## Friday, December 14, 2007

### If America had \$100 and 100 people...

Here's an easy way to look at income distribution and how it has changed over the years. Let's pretend America has 100 people in it and that the total income for all of America is \$100. If everyone made the same per year, everyone would get \$1.00 each.

Obviously no free market society operates that way. Instead, there is variability in talent and capability, and some people are able to perform some very important jobs better than others. Those talented people are hired at a premium, and thus they make more than others. That gives us an income distribution, with some people making more money than others. In our example, some people are going to get more than a dollar and some will get less. That's reality.

So how has the income distribution changed in our society since 1979? I've been going through the latest data from the CBO and have come up with a couple of figs to describe this.

First a little about "binning". A data set is best illustrated when you put them into categories, or bins. The CBO has made five bins, called quintiles. Thus, the bottom 20% is the lowest quintile, the people who accrue on average between 20% and 40% the total share of income per year are in the second quintile, and so on. The problem with binning is that you lose resolution. The CBO only chose 5 bins, and therefore it is impossible to say what is happening within a given bin (except for the highest quintile; more on that later).

Below is a figure that illustrates how income would be distributed to the various quintiles if our economy were \$100 large and the US had a population of 100 households. The value at any given point is the average amount of \$100 dollars each person receives per bin.
Thus, in 1979 each of the twenty people in the lowest quintile received \$0.26, and each of the twenty people in the highest quintile received \$2.21. As you can see, though, that the amount of the pie each group gets per year has changed over time. The top 20% has expanded it slice of the pie, while the bottom 80% has gotten a smaller and smaller piece of the pie. For example, in 2005 the twenty people in the lowest quintile received only \$0.19 each, and each of the twenty people in the highest quintile received \$2.73. In other words, the top twenty people get \$54 of the \$100 and leave \$46 for the rest of the 80 people. The change over time can be illustrated as a % change distribution of the \$100.

This figure shows that the piece of the pie given to the wealthiest people in the US has grown by 23% over the last 26 years. The piece of the pie given to the bottom 80% has decreased since then, as much as 28% for the bottom 20 people. The percentages don't add up because this is how each piece of the pie has changed over time. The bottom has a small piece to begin with; thus, a small decrease for them is actually quite big, relatively speaking.

The CBO also provides data for income distribution for within the highest percentile. The break the data down by Top 10%, Top 5%, and Top 1%. I showed you above that, on average, each of the top 20 get \$2.73. But what if you break the top 20 into categories themselves? How does the \$100 breakdown after that? Glad you asked...

Remember, this fig represents how much each person in each group receives out of \$100. Unlike above, when we were just looking at quintiles, not all the groups are the same size. The Top 1% has only 1 person, the Top 5% -1% has 4 people, and so on till we get to the quintiles where there are 20 people per group.

As you can see, the distribution of the \$54 to the top 20 people is actually highly skewed as well. In fact, it is so skewed I had to magnify the y-axis in order to make room for all the other data points for the bottom 95%. This is because the share of the \$100 the top 1%, which in our example is one household, is so much greater than everyone else. That one person received \$8.73 of the \$100 dollars in 1979; in 2005 that one person got \$18.39. How has the percentages changed over time? Each of the 4 people in the Top 5% -1% group received \$2.71 in 1979 and \$3.18 in 2005, on average.
The only group that hasn't changed much is the people ranked from 5 to 10 since 1979. The bottom 90 people have gotten a smaller piece of the pie over time. The #1 person has more than doubled his take. The only people to significantly increase their share of the \$100 over time is the top 5 people.

So how did we get to this situation? More on that later...

beebs said...

I have saved for over forty years. I find myself moderately well off.

I consider progressive taxation, income redistribution programs, and the estate tax to be theft by government, plain and simple.

Clearly, then, you must have figured something out that the other 90% of Americans could not.

BobbyV said...

I consider progressive taxation, income redistribution, and the estate tax to be some of the few ways we have to prevent those with political connections from criminally appropriating the wealth earned by hard-working Americans.

There could be several reasons why beebs is financially secure. S/He worked for a company that didn’t default on their pensions or S/He didn’t experience a major health crisis. Regardless, American workers deserve some protections from corporate malfeasance and serious illness.

