I just finished reading a great post about the fact that 93% of income gains in 2010 went to the 1%. As you can see in the chart below, the top 1% saw an increase of $105K in 2010, while the top 10% to 1% experienced average increases ranging from $711 to almost $4K and the bottom 90% actually experienced a decrease. And this was during a recovery year…….
Call me sedated, but these figures just don’t shock me anymore. They are still massively important of course, because they lead to questions over policy (i.e., Should we have more progressive taxation? Should capital gains tax rates increase? What groups are benefiting from the current policies?), and the post explores some important territory related to whether economic recessions serve to reduce income inequality. This theory, which was popular in 2007 and 2008 when the 1% was experiencing larger losses comparatively (largely due to capital gains losses), appears to be false at this point.
But what I actually became intrigued by was what the sources of the income gains actually were. For instance, while we know that an outsized portion of the incomes of the 1% are due to capital gains, what about the non-capital gains portion the income gains? And most importantly are they going up because of increased entrepreneurial risk taking?
The charts below, which are based on data from Saez and Piketty, provide breakdowns of the composition of the incomes (excluding capital gains) of the top 1% and top 10% since 1916.
For the top 1%, what was a pretty consistent mix of sources of income related to wages (salaries and bonuses), entrepreneurial activity (income from corporate and partnership entities), dividends and to a lesser extent, rents and interest, has now become increasingly weighted towards wages. The share of income from entrepreneurial activity peaked in the mid 1940s, and dropped steadily, reaching a nadir in the mid-80s before picking back up again (presumably due to the effect of the Internet?). But overall, while there are peaks and valleys the trend line for entrepreneurial share of income for the top 1% appears to be pretty flat.
When expanding to the broader top 10% group though, this view gets even murkier. Wages were always a larger percentage of income than for the top 1% understandably. And while entrepreneurial income share exhibits a similar trend for the top 10%, it is actually considerably lower than in the past. In fact, the current share of income due to entrepreneurial activities for the top 10% is 16.1% while the median for the past century (give or take 4 years), is 16.5%.
I don’t know the reasons for this, but I found it quite interesting. And of course, this doesn’t take into account potentially large shares of entrepreneurial riches that are realized through capital gains which may change the story considerably for those lucky enough to exit their startups in such a fashion (which despite the Facebook and Groupon headlines is not that large a group). But this does seem to indicate that it might be time to question whether we really are as entrepreneurial a society as we claim we are, or whether that is a leftover tag better suited to generations past?
So I wonder if the lower share of income from entrepreneurial activity has a net effect is on society (Less entrepreneurial society? Less job growth? Less innovation?). And I wonder if this is a trend that will continue in the future?