Steven Horwitz

Robert Carroll of the Tax Foundation has written a new piece entitled "Income Mobility and the Persistence Of Millionaires, 1999 to 2007" that uses a set of household tax returns from those years to look at income mobility with a particular emphasis on the mobility of millionaires. I'll bullet some key findings then add a few comments below.

Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more.

Of those taxpayer households in the highest quintile in 1999, 37.7% fell at least one quintile, with 14.4% falling two quintiles or more.

Of those in the top 1% in 1999, only 44.6% were still there in 2007.

Looking at households with earnings (in a very inclusive measure that includes things like capital gains) of $1,000,000 or more in any year over that period, Carroll finds:

"In all, over the 1999 through 2007 period, about 675,000 taxpayers earned over a $1 million for at least one year. Of these taxpayers, about 338,000 (50 percent) were a millionaire in only one year, while just 38,000 (6 percent) remained a millionaire in all nine years. Based on these results, it is clear that taxpayers move in and out of millionaire status with great frequency."



"What we want to find out is whether the fraction of transitory millionaires fell by more than the total number of millionaires once capital gains is excluded. What Figure 2 and 3 tell us is that while the total number of millionaires fell by about 36 percent, the number of one-year millionaires fell much more, by nearly 50 percent to 175,000. This tells us that realizing capital gains income helps explain why many taxpayers move up to millionaire status for just one year."

Carroll's results on overall mobility are right in line with the typical results found in the literature in recent years. (The results found by Cox and Alm and in a prior US Treasury data set, both covering the 1980s, show dramatically more mobility but have also been highly criticized on methodological grounds.) So despite the increase in "static inequality" shown by the increased percentage of income earned by the top earners over the last decade, there appears to be no effect on income mobility.

Carroll uses a nice analogy from Schumpeter that I'd never heard before: the distribution of income is like a hotel with some really fancy rooms on the top floors and some very basic ones on the bottom. All the rooms are always full, but who occupies which rooms changes from year to year.

If one wants to stretch the analogy a bit more, it's also the case that each year brings a new upgrade to every room. What constitutes a "basic" room gets slightly more luxurious each year as standards of living rise, and the same is true on other floors. It might be the case that the upgrades to the top floor rooms are proportionally greater than those to the basic and middle floor rooms, but given that the occupants of the rooms switch around from year to year, those greater improvements at the top are still consistent with improvements in the absolute standard of living for many.

And to take the analogy even further: if we account for immigration and other new entrants to the labor force, it's as if the hotel keeps adding rooms/floors on each year at the lower/basic level, enabling everyone else to potentially keep moving up (assuming that some occupants die or leave the country!).

The bottom line is that income mobility is alive and well and seems pretty consistent regardless of who is president or who controls Congress. The underlying market processes appear to be doing well at enabling a majority of those who start out poor to move up the income ladder within a decade or less. And when one combines Carroll's research with the "Good Old Days are Now" work on the dramatic declines in the real cost of most goods, the increased ability of those in the lower quintile to have them in their homes and the ongoing increase in quality of most goods, it is clear that despite a government that is way too big, the standard of living and the opportunities for poor Americans continue to improve.

As good as these results are, allow me to steal from a favorite source of mine and say "just think what we might do" if those market processes were even freer to work their magic.