Income Brackets and Income Earners

Thomas Sowell, in his book "Notes on Social Justice Fallacies", makes some very interesting points about income brackets and the movement of people within them.

Sowell notes how the media talks about the injustice between 'rich' and 'poor'. He points out that statistics are cited showing that the top 1% take nearly one quarter of America's income each year; the top 10% earn over 50% of total income; and incomes for all but the top 1% have stagnated for decades.

Sowell's insightful point is that income brackets must be distinguished from the people in them. Income brackets are fixed by definition like: the top 1%, the top 10%, the top quintile (20%), the bottom quintile and the bottom 10%. However, the people within the brackets change.

He cites data from the US 2020 census that shows the top quintile (20%) of household income starts at $141,111. So any household earning this amount or more is in the top quintile for that year. That same household in say, 2021 may earn more or less than $141,111. All else being equal (assuming the threshold hasn't changed) that household may remain in the top 20% or it may drop down an income bracket. Similarly, another household, in 2021, my earn more and move up into the top 20%. The point is that the people in the various income brackets change.

Data in the US, cited by Sowell, shows there is significant turnover in the various income brackets. He cites one study that found over 50% of Americans reach the top 10% bracket at some point in their lives. This is a staggering fact.

He cites a Canadian study that showed, in the period 1990-2009, 87% of the people initially in the bottom quintile rose into a higher quintile and that the "incomes of those initially in the bottom quintile rose at both a higher rate and a larger absolute amount than the incomes of those who were initially in the top quintile".

In Canada, household income is a bit tricky as we do not file household income tax returns. We file individual returns. According to Statcan, based on individual filings, the threshold median income of the top 10% of filers was $93,200 in 2016 moving up to $102,400 in 2020. This was an increase in the median income in that group of about 9%. The median income of the bottom 50 percent group was $33,900 in 2016 moving up to $40,700 in 2020. This was an increase of about 17%, almost double that of the top 10% group. The data on the site I am referencing only goes to 2020. Interestingly, this site does not break out numbers for the bottom 10% group. Why not one wonders, particularly since the site breaks out numbers for the top .01, .1, 1, 5 and 10% groups of filers? I guess Statcan is more interested in revealing numbers for those in the top income groups than in the bottom ones.

According to Statcan's site, the numbers of filers in each group increased over time. The number of 10% filers increased from 2,738,985 to 2,884,035, an increase of 5%. This suggests that more people moved up into the 10% group than down from that group over the period 2016 to 2020.

Sowell notes that in the US, studies have shown that the incomes of those who start out at the bottom increases more rapidly as they move up than the income of those that remain in the top income brackets. So, if there is any stagnation, it is more evident at the top than at the bottom.

The following analysis by Sowell is interesting. He says: "The 'poor' are often as misleadingly labeled as 'the rich.' In the University of Michigan study, where 95 percent of the people initially in the bottom quintile rose out of that quintile during the years covered, that left just 5 percent behind during those years. Since 5 percent of the 20 percent initially in the bottom quintile was just 1 percent of the population sampled, only this 1 percent, who were in the bottom quintile for the duration of that study, were therefore eligible to be called “poor” during all those years ... it is the incomes of this low-income 1 percent that was stagnating."

In other words, the income of most of those who start in the bottom 20% group rose over that period, and did not stagnate. The income group, as defined, stagnated, but not the vast majority of individuals that started in that group then moved upwards to higher income brackets. If a group is defined by a set income threshold that doesn't change, of course the income of that group stagnates. This is by definition. There will always be a bottom 10% income group simply by definition for the purposes of statistics. What is more important is that the people within this group change; they are able to increase their income and thereby move into higher income groups. Sowell's analysis shows that this is so for many reasons. One of the main reasons is that as people grow older they make more money. People at the peak of their earning years, typically in their fifties, make more money than those same people made in their earlier years of employment. Sowell also notes that people drop out of the top 10% income bracket. This makes sense as older people retire from employment their incomes decrease. While income brackets, as defined, may be static, data shows that the people in the brackets are dynamic.

If the share of income going to people in the top 20% or top 10% is growing and this growth is due to higher numbers of people reaching these income thresholds, we should celebrate. It means more people are making more money. The bigger income share does not mean that a fixed few people are taking a bigger share of the income pie, as is often suggested.

This is all positive data. With this data in mind, more should be done for those who are unable to leave the bottom groups due to disability and other factors beyond their control. It must be kept in mind however, that definitionally, there will always be a bottom 10% even when the people in this bracket are living well in comparison with other people in the world now and historically. Even the kings of old did not have central heating, running hot water and air conditioning.