The fleeting top 1% of income earners

by Thomas Sowell (via Greg Mankiw):

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.

These are not permanent classes but mostly people at current income levels reached by spikes in income that don't last.

These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas.

Some people's income in a particular year may be several times what it has ever been before or will ever be again.

Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers -- who are never accused of "greed," by the way.

Just as there may be spikes in income in a given year, so there are troughs in income, which can be just as misleading in the hands of those who are ready to grab a statistic and run with it.

Many people who are genuinely affluent, or even rich, can have business losses or an off year in their profession, so that their income in a given year may be very low, or even negative, without their being poor in any meaningful sense.

This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.

UPDATE: More Sowell here (via Don Boudreaux):

People in the bottom fifth of income-tax filers in 1996 saw their incomes rise 91 percent by 2005. The top 1 percent — “the rich,” who are supposed to monopolize the money, according to the left — saw their incomes decline a whopping 26 percent. Meanwhile, the average taxpayers' real income rose 24 percent between 1996 and 2005.