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Article Excerpt
INTRODUCTION
Many studies have documented the long-term trend of increasing income inequality in the U.S. economy. U.S. Census data, for example, show that the share of household income of the top 20 percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent. (1) Similarly, Piketty and Saez (2003,2007) found that the share of income of the top 10 percent of taxpayers increased from 31.7 percent in 1960 to 44.3 percent in 2005, while the share of the top I percent increased from 8.4 percent to 17.4 percent. Economists have suggested a variety of factors as possible explanations for these trends, including increased returns to skill and education, greater globalization of labor markets, the decline in unionization, increased immigration, increased reporting due to reductions in income tax rates, and changes in the supply of highly educated workers.
The increasing inequality of incomes is shown in Table 1, which provides illustrative statistics using the income tax data and measure of cash income used in this study. The table shows the income breaks for income quintiles and selected income percentiles of non-dependent taxpayers in 1987, 1996, and 2005, the time period included in this study. The ratios of the income cutoffs for the 20th, 40th and 60th percentiles to median income were virtually unchanged over this time period. While this ratio for the 80th percentile, the top quintile, increased by about 15 percent from 1.9 to 2.1, the ratios for the highest income classes increased considerably more. The cutoff-to-median income ratio for the top I percent increased by 67 percent from 7.4 to 11.7 and by 38 percent from 3.4 to 4.4 for the top 5 percent of taxpayers. Among taxpayers age 25 and over, the share of cash income of the top 1 percent rose from 11.3 percent in 1987 to 14.4 percent in 1996 and 19.3 percent in 2005.
Income mobility, the opportunity for lower income individuals to move up in the income distribution over time, is another important dimension of the distribution of income. Indeed, the opportunity for upward income mobility as a result of individual effort has sometimes been seen as a defining characteristic of the U.S. economy. (2) A recent survey (Pew Economic Mobility Survey, 2009, for example, showed that Americans view hard work (92 percent), having ambition (89 percent), and a quality K-12 education and staying healthy (tied at 83 percent) as essential or very important factors in contributing to a person's economic mobility. Economic historian Joseph Schumpeter compared income distribution and mobility to a hotel where some rooms are luxurious while others are small and shabby. The rooms are always occupied, but the occupants change over time. (3) Mobility means that over time people have opportunities to move between rooms. Fairness requires that those in the small rooms have an opportunity to move to a better one, and that the most luxurious rooms are not always occupied by the same people.
Others have likened income mobility to an escalator where the opportunity for mobility means that no matter which step a person starts on, he or she can move up. (4) With an escalator, while one can move ahead faster by walking up the steps, the movement of the escalator itself will carry the rider upward. That is, the real incomes of households can increase over time with the growth of the overall economy. (5) The extent to which households' incomes have risen over time with economic growth is another important dimension of income distribution.
The wider income gaps reported above could have the effect of reducing the opportunity for and extent of upward income mobility. Comparisons of snapshots of the income distribution at points in time, such as those in Table 1, however, do not measure the actual experiences of specific individuals or households and can therefore be misleading with respect to changes in the real incomes of individuals and households over time.
This study examines the income mobility of individuals over the last two decades using large panels of income tax returns that overcome many of the limitations of prior studies. The use of panel data means that the analysis tracks changes in the incomes of the same individual taxpayers over these time periods rather than comparing cross-sections at different points in time. The large size of the samples and oversampling of high-income returns increases the precision of estimates and allows analysis of the income dynamics of those with the highest incomes. While there are limitations in using tax return data, especially for the lowest income individuals, the use of tax return data generally provides more accurate measures of income and results in less attrition bias compared to most survey data. (6)
The analysis includes three alternative measures of income mobility that illustrate different aspects of income mobility. In addition, we present some preliminary analysis of the factors associated with income mobility, including initial income level, changes in marital and family status, entrepreneurship, and the role of life cycle factors. Key findings include:
* There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5 percent by one measure and 55 percent by another measure) moved to a different income quintile over this period. About half (56 percent by one measure and 42 percent by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.
* Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.
* The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.
* The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (19871996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.
* Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.
PRIOR STUDIES OF INCOME MOBILITY
Previous research on income mobility over the past several decades has generally found that about half of those in the bottom quintile move to a higher quintile and also that more than half of households move to a different income quintile within about 10 years. (7) Sawhill and Condon (1992), for example, used the Panel Study of Income Dynamics (PSID) to examine the mobility of individuals between the ages of 25-54 for the periods 1967-1976 and 1977-1986 relative to others in their sample. Using a measure of mobility that compares a fixed group of households over time, they found that over 60 percent of individuals were in a different income quintile a decade later. Among individuals initially in the lowest income quintile, 44 percent moved to a higher quintile between 1967-1976 and 47 percent moved to a higher quintile between 1977-1986. Downward mobility from the top quintile was experienced by 47 percent and 50 percent of individuals in the two periods, respectively. A later study by McMurrer and Sawhill (1996b) concluded that mobility rates had remained unchanged during this 20-year period.