I would love to see this data for 1932 through 1979, roughly the start and end of the New Deal era. It would be interesting to see if the shift in tone from the New Deal era to the Reagan era can measured this way, in terms of income distribution.

I'd also add that progressive taxation is pretty much what separates first world countries from third world countries. The weaker the taxation, the more poverty, the more corruption. So I'm happy to pay taxes within reason if the government is transparent and accountable.

Afferent Input said...

I'd like to see those same data. If anyone knows where to find raw data for income and share income back a long, long ways, please leave a comment here. I'd love to run numbers on that alone.

Maybe I should make a call for such data in it's own post...

Zak said...

I'd be interested in learning a little more in the methodology of how this exercise actually stacks up to the real US economy. Since 1979 (or since any other time frame you want to look at) there of course hasn't been a singular pie that represents all income and all wealth, or all the same people.

There's a funny little shell game going on. All people don't just stay in any one income level all their lives- in reality many move in and out of different income levels. Most of us start out low income at our first jobs, then work up to higher brackets. Some people get a break and rise quickly into the higher ranks, then fall out of it when bad times hit them. Poor become middle class, middle class become rich or poor, some rich people fall and become middle class or poor. No one is really the same static "X number of people in the same bracket" all our lives.

Also, how does any of this account for the fact that a lot of the wealth held by the top brackets, is the result of what's created by the entrepreneurs that invent and make the products, and create and run the industries that builds this wealth to begin with?

For example, all of us are viewing this little exercise using the fruits of a multi-billion dollar industry that didn't even exist as we know it today in 1979.

There isn't just 100 dollars and 100 Americans who all remain the same- I mean of course, no real world equation that mirrors that, it's a lot more complex.

There are shifting levels of wealth as a lot of it is created by people with new ideas and innovations. And yes, many times people figure out things that 90% of other people don't.

Anonymous said...

I have a high school education and have pulled myself up by my boot straps. I own a business and I have saved diligently for my retirement.

I consider progressive taxation, income redistribution and the estate tax to be give-away government plans meant to buy votes.

I work and save while many of my neighbors buy cars, run up credit card debt, drink Starbucks coffee and spoil their children. Their inability to manage their financial destiny should not become my burden.

The easy answer is a flat tax and a tax on goods. That way everyone pays their fair share and if you want the goods you pay a tax on the goods - this takes care of money earned illegally as well.

The millions we save in eradicating the IRS could be poured into healthcare or social security.

Will it ever happen? No way...too easy.

BobbyV said...

Anonymous said, "I work and save while many of my neighbors buy cars, run up credit card debt, drink Starbucks coffee and spoil their children."

It's too bad that anonymous doesn't understand that one can do all those things without carrying a credit card balance.

Do I not detect a veiled slam against - gasp - liberals? We liberals are known for drinking Starbucks lates and spoiling our children. We're also known for indoctrinating our children with evil ideas like evolution and safe sex. You'd think that by leading such a deviant lifestyle, God would smite liberals by maxing out their Amex cards. And just for good measure, He'll ruin their FICO score with excessive Blockbuster late fees.

aardvark7 said...

There is a definite self-righteousness about some of these comments : "I've saved for years, I'm a good steward of my money, how dare you tax me". But this isn't about tax, it's about salaries. The top 1% has far more money today because they've granted themselves huge pay increases, stock options, shares, golden handshakes, golden helloes, etc. The income of the average "big boss" in America is roughly 500 times that of his lowly "worker bee". Is this FAIR? Just? Right? Of course most will react by repeating the mantra "if the market dictates that that's the boss's valeu, then it is just and fair and right". Rubbish! The market hasn't dictated anything ; corporate directors are in a monopoly situation where they can vote themselves whatever they can get away with in terms of benefits, stock-options etc, whilst freezing or reducing the wages of the lowest-paid. They do this because humans are intrinsically selfish bastards ; and governements have a duty to curb such selfishness and injustice in society. They can introduce legislation to cap the amount of shares one person can hold, limiting golden handshakes etc. But they don't, because it's the people who have the money who have the power to buy off the politicians. I don't see how anyone can justify such a system ; sure it's survival of the fittest, but there is no notion of justice or fairness in it.

