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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Why 2012 Appears to Have Been a Bonanza Year for High Earners



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Annie Lowrey of the New York Times, drawing on an updated study by Emmanuel Saez and Thomas Piketty, reports that the top 10 percent of earners accounted for more than 50 percent of all income earned in the U.S. in 2012, and the top 1 percent accounted for 22.5 percent, an increase over the 19.7 percent earned by the top 1 percent in 2011. As Lowrey explains, U.S. firms and investors anticipated a sharp increase in capital gains taxes as the Bush-era tax rates were set to expire, and so companies paid out large dividends and investors sold assets. She specifies, however, that “the trends looked the same for income figures including and excluding realized capital gains.”

While it is true that the trend looks the same, excluding capital gains does makes a significant difference in the income shares of the top 10 percent (just over 50 percent when we include to roughly 47 percent wehwn we exclude), the top 1 percent, and the top 0.1 percent (roughly 5.5 percent to 4 percent). As Richard Burkhauser has argued, there is a strong case for measuring accrued gains rather than taxable realized capital gains to understand income patterns. That is, we should count increases (and decreases) in the value of financial assets when we calculate income, as doing so will give us a more realistic portrait of how the economic position of households change over time. 

It is also worth keeping in mind that the Tax Policy Center projects that 43.3 percent of tax units will have no federal income tax liability in 2013, and 14.4 percent of tax units will have no payroll tax liability. When we consider the share of income earned by the top 10 percent, etc., it is important to keep this 14.4 percent of tax units with no payroll tax liability in mind, as two-thirds of this pie slice (9.7 percent of all tax units) consists of elderly Americans. As the share of older Americans who have exited the workforce increases, and as the share of young adults enrolled in school also increases, we can expect that the income share of the top 1 percent of all tax units will also increase. This certainly doesn’t mean that all is well with the labor market — a more robust labor market might encourage young adults to enter the workforce while encouraging older workers to delay retirement. 

For more on the inequality debate, I recommend Jim Pethokoukis’s conversation with Richard Burkhauser.



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