papers by: 1. brian murphy, sylvie michaud & michael wolfson (mmw) – statistics canada
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1. Income Trajectories of High Income Canadians 1982-2005 2. 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 Canada - PowerPoint PPT PresentationTRANSCRIPT
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?