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A Closer Look at Growing Income Inequality

by | Aug 29, 2016 | Other

Increasing income inequality is not only offensive from a fairness perspective, but is also a persistent cause of lackluster economic growth. Last month, a North Star article documented the growing extent of income inequality in Minnesota. Data from the long series of Minnesota Tax Incidence Studies (MTIS) allows us to examine trends in Minnesota income inequality over the last quarter century at a more detailed level than is possible using data from other sources. Furthermore, data from the most recent MTIS can be used to examine projected income inequality in 2017.

The MTIS has been published by the Minnesota Department of Revenue (DOR) in odd-numbered years since 1991. The first MTIS was based on data from 1988. While the most common use of the MTIS is to examine the level of state and local taxes paid by Minnesotans in different income groups, the report is also a valuable source of information on changes in the degree of income inequality over time, providing periodic snapshots of the income distribution at two year intervals during the period from 1988 to 2012, with projected data for 2017. The definition of income used in the MTIS is based on a comprehensive measure of money income; while this definition has been modified somewhat since 1991, these changes have been fairly small and do not undermine comparisons over time.

The MTIS groups households into ten groups of equal size known as “deciles,” ranging from the first decile (the ten percent of households with the lowest income) to the tenth (the ten percent of households with the highest income). The tenth decile is further broken down into three groups: the top one percent, the next four percent (i.e., the top half of the tenth decile excluding the top one percent), and the next five percent (i.e., the bottom half of the tenth decile). The table below shows the income range for each of these groups based on 2012 data from the MTIS.

Y table

From 1988 to 2012, the share of total Minnesota income has declined within every income decile except for the first and the tenth. The growth in the share of income accruing to the first decile was tiny (0.1 percent); furthermore, interpretation of data for the first decile is problematic, due to data anomalies described in the MTIS. Only the tenth decile saw appreciable growth in the concentration of statewide income from 1988 to 2012; over this period, tenth decile income rose from 36.7 percent of the state total to 43.7 percent—a clear indication of growing income inequality.

Share of total statewide income accruing to the bottom half of the tenth decile increased by only 0.2 percent from 1988 to 2012. Nearly all of the 7.0 percent growth in the tenth decile’s share of income occurred within the top half of the tenth decile, consisting of households with a 2012 income in excess of $201,567. The share of statewide income for this group grew from 25.9 percent in 1988 to 32.7 percent in 2012. Furthermore, most of this 6.8 percent growth in the statewide share of income was concentrated in the top one percent of households with 2012 incomes in excess of $493,603. Among the top one percent, the share of statewide income increased from 13.0 percent to 17.5 percent over this 24 year period—yet further proof that income concentration is a trend primarily benefiting the very highest income Minnesotans.

Y areaAn examination of the above chart reveals that the growth in income concentration among the highest income households did not proceed at a uniform pace from 1988 to 2012. During recessions, the share of statewide income accruing to high income households dipped modestly, as was the case in the aftermath of the 1991 recession and the Great Recession of 2007-09, or more significantly, as was the case in the aftermath of the 2001 recession. These declines in the share of income concentrated at the top were likely the result of reduced capital gains realizations, related to a drop in stock prices. Because the income of high income households is more heavily concentrated in capital gains realizations, these households are more adversely affected by a decline in these realizations.

While the share of income concentrated at the top may have declined during and immediately after a recession, this loss was more than recouped by the highest income households during the subsequent recoveries. By comparing similar points in the business cycle (e.g., from peak to peak or from trough to trough), we see a steady increase in the share of statewide income concentrated at the very top. While recessions may interrupt the growth of income concentration, they have not reversed the long term trend.

Because this analysis is based on data from the MTIS, information for years prior to 1988 is not included. However, data from other sources reveal that income concentration in Minnesota has been increasing since the late 1970s.

Based on MTIS projections for 2017, the concentration of income at the very top will continue to increase in the short term. From 2012 to 2017, all deciles except for the tenth are expected to see a decline in their share of statewide income. Within the tenth decile, the share of statewide income is projected to increase from 43.7 percent to 44.2 percent, with the vast majority of the income growth once again concentrated in the top half of the decile. However, it should be noted that the 2017 projections are based on data that is now nearly two years old; if the projections were done today based on more current information, the results could be different. The 2017 MTIS—scheduled to be released early next year—will contain new projections for 2019.

By definition, an increased share of statewide income accruing to those at the very top of the income spectrum means a smaller share of income accruing to everyone else. The next installment in this series will examine the growth in the income disparity between middle-income households and those at the very top.

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