Selective Income Statistics

Alan Reynolds writes in The Wall Street Journal, Tax Rates, Inequality and the 1%, 12/6/11.

Excerpt:

A recent report from the Congressional Budget Office (CB0) says, “The share of income received by the top 1% grew from about 8% in 1979 to over 17% in 2007.”

But here’s a question: Why did the report stop at 2007? The CBO didn’t say, although its report briefly acknowledged—in a footnote—that “high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009.”

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top. Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce “inequality.” Of course, the same recessions also increase poverty and unemployment.

The latest cyclical destruction of top incomes has been unusually deep and persistent, because fully 43.7% of top earners’ incomes in 2007 were from capital gains, dividends and interest, with another 17.1% from small business. Since 2007, capital gains on stocks and real estate have often turned to losses, dividends on financial stocks were slashed, interest income nearly disappeared, and many small businesses remain unprofitable.

HKO comments:

Alan Reynolds has written extensively on the data relevant to income distribution. Income and Wealth, written in 2005 is an excellent and very readable explanation of the data and a refutation of many distortions that have been so commonly repeated that they still pose as fact.  You will find posts from his book and subsequent articles throughout this blog by putting his name in the search block.