1. Income Trajectories of High Income Canadians 1982-20052. The Income-Wealth Paradox: Connections between Realized Income and Wealth Among America’s Aging Top Wealth-holders

Papers by:1. Brian Murphy, Sylvie Michaud & Michael Wolfson (MMW)

– Statistics Canada2. Barry Johnson, Kevin Moore, Lisa Schreiber, (JMS)

- Statistics of Income, IRS & Federal Reserve

Comments by: Lars Osberg

Economics Department, Dalhousie University

“Reports from the New Frontier” Data Epochs in Income Distribution Analysis

1. pre-1975 Macro-shares, Cross-sections, Paper Tables

2. 1975 + Computers + micro-data from sample surveys

enabled disaggregation & hypothesis testing Explosion of labour economics research OK for ‘Middle 90%’ – but tails ignored !!

3. 2000 + Income tax data used to examine top end

Large samples enable examination of top tail (1% +) Piketty, Saez, Atkinson & Piketty, Saez & Veall

In Anglo countries – essentially all the change in income distribution has been in share of top 1%

‘Pulling Away’ of elite incomes – huge social issue

MMW: What income dynamics underlie the exploding income share of top 1%?

Canadian taxable incomes 1982-2005: “ growth is largely limited to the top 5% which

in turn has been driven largely by increases to the incomes of the top 1%”

Is this “more reward for more risk”? More variability in elite incomes?

No – decline in income mobility post 1995

Are income trajectories steeper? Less permanent income inequality?

No

Methodology

Longitudinal Administrative Databank (LAD) at Statistics Canada. 20% longitudinally linked sample of income tax

records from 1982 - 2005. 4.8 million filers in 2006. based on individuals filing tax return

1982 - 78% of Canadians age 15 + 2005 - almost 90%.

Female LF participation 52% -> 62% Tax credits – GST 1986; CCTB 1992

Total Money Income of Individual tax filers Total income for tax purposes adjusted to

include actual K gains & dividends 1994 – end of lifetime $100K exemption prompts spike

in K gains realizations LO: Omits social assistance payments @ bottom end

Absolute difference in income shares 1982 to 2005

“rise in income shares is dominated by a large growth concentrated mostly in the top 1% of the distribution” “almost half of the entire increase in

the top 5% was due to the top 0.1% of filers”

Absolute Change in Income Shares for Various Total Income Quantiles Between 1982 and 2005

0.1% 0.2%

-0.3% -0.5%-0.7%

-0.9% -1.1% -1.2%-1.5%

-1.8%-2.2%

6.5%6.5%

1.1%

5.5%

2.5%2.9%

1.8%

1.2%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1 2 3 4 5 6 7 8 9 10

11

12

13

14

15

16

17

18

19

20 All

Tri

mm

ed

All

Tri

mm

ed

All

Tri

mm

ed

To

p .

01

Vingtiles Top5

Top1

Top.1

Top.01

Total Income Quantile Group

Ab

so

lute

Ch

an

ge

in

In

co

me

Sh

are

Source: Statistics Canada, Special Tabulations from the LAD.

Changes in real income- far larger in top percentiles Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

Percentage Change in Real Income 1982 to 2004

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

20%to

25%

25%to

30%

30%to

35%

35%to

40%

40%to

45%

45%to

50%

50%to

55%

55%to

60%

60%to

65%

65%to

70%

70%to

75%

75%to

80%

80%to

85%

85%to

90%

90%to

95%

95 to99%

top 1%

Individual % change

Family % change

“Of all filers who made it to the top 5% in any given year, what part of the income distribution did they come from the year before?”

75% - 80% of the top 5% were in same top 5% in previous year 92% from top decile

“quite recently .. increase in the proportion of top 5 % filers staying put”

Correspondingly low percentages of lower deciles moving into top 5%

Distribution of the top vingtile, by income group from the previous year

Source: Statistics Canada, Special Tabulations from the LAD.

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

Per

cent

of

Gro

up in

Top

5

Top 001

Top 01

Top 1

Top 5

90-95

Percentage of tax filers in the nine lowest deciles who moved in the highest vingtile the next year

Source: Statistics Canada, Special Tabulations from the LAD.

0%

1%

2%

3%

4%

5%

6%

7%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

Per

cent

of g

roup

in to

p 5

85-9080-8570-8050-7010-500-10

What % of tax filers were ever in top x% of tax filers in previous 5 years?

top 20%, 10%, 5%, 1% and 0.1% Ratio computed

Complete Immobility implies 20/20 = 1; 10/10 = 1, 5/5 =1 …..

Complete Mobility implies new group in all years – ratio = 5

Higher quantiles are also smaller – greater variability but smaller target!

Declining mobility since 1991-95

Experience of High Income Over 5 Year Periods – Present in at Least One Year

0%

50%

100%

150%

200%

250%

300%

350%

Top 20 Top 10 Top 5 Top 1 Top 0.1

Ever

82-86 86-90 91-95 96-00 01-05

Source: Statistics Canada, Special Tabulations from the LAD.

What % of tax filers were always in top x% of tax filers in previous 5 years?

top 20%, 10%, 5%, 1% and 0.1% Ratio computed

Complete Immobility implies 20/20 = 1; 10/10 = 1, 5/5 =1 …..

