Striking it Richer: The Evolution of Top Incomes in the United States (Update with 2007 estimates)

Abstract

What's new for 2007?From 2006 to 2007, average real income per family grew by a solid 3.7 percent.Average real income for the top percentile grew faster (6.8 percent growth), further increasing the top percentile income share from 22.8 to 23.5 percent (Figure 2).Year 2007 is therefore the second highest year on record since 1913 almost equalling 1928, the record year when the top percentile share reached 23.9 percent (Figure 2).Even within the top percentile, the gains from 2006 to 2007 are extremely concentrated.The top .01%(top 14,988 US families, making at least $11.5m in 2007) share increased from 5.46% in 2006 to 6.04% in 2007 leaving well behind the 1928 peak of 5.04 percent (Figure 3).This shows that 2007 was an incredibly good year for the super rich.Year 2007 was actually also quite good for the bottom 99 percent of US families as their average income grew by 2.8 percent.This is the best annual increase since 1998.Real income growth for the bottom 99 percent had been very meagre during the Bush expansion starting in 2002.Even including 2007-a good year for ordinary US families-the top percentile captured 65 percent of total real income growth per family from 2002 to 2007 (Table 1). What will happen to income concentration next?The economic landscape has obviously changed dramatically since 2007 which marks the peak of Bush expansion.We know from National Account statistics that real incomes per family will fall in 2008 and 2009.Evidence from past recessions suggests that, in general, the top percentile income share falls during recessions, as business profits, realized capital gains, and stock option exercises fall faster than average income.Therefore, the most likely outcome is that income concentration will fall in 2008 and 2009.Based on the US historical record, falls in income concentration due to recessions are temporary unless drastic policy changes, such as financial regulation or significantly more progressive taxation, are implemented and prevent income concentration from bouncing back.Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration till the 1970s (Figures 2, 3).In contrast, recent

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