Revisiting the Composition of the 1%

by Dave Schuler on February 18, 2014

If you think that income inequality presents a problem due to the .1%, you’re in a pickle. The .1% of income earners, the highest 120,000 households, constitute the Bill Gateses, the Warren Buffetts, the Michael Jordans, and the Tiger Woodses. These are the super-rich. They’re the long tail of income earners and every society, including Soviet Russia and Communist China, have them. There is no imaginable policy that will reduce their incomes without destroying the economy along with it, decreasing the incomes of most the rest of the people. The best you can hope for is to stop subsidizing them, something I’ve advocated for decades.

The top 1% of income earners present a different kettle of wealthy fish. As of 2010 these were the households with incomes of $307,000 or more and, as of 2005, here’s who they are:

According to research on individual tax returns in 2004 and 2005 by Jon Bakija of Williams College, Adam Cole of the Treasury Department and Bradley T. Heim of Indiana University, the top 1% consists primarily of salaried executives at nonfinancial businesses (30%) and secondarily of doctors (14%), people working in finance (13%) and lawyers (8%). Among the “super rich” in the top 0.1% (about 110,000 households), the distribution still favors business executives (41%) over people in finance (18%).

Bringing the outlandishly high compensation paid to management of publicly-held companies will require reforms in corporate governance. That’s something that Stephen Bainbridge posts about nearly every day and he’s provided some suggestions for reform. My own pet solution would be enforcing and expanding the Clayton Act, something that’s fallen into neglect and disrepair. For example, I would strictly limit the number of corporate boards of directors on which a single individual may sit. Membership in scores of boards of directors, a commonplace today, is so rife with potential for abuse that I think it’s inevitable.

Note that the statistics quoted above are from before the financial crisis and Great Recession. I would be willing to bet a shiny new dime that the percentages among top 1% have changed since then with, incredibly, a higher proportion in banking and finance, more among physicians, and fewer among business executives. But I’d really like to see an analysis.

I also suspect that the top .1% of income earners have become significantly wealthier since then but that’s a different subject.

Returning to the point at which I began this post, if you’re concerned about income inequality, a good place to start is by defining the scope of your concern. Are you concerned about the top .1% or the top 1%?

As I’ve said any number of times before my greatest concern is with the top 1% who derive much of their income from government in one way or another. My preferred strategy for reducing income inequality is restricting the growth in the number of new poor, mostly by exerting some control over immigration, and trimming subsidies that go mostly to the highest income earners. If your concern is with the top .1% and you want to increase income equality via the tax system, I’d really like to see your plan.

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