Is There a Better Way to Examine Income Inequality?

type="main"> Dividing U.S. tax returns into half-millionaires (those reporting adjusted gross income (AGI) of $500,000 or more in a given year) and their complement allows greater use of IRS data on income sources than is possible with an analysis that examines a fixed percentage of returns, such as the top one percent. Contrary to popular perception and media rhetoric, the inflation-adjusted difference between the reported AGI of half-millionaires and the rest actually declined by 25 percent from 1993 to 2011. The income gap between half-millionaires and other filers reflects differences in kinds of income, with half-millionaires deriving a much larger fraction of their income from capital investments whose varying returns make that component of income—and thus the income of half-millionaires—more volatile. The percentage of total tax returns filed by half-millionaires in a given year and the percentage of their income derived from taxable gains reported on Schedule D account for virtually all of the variation in the half-millionaire percentage of aggregate AGI. As this finding suggests, the expanding income share for half-millionaires does not signify that some collection of privileged rich have become richer. The significant net growth in the percentage of filers who are half-millionaires has been uneven because a significant proportion of their income derives from volatile Schedule D gains, which are higher during economic expansions and lower during recessions. The incomes of half-millionaires—and especially millionaires—are anything but recession proof. But even with that volatile component of income included, when their percentage of returns doubles, their percentage of income less than doubles, consistent with declining income inequality.