Q: How much turnover is there among the richest Americans? A: A lot according to IRS data

“…According to the IRS from a previous report on the dynamics of the Top 400 earners (updated here with 2014 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,584 different taxpayers represented in total for the 23-year period between 1992 and 2014. Of these, fewer than 17% appear more than once and only 3% were represented in 10 or more years. Nearly three out of four taxpayers (71.2%) were in the Top 400 in only a single year.”…”

Mark Perry, "Q: How much turnover is there among the richest Americans? A: A lot according to IRS data," American Enterprise Institute, July 9, 2019, https://www.aei.org/carpe-diem/q-how-much-turnover-is-there-among-the-richest-americans/

Q: How much turnover is there among the richest Americans? A: A lot according to IRS data

Of the 9,200 total tax returns filed in the 23 years from 1992 to 2014 for the 400 highest earners in each year, there were 4,584 unique, individual taxpayers in the Top 400 over those 23 years, since some taxpayers were in the Top 400 group in more than one year. The new IRS data show that:

1. Of the group of 4,584 unique top earners from 1992-2014, there were 3,262 individual taxpayers who made it into the “Fortunate 400” only one time during the 23-year period. Those 3,262 one-timers represent 71.2% of the total 4,584 taxpayers (see chart above), and therefore only 1,322 taxpayers that make up the rest of that elite group (28.8% of the 4,584 total, or about one in four) were able to make it into the Top 400 in more than one year between 1992 and 2014.

2. Moreover, since 3,262 earners made it into the Top 400 only once (71.2%) and another 558 taxpayers (12.2%) made it into the top group twice between 1992 and 2014 (see table above), that means that 83.3% of the top earners made it into the “Fortunate 400” only once or twice (3,820 out of 4,584), and only 16.7% (764 taxpayers out of 4,584) were able to make it into the top group in more than 2 years out of 23 years.

3. There were only 138 taxpayers out of the 4,584 total taxpayers in the top earner group (3%) who were in the Top 400 in 10 or more years out of 23 (see table).

4. Why is there such a high turnover among the Top 400 and why are most taxpayers in that group for only a single year? Data in Table 1 of the IRS report provide an answer. The combined salaries and wages of the Top 400 in 2014 were about $5.6 billion, which represented only 4.4% of those taxpayers’ combined Adjusted Gross Income (AGI) of about $127 billion. But those top taxpayers as a group had about $76.8 billion in income from sales of capital assets in 2014, which was more than 60% of their combined AGI of $127 billion. So while the Top 400 are certainly high earners (average salary of about $14 million in 2014), what puts them into the Top 400 in a given year isn’t their high salaries, but rather their large gains from the sale of capital assets (average capital gain for the Top 400 taxpayers in 2014 was $192 million) - which are often one-time sales of appreciated stock, or one-time gains from selling a business, partnership, farm, or real estate.

5. Data from Table 1 also reveal that the Top 400 are a pretty generous group based on their reported charitable contributions. In 2014, the Top 400 combined gave nearly $14.5 billion to charity, at an average of more than $37 million per taxpayer. Even though that Top 400 group represented only about three one-thousandths of 1% of all 148.6 million taxpayers in 2014 (0.000269%), those 400 taxpayers accounted for nearly 7% of the $210 billion in total charitable contribution deductions in 2014.

According to the IRS from a previous report on the dynamics of the Top 400 earners (updated here with 2014 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,584 different taxpayers represented in total for the 23-year period between 1992 and 2014. Of these, fewer than 17% appear more than once and only 3% were represented in 10 or more years. Nearly three out of four taxpayers (71.2%) were in the Top 400 in only a single year.”

MP: Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. That is, once you find yourself in a top or bottom quintile, or a certain income percentile, or the Top 400, you’ll likely stay there for decades or even for life. But economic reality is very different - people move up and down the income quintiles and percentile groups throughout their careers and lives. The top or bottom 1/5/10% by income, just like the top or bottom income quintiles, are never the same people from year to year, because there is constant, dynamic turnover as we move up and down the income categories.

It’s very likely that most of the members of the IRS’s Top 400 started in one of the lower-income quintiles early in their lives and careers, and advanced into the higher income quintile and eventually into the Top 400 as they become successful, and they may drop into a lower-income quintile later in life. As the new IRS data show, almost three out of every four members of the ever-changing “Fortunate 400” over the last 23 years were only “members” of that group for a single year, which reflects the dynamic nature of the US economy and the significant income mobility that exists for Americans — at all levels of income.

Note: The IRS discontinued the top 400 taxpayer data series after tax year 2014 and replaced it with data on taxpayers at the.001 percentile level, which in 2014 represented the top 1,396 returns. According to the IRS: “This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution. As the number of returns increases with the growth of the economy, the number of returns in the.001 percentile will increase proportionally as well thus allowing for a consistent high-income data series.”

This post (and title) was inspired by a report yesterday by Robert Bellafiore and Aida Vazquez-Soto at the Tax Foundation titled “How Much Turnover Is There Among the Richest Americans?” based on the same IRS data above for the Top 400 Taxpayers from 1992 to 2014. Here’s a big slice of that report:

Income inequality has been a prominent topic on the presidential campaign trail, leading to proposals for wealth taxes, higher marginal income tax rates, and other policies. As scholars and everyday taxpayers continue to debate this issue and the question of increasing taxes on the richest Americans, one observation to keep in mind is the high degree of turnover among the highest-income Americans.

Data from the Internal Revenue Service shows the frequency of those filing who make the top 400 individual income tax returns with the highest adjusted gross income from 1992 to 2014. Of the 4,584 people who made it into the top 400 at some point over that period, 3,262 qualified for only one year. In other words, 71.2% of those who were in the top 400 made it once and not again. Of that same overall group, 138 people did qualify for at least a decade.

These data illustrates another important point about how tax rates, or the share of the tax burden on an income group, have changed over time: We should not conclude without evidence that it is the same people in that income group the entire time. For example, it can be easy to look at data on the top 1 percent’s tax rates over time and assume that the same people belong to that group in every year. However, such data on its own often doesn’t tell us whether a given income group represents the same people year after year, experiences a complete turnover annually, or something in between.

When the data do provide information on the people in a given group, as is the case here, the results can be surprising. At least among the top 400 such filers, there is more turnover than many might think. Policymakers and taxpayers should keep this in mind and be careful not to jump to unjustified conclusions as they consider the many changes to our tax code being debated today.