Forget Everything You've Heard in the Media About Income Inequality and Income Mobility

From the study "Income Mobility in the United States: New Evidence from Income Tax Data," by Gerald Auten & Geoffrey Gee (both of the Office of Tax Analysis, U.S. Treasury Department), which was released previously here.

This study examines the income mobility of individuals over the last two decades using large panels of income tax returns that overcome many of the limitations of prior studies. The use of panel data means that the analysis tracks changes in the incomes of the same individual taxpayers over these time periods rather than comparing cross-sections at different points in time. Key findings include:

* There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5% by one measure and 55% by another measure) moved to a different income quintile over this period. About half (56% by one measure and 42% by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

* Median incomes of taxpayers in the sample increased by 24% after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.

* The composition of the very top income groups changed dramatically over time. Less than half (39% or 42% depending on the measure) of those in the top 1% in 1996 were still in the top 1% in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.

* The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.

* Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.

MP: In other words, almost everything we hear in the media about increasing income inequality, the disappearing middle class, the rich getting richer and the poor getting poorer, and the lack of income mobility is either flawed, deficient, incorrect, incomplete or wrong.

The data show that there is significant income mobility up and down the income quintiles over longer periods of time, e.g. 1996-2005. Many of today's poor are tomorrow's rich, and many of today's rich are tomorrow's middle class or poor. The top income quintiles are not private clubs closed to new members, but are shifting, dynamic quintiles composed of an ever-changing group of different individuals from year to year. Consider that 75% of the individuals in the richest group of Americans in 1996, the top 1/100th percent, moved down into a lower income group by 2005, making room for a completely different group of individuals in that super-rich category.

HT: TaxProf Blog