The news comes from updated research released annually by Emmanuel Saez, Professor of Economics, and Director, Center for Equitable Growth, at the University of California, Berkeley.
Saez teamed up with Thomas Piketty ('Capital in the 21st Century') over 10 years ago, to research annual income data from 1913 till today. Their work put income inequality on the map. A simple chart illustrates their findings. Here it is, with the newly released data for 2013.
In
the updated research report, there's a comprehensive analysis of 2013 income reported to the IRS. It's noteworthy for a curious finding:
In 2013, top income shares have fallen relative to 2012. For example, the top 10% income share falls from 50.6% to 48.9%, the top 1% income share falls from 22.8% to 20.1%. Indeed, top 1% real incomes fell by 14.9% from 2012 to 2013 while bottom 99% average real incomes increased very modestly by 0.2%.
The fall in top incomes is due to the 2013 increase in top tax rates for labor income and for capital income. The tax change created strong incentives to retime income to take advantage of the lower top tax rates in 2012 relative to 2013 and after.
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The report highlights capital gains and deconstructs top incomes to show the proportions that come from labor, business/entrepreneurial sources, and capital (income and gains.)
In 2013, only 30% of the top 0.1%'s income came from wages and salaries. Capital is the source of most of their income. They pay themselves an amount they choose, when they choose. For that reason, income fluctuates a lot at the top.
In 2013, the top 0.1% reported an average of $5,280,000, compared to $6,745,000, in 2012. It was a drop of 22%, an amount that moves the dial lower on the inequality measure, even though incomes barely budged for 99% of the population.
It may be surprising for people to know that the record for income inequality was set in 2007. It still remains the high water mark. According to Saez, the drop in top incomes is temporary but he also says the stronger economic growth in 2014 may translate into larger gains for the bottom 99%.
The chart below looks at the trend from 1980 to 2013, compared to the performance of the NASDAQ Composite Index. The ups and downs of the income inequality trend mostly follow the ups and downs of the stock market. That makes sense if inequality is driven by capital instead of labor. (Note the inequality peak in 2007.)
The chart below is drawn to scale to illustrate the median income at four levels:
- at the bottom, in blue, the lower 90 percent,
- a layer of orange represents the lower half of the top 10 percent,
- the 4 percent just below the top 1 percent is represented by a layer of green,
- and the top 1% towers over the rest in purple. The income of the median 1 percenter was 35 times the median income of the bottom 90 percent.