Complete Mobility implies new group in all years – zero % always there

Rising Immobility since 1991-95

Experience of High Income Over 5 Year Periods – Present in All Years

Source: Statistics Canada, Special Tabulations from the LAD.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Top 20 Top 10 Top 5 Top 1 Top 0.1

Always

82-86 86-90 91-95 96-00 01-05

Individual Income Variability in 8 year Panels

Decomposing annual income into trend level of permanent income & deviation from trend Method A

Method B

1

4

MedFLogMedLLog

EXPTrend

uy iiiit log

Method A Trend Indicator by Permanent Income Quantile and 8-year Panel

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0-10 10-25 25-50 50-75 75-90 90-95 95-99 Trimmedtop 1

Trimmedtop 01

Top 001

1984-1991 1988-1995 1990-1997 1994-2001 1998-2005

Source: Statistics Canada, Special Tabulations from the LAD.

Method A Variability Indicator by Permanent Income Quantile and 8-year Panel

Source: Statistics Canada, Special Tabulations from the LAD.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0-10 10-25 25-50 50-75 75-90 90-95 95-99 Trimmedtop 1

Trimmedtop 01

Top 001

1984-1991 1988-1995 1990-1997 1994-2001 1998-2005

Method B Trend Indicator by Permanent Income Quantile and 8-year Panel

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0-10 10-25 25-50 50-75 75-90 90-95 95-99 Trimmedtop 1

Trimmedtop 01

Top 001

1984-1991 1988-1995 1990-1997 1994-2001 1998-2005

Source: Statistics Canada, Special Tabulations from the LAD.

Method B Variability Indicator by Permanent Income Quantile and 8-year Panel

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0-10 10-25 25-50 50-75 75-90 90-95 95-99 Trimmedtop 1

Trimmedtop 01

Top 001

1984-1991 1988-1995 1990-1997 1994-2001 1998-2005

Source: Statistics Canada, Special Tabulations from the LAD.

Trend & Variability

Much greater income variability at the bottom LO: Rising Economic Insecurity for poor

Increased by cuts to UI/EI post 1995 But income tax data misses Social Assistance Does an 8 year segment really capture

‘permanent income’ ? E.g. youth entry phase? Retirement transition?

No selection on age – but 6+ years missing data implies observation is dropped

Declining Income Variability at top

Summary

“growth is largely limited to the top 5% which in turn has been driven largely by increases to the incomes of the top 1%”

“marginal increase in the stability of the high income population” on a year-over-year basis over longer periods of time more variability in the lower part of the

distribution than in the 95%-99% general decrease in the variability of income

No Evidence for: “Greater Returns for Greater Risk” Ho

JMS: What’s the Income/Wealth relationship at the top ?

Longitudinal panel of U.S. income tax data linked to wealth data reported on U.S. estate tax returns filed for wealthy decedents – investigate: changes in the composition of realized income

over time asset management strategies by elite relationship between income and end of life

wealth Problem:

Individual and Joint Tax-filing possible in US – implies ambiguous & changing reporting unit

LO: What Hypothesis is being examined?

Data

Source: Federal Estate Tax Return, Form 706

gross assets filing threshold ranged from $600,000 in in 1994 to $1.5 million in 2004

5,164 decedents whose gross estates at death ≥ $1 M (2003$) and Form 1040 filed in last year

matched to

Individual Income Tax Returns (Form 1040) 72,373 income tax returns 1987 – 2003 Individual & Joint Returns

32.4% change filing status within 9 years pre-death

This paper - filers with constant filing status for the 7 years prior to death & ≥ $1M ( 2003 $) wealth.

“The panel aspect of the FPDD provides insight into how total income and various components change as filers age and near death. Since the data also contain information on estate tax filings, we can examine if the changes in income prior to death vary by wealth at the end of life.”

Portfolio Variability at death

JMS: Conclusions Wealthiest U.S. decedents ($1M+ in 2003)

above 95th percentile in U.S. distribution of income. Volatile incomes in the years leading up to death

due to market fluctuations, tax-planning and spending needs income composed primarily of taxable and non-taxable

investment income Wage income & income from non-financial assets relatively small portfolios heavily weighted toward financial assets, especially for those

in highest wealth category. (For whom stocks = almost 50% of wealth)

Controlled a significant share of U.S. total wealth at death. contrast to life cycle models of savings, do not appear to be

consuming out of savings, income shifting, moving investments from taxable income

producing assets to those that generate non-taxable interest, which consequently means moving from high to low rate of return

Popular measures of well being that focus only on income may significantly understate the ability to consume of the wealthiest individuals in the U.S.

LO Comments Years before death used to analyze portfolios & incomes

Did they see it coming? Why does it affect behavior?

AGE is not used as a variable !! Some of sample is 65+, some not

Expect different income sources & portfolios Expect different variability

JMS: Each observation - uniform weight Estate Multiplier Method thinks of death as The Grim Reaper’s

probabilistic sampler from the population PM = f( age, sex, etc.) Sample weight = 1/ PM

Year specific impacts on assets & incomes not mentioned Dot-Com boom & bust in stock market? Recession?

What hypothesis is being examined? Theoretical framework could guide empirical choices Any charitable bequest or redeeming social values apparent?