Income Mobility in the Top 1 Percent

 The provided sources highlight several key findings regarding the mobility of the top one percent in the United States, emphasizing that this group is characterized by significant and persistent "circulation" rather than being a static elite.

High Rates of Circulation and Exit

The primary finding is that the composition of the top one percent changes rapidly. On average, one-third of those in the top one percent exit the group after just one year, and two-thirds are no longer in that top group after a decade. This phenomenon is even more pronounced at the extreme top of the distribution:

• Top 0.1%: Approximately 76% of individuals exit this group within a decade.
• Top 0.001%: The ten-year exit rate reaches 82%.
• Top 400: While some taxpayers persist at this level, the median tenure among the 400 highest tax returns is only one year.

Impact on Income Inequality Measures

This mobility directly affects how researchers measure and interpret income inequality. When shifting from single-year "snapshots" to multi-year measures that account for this variability:

• Lower Inequality Levels: Top income shares are considerably lower when evaluated over longer time horizons. For instance, two-decade mobility reduces recent top 1% fiscal income shares by over 10%.
• Reduced Growth Trends: Accounting for income variability over 11 years reduces the observed growth of top 1% income shares over the last quarter-century by nearly one-fifth.
• Extreme Concentration: The reduction is most significant at the highest tiers; two-decade mobility reduces top 0.001% shares by 40%.

Sources of Income Mobility

The sources distinguish between "rentiers" (capital income) and "entrepreneurs" (passthrough business and labor earnings) to identify what drives these fluctuations.

• Entrepreneurial Drive: The long-run increase in income variability among the top 1% is almost entirely attributable to entrepreneurial income.
• Passthrough Businesses: Highly volatile passthrough business income (from S corporations, partnerships, and sole proprietorships) explains about two-thirds of the increase in top 1% variability. This reflects entrepreneurs frequently circulating into and out of top annual income groups.

Comparative and Contextual Findings

• International Context: Top income mobility in the United States is higher than in many other developed countries, including Germany, the United Kingdom, Canada, and Australia.
• Wealth Inequality: The effects of variability on wealth inequality are similar in magnitude but more modest as a share of total wealth. Long-run top one percent wealth shares are estimated to be 3 percentage points lower than standard annual measures when using multi-year data.
• Stability of Life Events: The sources of these exits have remained relatively stable over time; for example, roughly 7% of one-decade exits are linked to "divorce" (status changes) and 20% to labor force exits like retirement.

The high degree of mobility among the top one percent—characterized by a constant "circulation" of individuals—has a significant downward impact on standard measures of income and wealth inequality,,. Because annual "snapshot" estimates do not account for individuals moving into and out of the top tiers, they often overstate long-term concentration levels,,.

Reductions in Measured Income Shares

When shifting from single-year cross-sections to multi-year income measures that account for this mobility, top income shares are considerably lower,,. The impact of accounting for mobility increases as the income group becomes more exclusive:

• Top 1%: Intragenerational mobility over two decades reduces recent top 1% fiscal income shares by approximately 12 to 15 percent,,.
• Top 0.1%: Two-decade mobility reduces these shares by over 20 percent,,.
• Top 0.01%: The reduction reaches 30 percent,,.
• Top 0.001%: The most extreme tier sees a 40 percent reduction in its share when evaluated over a long-run horizon,,.

Impact on Inequality Trends

Beyond reducing the perceived level of inequality, mobility also changes the observed trend of rising concentration,. Accounting for income variability over an 11-year period reduces the growth of the top 1% fiscal income share over the last quarter-century by nearly one-fifth,. Researchers estimate that between 1989 and 2017, income variability alone accounted for 16 to 21 percent of the total growth in annual top 1% income shares,.

Sensitivity to Income and Wealth Definitions

The magnitude of this impact depends on the definitions used:

• Broad vs. Fiscal Income: The effect of variability is smaller when using a "broad income" measure (which includes corporate retained earnings and employer-paid benefits) than when using "fiscal income" (based strictly on tax returns),. Variability reduces top 1% broad income shares by about two-thirds of the amount it reduces fiscal income shares,.
• Wealth Inequality: While multi-year wealth measures are also lower than single-year measures, the proportional effect is more modest,. Long-run top 1% wealth shares are estimated to be 3 percentage points lower than annual measures, representing about a 9 percent reduction in wealth inequality—roughly half the proportional impact seen for fiscal income,,.

Conceptual Significance

These findings suggest that multi-year measures more accurately reflect long-run consumption ability than annual snapshots. The sources argue that the increase in top-level inequality is partially driven by increased income volatility, particularly from volatile passthrough business income, which causes entrepreneurs to cycle in and out of the top groups rather than remaining a permanent, static elite,,.

