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Report Shows Substantial Mobility of Taxpayers Across Income Spectrum

More than Half of Top 1% of Taxpayers in 1999 Moved Into Lower Income Percentile in 2007 Washington, DC, June 21, 2010 - A new Tax Foundation report shows significant movement of American households up and down the income spectrum over time, challenging claims of income inequality based on snapshot analyses of income distribution. Nearly 60 percent of taxpayers who were in the bottom-earning 20 percent in 1999 (earning less than $13,000) were in a higher income group in 2007, while nearly 40 percent of taxpayers who were in the top 20 percent in 1999 (earning more than $68,000) moved down in 2007.   Income mobility is even greater among high-income earners, who recently have been popular targets of federal and state tax policy proposals. Roughly half of millionaires from 1999 to 2007 were millionaires in just one year in the nine-year time period. By contrast, only 6 percent were millionaires in all nine years, according to the report, authored by Tax Foundation Senior Fellow Robert Carroll, Ph.D.  

"Concern over the rising gap between the rich and poor has been the primary rationale for President Obama's redistributive policies, but one important factor to take into consideration is the mobility of people up and down the economic ladder," Carroll said. "If people move quickly up and down through the income spectrum, the position they occupy at any point in time may be less of a concern."  

Tax Foundation Special Report, No. 180, "Income Mobility and the Persistence of Millionaires, 1999 to 2007," is available online at http://www.taxfoundation.org/research/show/26399.html.   While the share of income received by top earners has grown over the past several decades, the data reflect year-by-year movements of income but fail to capture the idea that people often occupy different places in the income distribution over time. Income mobility is partially due to the various stages in people's life cycles of earnings, whether they're just entering the wok force, newly retired or midlife during their peak earnings years.  

About 58 percent of taxpayers in the bottom 20 percent of the income spectrum in 1999 (earning less than $13,000) moved into a higher income group in 2007. For the top 20 percent of taxpayers in 1999 (earning more than $68,000), about 38 percent of them moved into a lower quintile in 2007.  

About 43 percent of the top 10 percent of taxpayers in 1999 (earning more than $96,500) moved into a lower income group in 2007. Among the highest-income taxpayers, more than 55 percent of the top 1 percent of taxpayers in 1999 (earning more than $339,600) moved into a lower percentile in 2007.  

From 1999 to 2007, about 675,000 taxpayers earned over $1 million for at least one year. Of these, about half were a millionaire in only one year, while just 6 percent remained a millionaire in all nine years.  

"Based on these results, it is clear that taxpayers move in and out of millionaire status with great frequency," Carroll said. "The volatile nature of capital gains realizations appears to be a major explanation for the transiency of millionaires."  

Excluding capital gains reduces the number of millionaires from 1999 to 2007 by more than a third, from 675,000 millionaires to 431,000. While the total number of millionaires fell by about 36 percent, the number of one-year millionaires fell by much more, by nearly 50 percent to 175,000. Excluding capital gains also shows that the remaining millionaires are more persistent. The fraction of one-year millionaires represents only 40 percent of all taxpayers who are millionaires when capital gains realizations are removed. By contrast, one-year millionaires make up 50 percent of all millionaire taxpayers when capital gains realizations are included.  

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.   To schedule an interview, please contact Bill Ahern, the Tax Foundation's Director of Policy and Communications, at (202) 464-5101 or ahern@taxfoundation.org.

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