The Volatility of Income for the One Percent

Townhall.com ^ | March 2, 2014 | Political Calculations

[Kaslin]

Last December, the IRS released the latest update to their annual tax return statistics to now cover the 2011 tax year. We thought it would be interesting to look at the threshold income that a typical American taxpayer would need to have earned to be included among the Top 50%, the Top 1% and the stratospheric Top 0.1% according to the IRS over the preceding 10 years [1]:

In the chart, we've shown the threshold incomes on a logarithmic scale (be sure to read Jim Hamilton's invaluable explanation for why we would choose to do this!)

Two things really stand out in what we observe in the data from 2001 through 2011:

1. The higher the income percentile, the more likely incomes generally rose over time to be in a given percentile.
2. The higher the income percentile, the greater is the volatility of income from year to year to be in a given percentile.

Our next chart underscores our second observation - we simply calculated the percent change from the previous years threshold income to be in the Top 50%, the Top 1% or the Top 0.1%:

Now, ask yourself a question: Could you afford to go through a year where your income might drop by 20% or more from the previous year?

The answer likely depends on how much you might have been counting on having the same kind of income you did in the previous year. For the individuals who actually earned incomes that put them in the Top 0.1% [2], the answer is probably not too bad, because if they stayed in the Top 0.1%, they were still earning a significant amount of income.

But that kind of income volatility from year to year is potentially catastrophic for their two biggest financial dependents: the federal government and potentially their state government, where the reliance upon extremely progressive income tax rates imposed upon high income earners for their revenue would virtually ensure that they will face a major fiscal crisis if the millionaires and billionaires included in these top ranks have a really bad year.

Notes

[1] The IRS first started reporting data for the Top 0.1% in 2001.

[2] While there's certainly some overlap from year to year, the actual people whose earned income puts them in the Top 1% and especially the Top 0.1% is not consistent from year to year - there's a lot of turnover at these income levels.

Reference

Pomerleau, Kyle. Tax Foundation. Summary of Latest Federal Income Tax Data (2011). Table 7. Dollar Cut-Off, 1980-2011 (Minimum AGI for tax return to fall into various percentiles; thresholds not adjusted for inflation). 18 December 2013.

[George from New England]

the two most important years are missing. 2012 and 2013

[Oliviaforever]

Look at that dip on the second chart. The line crashes as soon as Obama announced his run for the presidency.

[DrDude]

That’s why 2012 and 2013 are missing

[zeestephen]

The link to information on “natural log” charts is quite interesting.

I haven’t used them since college, almost 50 years ago, and I forgot how useful they can be.

Speaking of useful, it is always best to supply inflation adjusted charts, which, unfortunately, the author has not done.

One final thought:

It took the IRS almost 2 full years to release data from 2011.

Historically, that is interesting, but not very helpful to those of us who want current information.

I have to believe that good estimates for 2012 and 2013 could be obtained in a couple hours using off the shelf commercial software.

One problem may be access to IRS data.

Having open access actually requires a background check and a security clearance, but I can’t recall which level.

[Kaslin]

Well, as you can see the chart only goes to 2011

[Kaslin]

Also notice the line goes down after rats took over the House and Senate in January of 2007.