they did in 1990, their absolute income is higher. A smaller share of a larger national pie can still mean more income than the bigger slice of a smaller pie. This is true even after you consider growth in population. According to IRS statistics, in 1990, the bottom 50 percent of income earners reported If percent of real adjusted gross income, some $517 billion in pre-tax income. In 2007, they reported only 12 percent of AGI, but this percentage amounted to more absolute dollars--some $1.1 trillion in pre-tax income.

But even these figures miss a more fundamental point. The top I percent in 1990 are not necessarily the same people as the top I percent in 2012. Data describing comparative income performance generally do not take into account the movement of individual households through time. There is no accurate assessment of the income gap without accounting for income mobility. The more the mobility, the less the significance of widening income disparities.

So what does that mobility look like? Take the top earners in America. Using IRS data, the Tax Foundation has shown that of the 675,000 taxpayers who reported $1 million in pre-tax income at some point between 1999 and 2007, only about half remained millionaires just one year later (see figure).A tiny 6 percent, or 38,000 people, retained their millionaire status for all nine years. In other words, most top earners are likely to lose their membership in the millionaires club. …