Anonymous said...

one should take into account also the size of the pie, not just how the pie has been divided to the different groups. is the lowest quintile worse off in absolute terms than 26 years ago? the burden of proof is that they are not.

if somebdy looks at the ABSOLUTE standard of living of the lowest quintile now in US and compares it with that of the lowest quintile in France, Germany, UK, Japan, Canada will see that overall the American por have it better still. not by much is true. and with more risks as far as health care and social security.

despite the fact that liberals claim that the rising tide has lifted only the yachts truth is that all the boats have been lifted by the extraordinary economic growth. no doubt, the yachts have risen more that the little boats...

while there is need to temper the rise in inequality between classes we should be careful not to stall the engine of economic growth. going to the path taken by France may not be the best fix of the problem. will end up growing a lot slower and having less pie to share for everybody.

at this time I am afraid both of the extreme supply-side conservatives and the socialist leaning liberals ( I have no ideea why we keep calling them liberals when they are really socialists). I consider myself a liberal but I think there is too much shift to the left from a good part of liberal leaning people. and this will not help when fighting the conservatives.

I do believe that we need a health care reform including expansion of Medicare to every American who wishes to sign up for it before 65. I do believe we need to spend a lot less on wars in areas of the world we have very poor understanding of. I do believe we need to spend alot more on educating our kids better ( if you look at PISA results will see a huge gap between the abilities of our kids in math and science compared with the Fins, Koreeans and French). I do believe we need to wean ourselves off oil, SUV's and energy wasting.

Anonymous said...

Can you send me the data set you used to generate the last graph of your Dec 14 post ("If America had \$100 and 100 people...")?. I want to plot the income gains of the top 1% against the stock market returns for the same period to see how closely they track one another (or I'll send you the stock return data and you can plot it).

David

Anonymous said...

aardvark7 you understand as many have not what this is about!
This is about the RICH and Privileged in this country getting that way at the expense of the rest of us. I have worked my whole life in corporate American and I have been asked for the last 20 years to do more work with less pay else someone will do it instead of me! This constant threat of getting fired if I do not preform to their expectation. This is what the motivation to work harder for less pay is to keep your job not to get raises or bonus. While the ask you to find ways to have work off sourced to India. Or if they do give you a raise it does not even equal inflation. All the while the corporation is doing well and the people at the top of the food chain continue to get fatter and fatter! How the Hell is that Fair? Your RIGHT IT IS NOT! When is enough a enough? I am trying to raise a family wife, 3 kids. I am not alone I read blog after blog of disinfranchised Americans. If we contiunally allow the rich in this country to exploit us things wil only get worse! If we stay this course there will be a revolution in this country because when gas hits 8 dollars a gallon along with Milk and Eggs the haves and the have nots will clash! And it will not be Pretty!

Thomas Nephew said...

Hoping it's OK to post that 5th image to the facebook group "No Blank Check for Wall Street"

Afferent Input said...

Sure thing. The image is all over the place anyway. The more people that see it the better. Just be sure to point back to this post, please.

BizCoach said...

I've worked myself up and I believe I'm in the top 5% and I think progressive tax is the only fair way to go. Here's why. I could not have done what I did in most other countries.

If you think of tax and the price to be an American, and enjoy the piece, protection, infrastructure, court system etc. then it becomes obvious that people at the top are able to take advantage of this much more than people at the bottom.

And the increase is not arithmetic as a flat tax would indicate. If I'm twice as rich as the average bear, I probably have a lot more that twice as many business dealings (that succeed because we have a solid justice system and until recently a solid banking system) and get more than twice as many deliveries that depend on the roads, and a secure source of oil protected by the military etc.

Not to mention that I had a public education that was probably better than most.

So I'm all for fairness but self-made people need to be fair and admit how much of a boost they get from things that are paid for by taxes.

tk said...

Couldn't agree more with BizCoach. A flat tax, while it may be simple to understand, is anything but fair.

Real Estate Raj said...

"Alan Greenspan, chairman of the Federal Reserve Bank, make the case for wealth:
"Ultimately, we are interested in the question of relative standards of living and economic well-being. We need to examine trends in the distribution of wealth, which, more fundamentally than earnings or income, represents a measure of the ability of households to consume."

