"significant income mobility from 1996 to 2005"

From Mark Perry of "Carpe Diem."

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In a recent article titled “Why President Obama Is Wrong on Inequality,” Reason science correspondent Ron Bailey points to an interesting 2009 article by two economists from the Office of Tax Analysis (U.S. Treasury) that compares US income mobility in two periods, 1987 to 1996 and 1996 to 2005. Here’s the abstract of the article “Income Mobility in the United States: New Evidence from Income Tax Data“:

While many studies have documented the long–term trend of increasing income inequality in the U.S. economy, there has been less focus on income mobility and the potential opportunity for upward mobility. Data from panels of individual income tax returns suggest that there was considerable income mobility in the U.S. economy over the 1987–1996 and 1996–2005 periods. Consistent with prior mobility studies, the data show that over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period. By contrast, those with the very highest incomes in the base year were more likely to drop to a lower income group and the median real income of these taxpayers declined in each period. Economic growth resulted in rising incomes for most taxpayers over both time periods. Initial position in the income distribution and changes in marital status were found to be associated with the largest upward or downward movements through the income distribution.

The authors analyzed 84 million federal income tax returns for 120 million taxpayers who had taxable income in both 1996 and 2005 to assess the degree of income mobility over the decade from the mid-1990s to the mid-2000s. The two charts above display some of the authors’ key findings on the high degree of income mobility for US taxpayers between 1996 – 2005, taken from Table 2 of their paper and summarized below for various income quintiles and income groups:

1. More than 56% of taxpayers (100% – 43.7%) in the lowest income quintile in 1996 had moved to a higher quintile by 2005 (see arrow in top row of the top chart above), with about half of those upwardly mobile low-quintile taxpayers (28.8%) moving up to the second quintile, while nearly as many (27.4%) moved up two or more quintiles, and 4.5% of the low-income quintile taxpayers in 1996 moved to the highest quintile within a decade.

2. For taxpayers in the second quintile in 1996, more than three times as many moved up to a higher quintile (54.4%) in 2005 than moved down to the lowest quintile (15.3%), see top chart above.
3. Middle-income taxpayers were also quite mobile across income groups -  68.2% were in a different quintile in 2005 than in 1996 and only 31.8% stayed in the middle-income quintile (see top chart above). During the decade, more than twice as many middle-income taxpayers moved to a higher income quintile (47.2%), than moved to a lower income quintile (20.9%).

4. While taxpayers in the top quintile in 1996 had a fairly high probability of being in the same quintile in 2006 (69.1%), almost one-third (30.9%) had dropped down to a lower quintile, and 2.6% dropped all the way to the bottom quintile.

5. The bottom chart above displays data for the top three highest income categories for US taxpayers: the top 10%, top 5% and top 1%.  For the top 1% of US taxpayers in 1996, more than half (58.5%) had dropped to a lower income group by 2005, although most (87.8%) remained in the top income quintile in 2005.

Based on Item 5, the authors make a key point (emphasis added):

This statistic illustrates that the top income groups as measured by a single year of income often include a large share of individuals or households whose income is only temporarily high. Put differently, more than half of the households in the top 1 percent in 2005 were not there nine years earlier. Thus, while the share of income of the top 1 percent is higher than in prior years, it is not a fixed group of households receiving this larger share of income every year.

Further, the authors compare income mobility over two periods: a) 1987 to 1996 and b) 1996 to 2005, and found that income mobility was approximately the same for almost all income groups during the two time periods.

Here are the paper’s key findings from the conclusion:

There was considerable income mobility of individuals in the U.S. economy during the 1996–2005 period, and that the degree of relative income mobility among income groups is roughly unchanged from the prior comparable period (1987–1996). The analysis found that more than half of taxpayers moved to a different income quintile between 1996–2005. About half of those taxpayers in the bottom income quintile in 1996 moved to a higher income group by 2005. The analysis also found that the composition of the very top income groups changes dramatically over time. Less than half of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one–fourth of individuals in the top 0.01 percent in 1996 remained in that group in 2005.

Bottom Line: The dynamism of the US economy is generally under-appreciated, and the significant income mobility documented above receives almost no attention from those complaining about income inequality and stagnant household incomes. Contrary to prevailing public opinion that Americans get stuck at a given low-income level for decades or generations, the empirical evidence summarized above tells us that there is significant movement up and down the economic ladder over even very short periods of time, like one decade.

Many of today’s low-income households will rise to become tomorrow’s high-income households, and some will even eventually be in the “top 10%” or “top 1%.”And many of today’s “top 1%” or top income quintile taxpayers are tomorrow’s middle or lower class households, reflecting the significant upward and downward mobility in the dynamic US labor market – an important point in any discussion about the alleged problem of rising income inequality.

Finally, consider these words of wisdom from Thomas Sowell, who offers this key insight on income mobility (emphasis added):

Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a “problem” for which a “solution” is necessary. They have created a powerful vision of “classes” with “disparities” and “inequities” in income, caused by “barriers” created by “society.” But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the “barriers” assumed by many, if not most, of the intelligentsia."