Top Income Concentration and Volatility

37 Pages Posted: 8 Feb 2018 Last revised: 29 Apr 2020

See all articles by Jeffrey P. Thompson

Jeffrey P. Thompson

New England Public Policy Institute, Federal Reserve Bank of Boston; Federal Reserve Board of Governors

Michael Parisi

Government of the United States of America - Internal Revenue Service (IRS), Statistics of Income Division

Jesse Bricker

Board of Governors of the Federal Reserve System

Date Written: 2018-02-05

Abstract

Measures of income concentration—such as the share of income received by the highest income families—may be biased by pro-cyclical volatility in annual income. Permanent income, though, can smooth away such volatility and sort families by their usual economic resources. Here, we demonstrate this bias using rolling 3-year panels of IRS tax records from 1997 to 2013 as a proxy for permanent income. For example, one measure of 2012 income concentration—the share of income received by the top 0.1 percent—falls from 11.3 percent to 8.9 percent when families are organized by permanent income instead of annual income. However, the growth in income concentration cannot be explained by this volatility, as growth rates are comparable in the permanent income and annual income groupings during our sample period. Further, the probability of remaining in the highest income groups, while relatively low at the very top of the distribution, increased slightly during our sample period, suggesting that top incomes have become less volatile in this dimension. These results are confirmed using household income data measured in the Survey of Consumer Finances (SCF)—a household survey with a large oversample of high-income households and a unique measure of permanent income.

Keywords: Inequality, Top incomes, Volatility

JEL Classification: D31, D61

Suggested Citation

Thompson, Jeffrey P. and Parisi, Michael and Bricker, Jesse, Top Income Concentration and Volatility (2018-02-05). FEDS Working Paper No. 2018-010, Available at SSRN: https://ssrn.com/abstract=3120335 or http://dx.doi.org/10.17016/FEDS.2018.010

Jeffrey P. Thompson (Contact Author)

New England Public Policy Institute, Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Federal Reserve Board of Governors ( email )

Washington, DC 20551
United States

HOME PAGE: http://https://www.federalreserve.gov/econres/jeffrey-p-thompson.htm

Michael Parisi

Government of the United States of America - Internal Revenue Service (IRS), Statistics of Income Division ( email )

DC
United States

Jesse Bricker

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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