Anonymous said...

At this stage, adjusting the income tax (either by changing marginal tax rates and/or by closing loophole, denying deductions, etc) to redistribute wealth from high earners to low wage households would be like rearranging the deck chairs on the Titanic. Over the past thirty years US households have seen not only a shocking redistribution of income toward top earners, but also a consequent, massive and damaging inequality in wealth (as opposed to income).

It is time to consider a wealth tax: a sizable one off levy on the wealth of every household, corporation, trust or other legal person with assets of over say \$2m. ideally the levy would be progressive with those with fortunes in excess of say \$100m paying the lion's share. The proceeds could be used to repay debt, make infrastructure investments, finance financial aid, healthcare and income transfers to poorer households.

Any student from Economics 101 will grasp the likely stimulative effect of this sort of wealth transfer since those with lower incomes (and less wealth) are more like to consume what they are given. Also, if the tax were enacted in a way that rules out it being levied again for a considerable period, the effect of incentives to work, save, invest etc of those who are assessed the tax would be minimized.

Now THAT would be a class war worth fighting.

Anonymous said...

Why nothing in this post about the size of the pie growing? Get real.

Jérôme said...

The funny thing with all the comments to keep on the same track forever and not redistributing wealth, is that at the end, there can only be one winner... One winner like in one people. I would like to see the face of people defending the liberal system at that point. Are we gonna say: "fair enough this guy was better than everyone else! He deserves it"

AMusingFool said...

Several people have gotten awfully holier-than-thou about how they don't want to pay for their neighbors debts. While that's certainly an understandable attitude, they should reflect on what the government provides.

They should also reflect on how an inheritance tax helps prevent (or at least slow) the growth of an aristocracy.

They might also want to think about how progressive taxation helps the entire nation.

How? Well, look at a graph of the top tax rate measured against percent growth in GDP. The correlation between the two is VERY strong.

You'll note, if you do that, that it also tracks the difference between the top of the pie against the rest of the pie. That is, the economy grows most quickly when the top 1% are closer to the rest.

Also consider how unfair a flat tax is. If I'm in the bottom quintile, my living expenses are much closer to my income (actually, according to NY Times graph from a while ago that I can't find at the moment, my expenses will be greater than my income), with the separation becoming larger as income goes up.

And that chart was showing living expenses for the top quintile at only about twice that of the bottom quintile.

So a flat tax heavily penalizes those at the bottom of the pyramid, while leaving those at the top paying so little as to not care.

Finally, in calling taxation theft, where are the expenditures that you find so objectionable? The money isn't being thrown in a pit and burned (well, unless you want to call Iraq/Afghanistan that, in which case I won't argue with you).

AMusingFool said...

I forgot; there was also a comment in here that the bottom quintile in the US is better off than in several other countries. That's certainly false, for several reasons.

One, the social safety net is much better overseas. Two, the chance of going bankrupt for medical problems is much smaller (related to one, of course). Three, you're guaranteed access to good medical care (again related to one).

If you've got quite a bit of money, the US is probably better (only probably because until your wealth reaches obscene levels, there's still the threat of medical bankruptcy), but for the poor? Not a chance.

Anonymous said...

Ben said...

Regardless, American workers deserve some protections from corporate malfeasance and serious illness.

Anonymous said...

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Thanks to you all!

Anonymous said...

For those that are against taxing the extremely wealthy - have you never played Monopoly? That's what we are seeing in the world now, and the only way to stop everyone except for the extremely wealthy from going bankrupt is to get some of that money back into circulation in the economy, as the life blood of the economy.

The only way to do that is to tax the wealthy, to get the circulation going again before gangrene sets in and it all rots.

Anonymous said...

Any chance you could post the sources for this data?

Lexapro said...

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Alex Linsker said...

This is a great visual, thank you. Could you post a link to the CBO data?
P.S. This looks like pre-income tax data, and changes in post-income tax rates (total income tax of state, payroll, federal, after total deductions - TPC has a chart: http://www.taxpolicycenter.org/numbers/Content/PDF/T11-0322.pdf) would be even worse.

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