News & Updates

Income Inequality on Steroids: The Top of the Top 1%

by | Sep 9, 2016 | Other

Minnesota is no exception to the national trend of rising income inequality. Previous installments in this series have shown the concentration of income at the top of Minnesota’s income spectrum and the growing gap between the top one percent and middle-income households, especially after adjusting for inflation. However, to fully understand the extent to which income is concentrated, it is necessary to look to the ultra high-income households that comprise the top fraction of the top one percent.

An April 2016 Salon article noted that:

There’s strong evidence that it’s not the 1 percent you should worry about—it’s the 0.1 percent. That decimal point makes a big difference. Over the last decade, a gigantic share of America’s income and wealth gains has flowed to this group, the wealthiest one out of 1,000 households. These are the wildly exotic and rapidly growing plants in our economic hothouse.

While the 2015 Minnesota Tax Incidence Study (MTIS) does not contain information that focuses specifically on the top 0.1 percent, it does provide information for a thin sliver of über-rich households at the very top of Minnesota’s top one percent. In addition to showing data for ten equally sized population groups—referred to as “deciles”—and the top five and top one percent, the MTIS also divides households into groups of equal income. This includes information for 5,568 extremely high-income households that had ten percent of total 2012 statewide income. These 5,568 households are further divided into an even wealthier group of 817 households that had five percent of total statewide income.

These 5,568 highest-income households represent the top 0.216 percent of Minnesota households by income, while the 817 households represent the top 0.032 percent. Using this data, it is possible to examine income levels at the very top of the top one percent.

The table below shows household income at thirteen points along Minnesota’s income spectrum, each based on 2012 data from the 2015 MTIS. Household income at the tenth percentile (i.e., the income level at which ten percent of households have a lower income and ninety percent have a higher income) is $10,902. The tenth percentile represents the upper limit of the first decile. The next data point represents the income level at the twentieth percentile (i.e., the upper limit of the second decile), and so forth. The income level at the 99th percentile ($493,603) represents the lower limit of the top one percent. The income level at the 99.784 percentile ($1,226,535) represents the lower limit of the top 5,568 households which had ten percent of statewide income, while the income level at the 99.968 percentile ($4,594,181) represents the lower limit of the 817 households that had five percent of statewide income.


The data from this table is plotted in the following chart. The dots in this chart represent the thirteen data points taken directly from the MTIS, while the line connecting the dots represents a computer-generated approximation of the income level between the thirteen data points provided in the MTIS. The line begins at the tenth percentile and ends at the 99.968 percentile because there is no information on income levels below and above those data points, respectively.


The nature of the income curve in the above chart can be described as nothing short of exponential, remaining nearly parallel to and only slightly above the horizontal axis until approximately the 95th percentile, at which point it begins to bend upward, becoming nearly vertical by the 99th percentile (the beginning of the top one percent). From this graph, it is clear that incomes do not rise at a uniform rate from the lowest income to the highest income households; incomes rise especially quickly above the 99th percentile, with truly stratospheric income levels occurring at the 99.784 percentile and above.

The inclusion of the income at the 99.968 percentile ($4,594,181) in the above chart compresses the vertical axis, thereby concealing much of the income variation that exists below the 95th percentile. This variation becomes more apparent if we exclude income levels above the 95th percentile, as is done in the following chart.


Significant income disparities do exist below the 95th percentile—and those disparities accelerate as the 95th percentile is approached, as denoted by the concave shape of the curve in the above chart. However, income disparity below the 95th percentile pales in comparison to the disparity above the 95th percentile. The chart below focuses on income levels for the 95th percentile and above. This chart is essentially the same as the first chart, except that the bottom 95 percent is excluded so that the detail above the 95th percentile is more apparent.


This graph makes even more apparent what was evident in the first graph: the hyper-acceleration of household income levels does not occur until after the 99th percentile is passed. The astronomical acceleration in income levels—denoted by the near vertical slope to the income line—does not occur until the 99.784 percentile is passed, with even more rapid acceleration in income levels occurring as the 99.968 percentile is approached. This is proof of the extreme level of income concentration at the very top of the top one percent.

Relative to the income level at the tenth percentile ($10,902), the first tenfold increase in income (to $109,020) is reached at approximately the 83rd percentile. The second tenfold increase (to $1,090,200) is achieved at approximately the 99.7 percentile. The third tenfold increase (to $10,902,000) is reached somewhere above the 99.968 percentile but below the 100th percentile. In other words, the first tenfold increase occurs within the span of 73 percentile (from the tenth to the 83rd), while the next tenfold increase occurs within the span of just 16.7 percentile and the third occurs within the span of less than 0.3 percentile. This further illustrates the extraordinary income levels achieved within the top third of the top one percent.

Whether we are focusing on the top one percent or the top 0.1 percent of households, extreme income inequality is a serious problem for the state and national economies. A July 26 North Star article noted that the principal economic problem of the last several decades has been the decline in the purchasing power of lower- and middle-income consumers. This declining purchasing power means less demand for goods and services, which in turn means fewer jobs and further erosion in purchasing power. A vicious cycle ensues.

The deterioration of lower- and middle-income purchasing power and the resulting economic stagnation are the inevitable consequence of the increased concentration of income within a tiny slice of the population. No matter how much income accrues to the top one percent or the top 0.1 percent, these high-income consumers cannot purchase enough to replace the erosion of purchasing power among the masses of lower- and middle-income consumers. As noted in the July 26 article:

Policies that purport to “turn around the economy” should be evaluated based on their ability to return a fair portion of wealth and income to the lower- and middle-income families that are the backbone of the U.S. economy.

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