Wednesday, November 28, 2007

The Top 1%

We've heard a lot this election cycle about "the top 1%" of income earners. Usually in a context like this:

Mr./Ms. Candidate (D):
". . . and I'll give every American healthcare by making sure the top 1% pay their fair share!"
Audience: (applause)
Newscaster: "A bold new proposal, from a bold new . . . (blah, blah, blah)"

But who are the mysterious "top 1%?" and what is "their fair share" anyway?

One gets the impression that they are watching CNN, poolside at the summer home, champagne in hand, laughing at the audacity of the politicians and vowing: "I will never, NEVER! pay my fair share!"

Or perhaps they are meeting old friends at the upscale "Club Un Percenteaux" in Manhattan (a very exclusive club -- it only admits 1% of those who apply) and plotting to buy off Congress to keep their low tax rates.

Thomas Sowell has a great article on who they are on National Review Online. Turns out the club isn't so exclusive after all:

Who are those top one percent? For those who would like to join them, the question is: How can you do that?

The second question is easy to answer. Virtually anyone who owns a home in San Francisco, no matter how modest that person’s income may be, can join the top one percent instantly just by selling their house.

But that’s only good for one year, you may say. What if they don’t have another house to sell next year?

Well, they won’t be in the top one percent again next year, will they? But that’s not unusual.

Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005. . .

These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.

More ways to get in the club:

These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas. . . corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. . . Some of these incomes are almost as large as those of big-time entertainers — who are never accused of “greed,” by the way.

I might add own a small business to the list. The tax code makes it easy to live very well off your business, and report almost no income (it's been reinvested in the business).

It's not the same people who are rich at any given time. That's the beauty of the American economy. Anyone really can get rich (at least for a while), and no one has to stay poor. The free flow of goods and labor, the flexibility of business to hire (and fire) as necessary, and nearly universal access to education means that:

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

As to what "their fair share" may be, who knows. One might think it would be roughly the same as their percentage of the total income in the country. I do know that (according to the IRS) in 2004 they paid
  • 36.89% of all income taxes, and made
  • 19% of the total income.
Meanwhile, the bottom 50% paid
  • 3.3% of all income taxes, and made
  • 13.4% of the total income
There's at least an argument that they pay their share already.