By Nishant Yonzan, Stone Center research assistant

Spotlight on Data

In Emmanuel Saez and Gabriel Zucman’s recently published The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay, the authors report that, in 2014, the top percentile of the population took home over 20 percent of national income, while the bottom half made only 12 percent. This statistic is appalling, particularly when you consider that in a perfectly equal society—in which everyone brings home equal income—the top 1 percent would bring home exactly 1 percent of total income and the bottom half would bring home exactly 50 percent.

Saez and Zucman use national income as the denominator to calculate the shares of income that each group makes. What is national income? This is a measurement that captures the incomes of households, the incomes of corporations (both financial and non-financial), incomes of governments, and incomes of nonprofits.1  Saez and Zucman take this income concept and distribute it across the U.S. population, as you see below:
[Figure 1]

 

While the above measure is based on national income, there are other measures of income that are used by inequality scholars. In some cases, results can vary when using different definitions of income. Hence, it is a useful exercise to compare the results by using various definitions of income.
 
In what follows, I compare the shares of these two groups—the top percentile and the bottom half—using two concepts of income: factor income and market income. Further, instead of using a distribution of individuals, as Saez and Zucman have done, I use a distribution of households.2 Factor income includes income from one’s labor (wages and salaries) and from one’s ownership of capital (interests, rents, royalties, and dividends). Market income adds income from public pensions (both contributory and non-contributory) to the definition of factor income.
 
For my calculations, I have used the Luxembourg Income Study (LIS) Database, which harmonizes income survey data from about 50 countries around the world, including the United States. The chart below shows the share of factor and market incomes held by the bottom 50 percent and the top 1 percent of households ranked by the respective income concepts. While the magnitude of the income shares, particularly for the top 1 percent, are lower than in the first chart, the trends in income shares for both the bottom 50 percent and the top 1 percent are similar:

[Figure 2]

 

The chart above shows that, in 2016, the top 1 percent of households held 10.3 percent of total factor income, while the bottom 50 percent of households held 10.0 percent of the same. In 1974, the top 1 percent held only 5.9 percent of the total factor income, while the bottom half held 16.7 percent. This is as dramatic a change as we saw in Figure 1.
 
It is also worth remarking on the role of pensions. The population of the elderly has steadily increased in the last five decades; therefore, we expect the share of households receiving pension income to have increased as well.
 
As you can see from the chart above, the addition of pensions shows that the income share of the bottom half of the distribution is higher than without it. In 2016, the bottom half held 15.8 percent of the total market income—greater than the 10.0 percent share they held of factor income and the 12.5 percent share of national income. Nonetheless, we still observe the declining trend in income for the bottom half. In 1974, the households in the bottom half held 20.6 percent of market income. In 2016, those households only held 15.8 percent—a decline of over 23 percent.
 
Take your pick of denominator—in the last 50 years, the bottom half saw either a 36 percent drop in income (using national income), or a 40 percent drop (using factor income), or a 23 percent drop (using market income). No matter how we define income, the conclusion is clear. While the rich might be getting richer, there is no question that the bottom half are getting poorer.
 
Footnotes:
 
1  See Alvaredo et. al (2016) for a detailed discussion on the national income concept and how it is distributed across the individual distribution.
 
2  Income share are sensitive to the definition of unit used in the analysis — that is individuals, households, or tax filing units. For a discussion on this see https://www.lisdatacenter.org/newsletter/nl-2018-6-h-4/.
 
Sources:
 
Alvaredo, F., Atkinson, A., Chancel, L., Piketty, T., Saez, E., & Zucman, G. (2016). Distributional National Accounts (DINA) Guidelines: Concepts and Methods used in WID.world (No. 2016/1). WID.World.
 
Luxembourg Income Study (LIS) Database, http://www.lisdatacenter.org (multiple countries; October 5th, 2019). Luxembourg: LIS.
 
Piketty, T., Saez, E., & Zucman, G. (2017). Distributional national accounts: methods and estimates for the United States. The Quarterly Journal of Economics, 133(2), 553-609.
 
Saez, E., & Zucman, G. (2019). The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay. W. W. Norton & Company.