Distribution of Incomes 1972 - 2005

Last Revised 1/2/09
 

This page has been produced to support discussions of incomes and taxes, to provide references as to how we rank in the American economic spectrum. What is the median income? How do others compare to myself? How have incomes changed over the years? Who has seen the most gain? Who is middle class, and who is rich? This page will support those questions.

Data Sources:

 

Statistics of Income Analysis

We start by graphing midrange incomes using the traditional percentile method to discuss the economy that characterizes the majority of Americans (the bottom 90%.)

We can see that over the last 33 years midrange incomes have increased together, a fivefold increase regardless of percentile. We can see that the distribution is rather flat on a logarithmic scale. If we extrapolate this generally flat line we can see that, if this trend that characterized most of us, applied to the wealthiest of us, the highest income in America would be about $110,000 (in 2005.)

The flatness of the line may be interpreted this way: If I want to increase my income by 10%, I must work to increase my status by 4.1 percentile points. If I want to work to double my income, I must increase my status by about 30 percentile points. Or, for comparisons, a person who makes twice as much as me, or half as much as me, differs in status by about 30 percentile points.

The top 5% of Incomes

For higher incomes, percentile lacks clarity so we graph using inverse frequency.

Here, we see a different story. The higher the status of the earner, the more his income has increased in the last 33 years. Here, we notice that if we extrapolate the curve on the low end we get a value of about $60,000. That means that if the economy that characterizes the wealthiest applied to all of us, the lowest income in America would have been about $60,000 in 2005.

Comparing the two graphs above we see two distinct patterns in our economy. One pattern characterizes those making less than $100,000. The other pattern characterizing those who make over $200,000. We might examine this further using a chart to compare income growth over the last 33 years.

Percentile Inv. Frequency
1972 Income
2005 Income
Growth (ratio)
30 1.4
$3,800
$18,000
5
50 (median) 2
$8,000
$41,000
5
90 10
$20,000
$100,000
5
95 20
$24,000
$120,000
5
99 100
$50,000
$270,000
5
99.5 200
$71,000
$440,000
6
99.8 500
$100,000
$1,200,000
12
99.9 1000
$130,000
$1,900,000
15
99.988 8000
$250,000
$10,000,000
40
X% are below Only 1 out of Y are above
$ per year
2005-income / 1972-income
We see the bottom 99.5% of us have shared a common economy over the last 33 years, on the average we have experienced a fivefold growth in incomes (not adjusted for inflation.) However, the top 1 in 500 (0.2%) have experienced a rapidly growing economy enjoying growth over 12-fold and even over 40-fold, which is 2.4 to 8 times the growth the rest of us have experienced. Our economy has split into two - a slow growing economy which 99.5% of us experience, and a rapidly growing economy that roughly 1 in 500 experience.
Share of Annual Income

The top-heavy growth in incomes resulted in the share going to the bottom 50% being cut in about half, while the share going to the top 1% increased roughly 3-fold. More income is now concentrated at the top now than any time in the last 70 years. The last time the rich enjoyed this large a share of the total income was just before the crash of 1929.

This represents share of annual income, not share of wealth. The portion of wealth controlled by the top 1% is even larger.

We might look at that top heavy growth another way. If the total money going into incomes increased the same amount, but growth was distributed equally throughout the economy what growth would the average earner have seen? The growth ratio would have been about 7.9, instead of the roughly 5 for the bottom 99%. How does that translate to real dollars? The typical wage earner (the bottom 99%) would be getting 60% more than he is now! For example if you earned $40,000 in 2005, the common growth rate would have earned you $64,000.

Had the growth rate been distributed equally, the number of Americans in poverty would have been much lower. There would have been less need for spending on poverty, and there would have been more tax revenues going into the various branches of the government, particularly payroll taxes.

An Analogy:

Peter, Ed and Paul work together and earn $1000 total. For arbitrary reasons they decide to pay Peter $100, Ed $200 and Paul the remaining $700.

