The State of Working Pennsylvania 2007

Authors: 
Mark Price
Publication Date: 
September 1, 2007

EXECUTIVE SUMMARY

Since the summer of 2006, increasing attention has been paid to the rise in income inequality in the United States, fueled in part by publicity surrounding the billion dollar salaries of hedge fund managers.

As Figure 7 illustrates, income inequality in the United States now approaches levels not seen since the first third of the 20th century. (Note: The share of income going to the top 10% would be even higher in Figure 7 if it did not exclude capital gains.)

Much of the growth in income inequality observed in Figure 7 is driven by changes in earnings among the top 1% of families. Economists Thomas Piketty and Emmanuel Saez estimate that the income of the top 1% of tax units increased by 130% between 1973 and 2005. Meanwhile, the income of the bottom 90% of tax units decreased by 8%.

This section of The State of Working Pennsylvania 2007 presents fresh data and estimates to address two questions: Are income gaps in the state of Pennsylvania as high as they are nationally? And, have income gaps grown in Pennsylvania over time in the same way as they have nationally?

Our analysis relies on Personal Income Tax statistics published by the Pennsylvania Department of Revenue (DOR) since 1973 and also on previously unpublished DOR data that look in more detail at the very top-end incomes in 2004. To our knowledge, the 2004 Pennsylvania data discussed below have more detail on the very highest incomes than any other state-level or U.S. data source previously examined.

PA Inequality in 2004 Mirrors That Nationally

To see if Pennsylvania income trends follow the national pattern, we first examine 2004 data on taxable incomes for seven subgroups sorted from the lowest incomes to the highest incomes (Figure 8). (Note that this 2004 Pennsylvania data does include capital gains.)

Note that Pennsylvania taxable income does not capture all sources of income. For example, it does not include income from government transfers such as social security payments or income from private pensions. These missing sources of personal income are a smaller share of total income for taxpayers in the top 10% than in the bottom 90%. For this reason, comparisons of inequality using taxable income data overstate the differences in personal income between these groups. Figure 8 is the only place in this report where our estimates are not conservative.

In 2004, 90% (or 5.8 million) Pennsylvania taxpayers had taxable incomes less than $95,050, with an average Pennsylvania taxable income of $26,975. The next highest 5% of taxpayers, those with taxable incomes greater than $95,050 but less than $132,463, had an average taxable income in 2004 of $110,741.

Skipping to the very top of the income distribution, in 2004 just over 5,000 Pennsylvania taxpayers had annual taxable incomes greater than $1.3 million but less than $6.3 million, placing them between the 99.9th and 99.99th percentiles. These taxpayers had an average taxable income of $2,476,476.

The wealthiest 0.01% had taxable incomes greater than $6.3 million in 2004. The average income for these 580 taxpayers was $15,932,806. In 2004, one out of every 632 taxpayers, or 9,186 Pennsylvanians, had a taxable income in that one year of more than $1 million.

Next we calculate the share of total Pennsylvania income for different sub-groups within the highest-income 10% of Pennsylvania taxpayers. In doing this, we shift from talking about each group’s taxable income to talking about each group’s share of total Pennsylvania personal income. (The methodology we use to estimate shares of personal income from taxable income data follows that of Piketty and Saez. For reasons explained in the next footnote, this methodology underestimates the personal income of the top 10% of taxpayers and overestimates that of the bottom 90%. Therefore, by extension, this methodology underestimates levels of income inequality.)

Considered as a group, the top 1% of the Pennsylvanians (58,000 taxpayers with annual taxable incomes greater than $317,165) claimed an estimated 13¢ of every dollar of personal income in 2004 (Figure 9).

The next 4% of earners, those falling between the 95th and 99th percentiles, some 232,000 taxpayers, claimed 11¢ of every dollar of personal income in the state. The next 5% of earners, those falling between the 90th and 95th percentiles claimed 8¢ of every dollar of personal income in the state. The remaining 5.8 million taxpayers, the bottom 90%, claimed the remaining 67¢.

Figure 10 presents Pennsylvania data on incomes in 2004 alongside estimates of incomes (including capital gains as does our 2004 Pennsylvania data) by Piketty and Saez for the entire United States. In part because levels of inequality are ordinarily higher in larger geographical units (e.g., a state than a county, a nation than one state), the key question in this comparison of Pennsylvania vs. U.S. inequality is not what the exact level of inequality in Pennsylvania is versus that of the United States as a whole. The key question, instead, is whether the general shape of the income distribution is the same in Pennsylvania as it is in the United States. Another reason to focus on the general shape of the two distributions is that while we have actual data for the highest income groups from Pennsylvania, the income of these groups had to be estimated (by Piketty and Saez) for the United States from publicly available Internal Revenue Service (IRS) data that do not go all the way up to the highest income levels. As explained in the next footnote, there is reason to believe that the Piketty and Saez method substantially underestimates the highest income levels, especially in recent years.

As Figure 10 shows, Pennsylvania incomes for the three highest-income groups are lower than estimates for same three groups in the United States. As a result, the top 10% of earners in the U.S. takes home an estimated 46¢ out of every dollar, versus 33¢ for Pennsylvania (Figure 11). The general shape of the curve is the same nationally as in Pennsylvania. Incomes at the very top are sharply higher than those slightly lower in the distribution.

PA Growth in Inequality Also Follows National Trends

Our second question was whether income gaps have grown in Pennsylvania over time, as they have nationally. The short answer is yes; in the state, as in the nation, a large share of the increase in income since 1973 has accrued to the highest income groups. (In this analysis, we go back to excluding capital gains because this avoids complications regarding how to treat capital gains over time. This makes our estimates of the concentration of income gains at the very top conservative.)

Figure 12 presents the percent change in average incomes, excluding capital gains, for seven groups of taxpayers. Between 1973 and 2004, the top 0.01% of tax units in Pennsylvania saw their incomes increase by 278%. By contrast, the bottom 90% of tax units experienced an increase of just 12%, which over 32 years represents an increase in income of less than 0.4% per year.

As a result of the faster increase in incomes at the top, high-income Pennsylvanians received a larger share of the increase in total income between 1973 and 2004 than they received of total income in 1973.
Specifically, in 1973, 6¢ of every dollar income earned in Pennsylvania was claimed by the top 1% of Pennsylvanians (Figure 13). Further, between 1973 and 2004, two-and-a-half times as much (15¢) of every additional dollar of income was claimed by the top 1% of Pennsylvanians (Figure 14).

Data on taxable income from the Pennsylvania Department of Revenue is only available since the early 1970s, when the state first implemented an income tax. The Internal Revenue Service has published data on taxable income in the state of Pennsylvania since 1917. Using this data, Estelle Sommeiller, a recent graduate of the University of Delaware department of economics, estimated the share of personal income, excluding capital gains, held by the top 10% of Pennsylvania taxpayers since 1917.

Figure 15 presents Sommeiller’s data alongside our own estimates based on Pennsylvania Department of Revenue data and reveals the following trends:

The share of personal income held by the top 10% peaked at 35% in 1921.

This share declined in the 1920s before recovering somewhat to 31% in 1940.

At around 28%, the share of the top 10% in the last several years is higher than it has been, with the exception of 1987, since the 1940s.

In Figure 16, we examine changes in the share of all personal income, including capital gains, since 1988. (Throughout this period, all capital gains are considered part of taxable income, thereby simplifying the inclusion of this income in estimates in a consistent way.) We find, similar to national trends, that the increases in income in the top 10% are largely driven by changes in income for the Top 1% of tax units (Figure 16).