Two studies by the U.S. Department of the Treasury (1992a, 1992b) examined income mobility using a panel that followed 14,351 taxpayers over the period from 1979-1988. (8) The first Treasury study found that 86 percent of taxpayers in the lowest income quintile in 1979 had moved to a higher quintile by 1988 and 15 percent of them had moved all the way to the top quintile. The unusually high degree of mobility reported by this study resulted from several methodological features of the analysis. (9) When the second Treasury study followed the Sawhill-Condon methodology by limiting the sample to taxpayers age 25-64 and comparing taxpayers within the panel rather than all taxpayers, the Treasury data showed that 50 percent of the lowest income quintile had moved to a higher quintile after 10 years. Thus, the results were similar to those of Sawhill and Condon when a similar methodology was used. Using an extended version of the panel, Carroll, Joulfaian, and Rider (2006) found that 54 percent of taxpayers age 30-44 and in the lowest quintile in 1979 had moved to a higher quintile by 1995, while 47 percent of those in the top quintile had moved down. When they subdivided the period into five or eight sub-periods, they found some evidence that mobility had declined in the later part of the period, although much of the decline seemed to reflect effects of the double-dip recession in the early 1980s.
Several recent studies have used PSID data to examine relative income mobility in the 1970s, 1980s, and 1990s. Bradbury and Katz (2002a, 2002b) found that about half of households in the bottom quintile moved out after 10 years (51 percent for 1969-1979, 50 percent for 1979-1989, and 47 percent for 1988-1998). They concluded that relative mobility declined slightly in the 1990s as 40 percent of households remained in the same income quintile, as compared to 36 percent in the 1970s and 37 percent in the 1980s. (10) They also showed that the income gaps widened over this period, which would make mobility across quintiles more difficult, and could have accounted for the small decline in relative income mobility. (11) Also using PSID data, Acs and Zimmerman (2008) found that intragenerational mobility of cohorts of individuals aged 25-44 was similar over the periods 1984-1994 and 1994-2004. In each period, about 60 percent changed income quintiles relative to their peers and about 47 percent of those initially in the lowest income quintile rose to higher quintiles. Hungerford (2008) found that in both the 1980s and 1990s, 47 percent of those in the lowest income quintile had moved to a higher income quintile by the end of the decade, but concluded that overall mobility declined in the 1990s.
INCOME MOBILITY--1996-2005
This study examines income mobility over the period from 1996-2005 using data from a large sample of individual income tax returns for these two years. While the income data are as reported on tax returns, the analysis includes both primary and secondary taxpayers who are each followed separately. Thus, if a married couple filed a joint tax return in 1996, divorced, and then filed separate tax returns in 2005, each person is followed separately, even if one or both of them appear as a secondary taxpayer on another tax return in 2005. To avoid counting transitions from school to work as mobility, the analysis follows the common practice in previous research of excluding taxpayers who were under age 25 in the beginning year. (12) The resulting panel includes a sample of approximately 107,000 tax returns with 175,800 primary and secondary (i.e., spouses on joint returns) taxpayers who filed for tax years 1996 and 2005. (13) The sample represents approximately 120 million taxpayers on 84 million income tax returns. Income is defined as cash income as reported on individual income tax returns and supplemented by data on Social Security benefits reported on information returns filed with the Internal Revenue Service (IRS). (14) To remove the effects of inflation, cash income is adjusted to 2005 dollars using the Consumer Price Index Current Methodology Series. Income is adjusted for family size by dividing by the square root of the number of members of the household. (15)
In order to provide a more complete picture of the different dimensions of income mobility, this section shows three alternative measures: two measures of relative income mobility and one measure of absolute income mobility. (16) Relative income mobility shows how the income of households changed over time relative to the incomes of other households, while absolute income mobility shows how the real incomes of households changed over time.
Taxpayers are grouped by income quintiles (the lowest 20 percent, the second 20 percent, etc.). Results for the top 1 percent, 5 percent, and 10 percent of the population are also reported. (17) The two measures of relative income mobility are illustrated using a transition matrix that shows the movement of individuals across the population quintiles and also into and out of the top income groups. For individuals in each income quintile in 1996, the transition matrix shows the percentages that end up in each income quintile in 2005. The measure of absolute income mobility groups taxpayers by income quintile in 1996 and shows the distribution of percentage changes in real income by 2005. The use of income quintiles and top income groups provides a relatively simple way to illustrate the extent of income mobility over time. Because of its simplicity, the approach has some limitations. For example, some taxpayers may have crossed a quintile income threshold by moving up or down only a few income centiles, while others could have moved as many as 19 income centiles without moving to another quintile. The extent of such cases cannot be seen in the transition matrix. Later sections of the paper, however, provide other measures of mobility that provide more nuanced perspectives.
The first measure of mobility shows how the incomes of taxpayers in each income group in 1996 changed relative to the incomes of all taxpayers in the comparable filing population in 2005 (Table 2). This measure likely represents the most common understanding of income mobility, moving up (or down) relative to the total population. The income thresholds in 1996 and 2005 for the income quintile groups in this measure are based on all non-dependent...
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