They all work harder and together generate $10,000 profit. If they follow the trends of the last 30 years, they would divide that sum by giving Peter $500, Ed $1000, and the remaining $8500 would be given to Paul. However, if they had all gotten the same rate of pay, Peter should have gotten $1000, Ed $2000, leaving Paul with $7000. Effectively, the first choices robs poor Peter, and middle class Ed, to pay rich Paul.

Implications for Economic Class Discussion
We talk about middle class, poor, and rich, but we don't define those terms clearly. Wouldn't it make sense to define middle class as those in the middle (between the 25th and 75th percentiles?) By that definition in 2005, middle class ranged from about $23,000 to about $73,000. The definition of rich is much more debated. We could define rich as the top 1%. By that definition, rich would start at about $250,000. We could define rich as being ten times the middle. In that case rich would start at roughly $400,000. Both of these definitions of rich are much lower than the multi-million dollar compensation packages for executives and celebrities commonly described in the news. Multi-million dollar compensation would be defined as superrich by any reasonable measure.
Over the years some discussion has been made about the cost of caring for the poor. Government spending to help the poor may amount to as much as 10% of the typical American's income. Some claim that it is not justified to make citizens pay that much to support others. However, the calculations above show that in a similar sense the typical American in now paying about 40% of his income to make the rich richer than they were 30 years ago! Which inequity has the greater burden paying up to 10% to support the poor or paying about 40% to support the rich?

Percentile:

Percentile means what part are below this number. For example: 30th percentile means that 30% are below that value.

Inverse Frequency:

Inverse frequency asks what portion is above this value. For example: an inverse frequency of 200 means that only 1 out of every 200 people are above this value.

Percentile vs. Inverse Frequency:

Percentile is a good means of distinguishing between the values ranging from 1% to 99%. But above the 99th percentile the numbers become hard to read and hard to compare.

Frequency and Inverse frequency are good means of distinguish between small portions, smaller than 1 out of every 2. They are particularly useful when the portions are smaller than 1 out of every 20.

Logarithmic Graphing:

On a logarithmic graph each equal distance represents the same ratio. For example: 1 cm might represent twofold. Thus, any step up of 1 cm means doubling to twice as much, regardless of where this occurs on the graph.

 

Related Pages:

Outside Links:

Income Distributions

Compensation of the wealthy

Compensation of the workers

 

 

Implications for Tax Discussions

Various considerations go into determining fairness in taxation. Major considerations include ability to pay, and the government's role in defending wealth and the acquisition of wealth. Since most of the gains were realized by the top 1/2 of 1%, it would follow that both their ability to pay has increased significantly. We can ask what tax rate would produce an equal burden? Or, how would this equal burden produce the same revenues?
Recently, the tax discussion has been reframed in terms of share of total income taxes. This misleading reframing has been promoted by members of the top 1%. To address this concern we can ask, "If the top 1% saw a significant increase in their share of the total income, did they also experience the same in their share of total taxes? We may also ask, "Since the bottom half suffered a drop in share of total income, did they also experience a similar drop in share of total taxes?
The data clearly shows that the bottom 99% saw a decrease in their share of total income, with the increase going entirely to the top 1%. How does this compare to share of taxes?
A quick comparison answers that question. Since 1968 the tax increase of the top 1% was roughly 1/3 of their share in the increase in income. For the bottom half, their drop in share of taxes roughly matched their drop share of income. The group between the median (50 percentile) and 99th percentile saw a significant drop in their share of incomes, but no change in their share of taxes.
Note: these graphs compare 1968 to 2006 due to data on hand. Graphs above compare 1972 to 2005 due to data on hand.
  Many pundits insist that taxes on the rich suppress the economy. But in 1968 the economy was creating jobs faster than it has been since the tax cuts of 2001. Similarly GDP growth was higher. Footnote: The original research leading to this and related pages was intended to show that Reagan was right. However, the data may lead one to the opposite conclusion.
 

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