Income Inequality Decreased Significantly in 2013

October 28, 2015

The top 1% of American households made a smaller share of national income in 2013 than 2012, according to new statistics from the IRS. Overall, the recently released statistics show a more equal income distribution in 2013 than the year before.

In 2013, the 1% highest-income households earned 19.04 percent of all adjusted gross income reported on tax returns. This figure is down from 2012, when the top 1% of households earned 21.86 percent of adjusted gross income. Overall, the share of income earned by the top 1% of households shrunk by roughly 13 percent in 2013.

Looking at figures from other income groups, it is clear that income inequality decreased across the board in 2013. The top 0.1 percent of households saw their share of income shrink from 11.25 percent in 2012 to 9.03 percent in 2013; the top 0.01 percent of households saw their share of income shrink from 5.55 percent to 4.26 percent. Meanwhile, the bottom 95 percent of households saw their share of income increase from 63.16 percent to 65.58 percent.

Share of Adjusted Gross Income, by Income Group, 2012-2013

Top 0.001%

Top 0.01%

Top 0.1%

Top 1%

Top 2%

Top 5%

Top 10%

Top 20%

Top 50%

2012

2.42%

5.55%

11.25%

21.86%

27.06%

36.84%

47.87%

63.30%

88.90%

2013

1.87%

4.26%

9.03%

19.04%

24.31%

34.42%

45.87%

61.90%

88.51%

In general, income inequality is lower today than it was before the Great Recession. In 2006, the top 1% of households earned 22.10 percent of national income, over three percentage points higher than their share in 2013.

It is important to note that the statistics presented above are likely distorted by unusual income reporting behavior in 2012. Specifically, capital gains realizations spiked in 2012, as investors rushed to realize their gains before rates increased in 2013. This means that income reported to the IRS by wealthy individuals looked unusually high in 2012, and income share figures were bound to be lower in 2013. Based on a back-of-the-envelope calculation, I suspect that inflated capital gains realizations in 2012 account for the majority of the apparent drop in inequality in 2013. Put another way, income in America looked artificially unequal in 2012, because of increased capital gains realizations.

On the other hand, changes in the federal tax law likely led to even lower inequality than shown in the figures above. As we detailed a few weeks ago, taxes on the rich rose significantly in 2013, a trend that is also reflected in the recently released percentile data. According to the new figures, in 2013, the top 1% of households faced an average tax rate of 27.08 percent, up from 22.83 percent in 2012. Because the IRS figures presented above represent each group’s share of pre-tax income, the share of after-tax income received by the 1% likely fell by an even greater amount between 2012 and 2013.

A caveat: none of the above statistics should be taken too seriously, as accurate measures of income inequality in the United States. IRS data is collected in order to raise revenue, not to measure social trends. Several factors make IRS data an unreliable source for measuring inequality, including incomplete data about capital gains realizations (as noted above), regional differences in cost of living, and lack of correction for household size.


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