According to the sources, the significant variability and mobility observed within the top one percent are primarily driven by entrepreneurial income rather than capital income. The sources divide the economic elite into two categories: entrepreneurs (whose income comes from passthrough businesses and labor earnings) and rentiers (who rely on capital income like dividends, interest, and capital gains).

The key findings regarding the sources of this variability include:

The Dominance of Entrepreneurial Income

The long-run increase in income variability among the top 1% is almost entirely attributable to entrepreneurial income.

• Passthrough Business Income: Income from S corporations, partnerships, and sole proprietorships is highly volatile. It explains approximately two-thirds of the increase in top 1% income variability.
• Wages: Wage variability accounts for about three-tenths of the increase. This is partly because top wages have become increasingly dependent on passthrough business profits.

The Role of Tax Reform

The Tax Reform Act of 1986 (TRA86) is identified as a major catalyst for increased variability.

• Shift in Business Structure: TRA86 lowered the top individual tax rate below the corporate rate, prompting a shift away from C corporations toward passthrough entities.
• Increased Reporting: This compositional shift meant that more business income—and its inherent volatility—began appearing on individual tax returns.
• Loss Limitations: New limitations on deducting passive investment and rental losses after 1986 also made reported passthrough net profits appear more variable.

Capital Income Trends

In contrast to entrepreneurial income, capital income has had a much smaller or even offsetting effect on variability.

• Capital Gains: Increases in the variability of capital gains had only a minor impact on the overall trend.
• Dividends and Interest: Variability in dividends and interest actually declined, modestly offsetting the increases seen in other income sources.

Impact of Income Definitions

The source of variability is also sensitive to how income is defined. When using a "broad income" measure (which replaces volatile realized capital gains with more stable corporate retained earnings), the measured variability of the top 1% decreases by about one-third. This is because much of the corporate retained earnings are tied to retirement savings, which are more equally distributed and less volatile than the direct capital income reported on tax returns.

The methodology used in the sources to analyze the income mobility of the top one percent centers on the use of longitudinal tax panel data to track the same individuals over decades, rather than relying on the single-year snapshots common in most inequality research.

Data Sources and Sampling

The researchers utilize three primary sets of U.S. individual income tax returns to provide a historical perspective spanning over 50 years:

• The 1973-Centered Panel: A stratified sample with significant oversampling of high-income returns.
• Continuous Work History Sample (CWHS): A random sample since 1979 based on the last four digits of Taxpayer Identification Numbers (TINs).
• The Large Panel: A five-percent sample of TINs starting in 1999 that includes both filers and non-filers, allowing for analysis of extremely small groups like the top 0.001%.

By using random sampling, this methodology addresses sampling biases found in previous studies where individuals with income losses often dropped out of panels due to changing sampling probabilities.

Sample Inclusion Criteria

To ensure the data reflects a stable population and accounts for periodic non-filers:

• Age: All individuals must be at least 20 years old throughout the multi-year period.
• Filing Frequency: Participants must file tax returns with a minimum frequency (e.g., at least seven times in a 21-year period) to be included.
• Non-filer Allocation: Those who do not file in a specific year are allocated an income equal to 20 percent of the average filer income for that year, a figure validated by information returns from the population of non-filers.

Income Definitions

The study compares two primary income measures:

• Fiscal Income: This is the main measure, defined as Adjusted Gross Income (AGI) plus adjustments, minus taxable unemployment and Social Security benefits. It includes taxable realized capital gains to maintain comparability with previous research.
• Broad Market Income: Used for sensitivity testing, this measure includes components missing from tax returns, such as corporate retained earnings, tax-exempt interest, and employer-paid insurance.

Measuring Variability and Mobility

The core of the methodology is the Variability Equation, which defines mobility as the difference between annual and multi-year top income shares:

Variability = TopShare(Annual) – TopShare(Multi-year)

TopShare(Annual) is the average of annual top shares over a period, while TopShare(Multi-year) ranks individuals based on their average income over that entire period. The difference, or "variability," identifies how much of measured inequality is due to individuals re-ranking or moving into and out of the top group.

Wealth Estimation Methodology

The researchers extend the gross capitalization approach to wealth inequality. Traditionally, this method capitalizes annual capital income to estimate wealth. This study innovates by capitalizing multi-year averages of income, which helps control for idiosyncratic year-to-year fluctuations in the rate of return rather than actual changes in underlying wealth.