1. Income Trajectories of High Income Canadians The Income-Wealth Paradox: Connections between Realized Income and Wealth Among America’s Aging Top Wealth-holders Papers by: 1. Brian Murphy, Sylvie Michaud & Michael Wolfson (MMW) – Statistics Canada 2. Barry Johnson, Kevin Moore, Lisa Schreiber, (JMS) - Statistics of Income, IRS & Federal Reserve Comments by: Lars Osberg Economics Department, Dalhousie University

“Reports from the New Frontier”  Data Epochs in Income Distribution Analysis 1. pre-1975  Macro-shares, Cross-sections, Paper Tables  Computers + micro-data from sample surveys enabled disaggregation & hypothesis testing Explosion of labour economics research OK for ‘Middle 90%’ – but tails ignored !!  Income tax data used to examine top end Large samples enable examination of top tail (1% +)  Piketty, Saez, Atkinson & Piketty, Saez & Veall In Anglo countries – essentially all the change in income distribution has been in share of top 1%  ‘Pulling Away’ of elite incomes – huge social issue

MMW: What income dynamics underlie the exploding income share of top 1%?  Canadian taxable incomes : “ growth is largely limited to the top 5% which in turn has been driven largely by increases to the incomes of the top 1%”  Is this “more reward for more risk”? More variability in elite incomes?  No – decline in income mobility post 1995  Are income trajectories steeper? Less permanent income inequality?  No

Methodology  Longitudinal Administrative Databank (LAD) at Statistics Canada. 20% longitudinally linked sample of income tax records from  4.8 million filers in  based on individuals filing tax return % of Canadians age almost 90%.  Female LF participation 52% -> 62%  Tax credits – GST 1986; CCTB 1992 Total Money Income of Individual tax filers  Total income for tax purposes adjusted to include actual K gains & dividends 1994 – end of lifetime $100K exemption prompts spike in K gains realizations LO: Omits social assistance bottom end

Absolute difference in income shares 1982 to 2005  “rise in income shares is dominated by a large growth concentrated mostly in the top 1% of the distribution” “almost half of the entire increase in the top 5% was due to the top 0.1% of filers”

Absolute Change in Income Shares for Various Total Income Quantiles Between 1982 and 2005 Source: Statistics Canada, Special Tabulations from the LAD.

Changes in real income - far larger in top percentiles Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No XIE

“Of all filers who made it to the top 5% in any given year, what part of the income distribution did they come from the year before?”  75% - 80% of the top 5% were in same top 5% in previous year 92% from top decile  “quite recently.. increase in the proportion of top 5 % filers staying put”  Correspondingly low percentages of lower deciles moving into top 5%

Distribution of the top vingtile, by income group from the previous year Source: Statistics Canada, Special Tabulations from the LAD.

Percentage of tax filers in the nine lowest deciles who moved in the highest vingtile the next year Source: Statistics Canada, Special Tabulations from the LAD.

What % of tax filers were ever in top x% of tax filers in previous 5 years?  top 20%, 10%, 5%, 1% and 0.1%  Ratio computed Complete Immobility implies 20/20 = 1; 10/10 = 1, 5/5 =1 ….. Complete Mobility implies new group in all years – ratio = 5  Higher quantiles are also smaller – greater variability but smaller target!  Declining mobility since

Experience of High Income Over 5 Year Periods – Present in at Least One Year Source: Statistics Canada, Special Tabulations from the LAD.

What % of tax filers were always in top x% of tax filers in previous 5 years?  top 20%, 10%, 5%, 1% and 0.1%  Ratio computed Complete Immobility implies 20/20 = 1; 10/10 = 1, 5/5 =1 ….. Complete Mobility implies new group in all years – zero % always there  Rising Immobility since

Experience of High Income Over 5 Year Periods – Present in All Years Source: Statistics Canada, Special Tabulations from the LAD.

Individual Income Variability in 8 year Panels  Decomposing annual income into trend level of permanent income & deviation from trend Method A Method B

Method A Trend Indicator by Permanent Income Quantile and 8-year Panel Source: Statistics Canada, Special Tabulations from the LAD.

Method A Variability Indicator by Permanent Income Quantile and 8-year Panel Source: Statistics Canada, Special Tabulations from the LAD.

Method B Trend Indicator by Permanent Income Quantile and 8-year Panel Source: Statistics Canada, Special Tabulations from the LAD.

Method B Variability Indicator by Permanent Income Quantile and 8-year Panel Source: Statistics Canada, Special Tabulations from the LAD.

Trend & Variability  Much greater income variability at the bottom LO: Rising Economic Insecurity for poor  Increased by cuts to UI/EI post 1995  But income tax data misses Social Assistance  Does an 8 year segment really capture ‘permanent income’ ? E.g. youth entry phase? Retirement transition?  No selection on age – but 6+ years missing data implies observation is dropped  Declining Income Variability at top

Summary  “growth is largely limited to the top 5% which in turn has been driven largely by increases to the incomes of the top 1%”  “marginal increase in the stability of the high income population” on a year-over-year basis over longer periods of time more variability in the lower part of the distribution than in the 95%-99% general decrease in the variability of income  No Evidence for: “Greater Returns for Greater Risk” H o

JMS: What’s the Income/Wealth relationship at the top ?  Longitudinal panel of U.S. income tax data linked to wealth data reported on U.S. estate tax returns filed for wealthy decedents – investigate: changes in the composition of realized income over time asset management strategies by elite relationship between income and end of life wealth  Problem: Individual and Joint Tax-filing possible in US – implies ambiguous & changing reporting unit LO: What Hypothesis is being examined?

Data  Source: Federal Estate Tax Return, Form 706  gross assets filing threshold ranged from $600,000 in in 1994 to $1.5 million in 2004  5,164 decedents whose gross estates at death ≥ $1 M (2003$) and Form 1040 filed in last year  matched to Individual Income Tax Returns (Form 1040)  72,373 income tax returns 1987 – 2003  Individual & Joint Returns 32.4% change filing status within 9 years pre-death This paper - filers with constant filing status for the 7 years prior to death & ≥ $1M ( 2003 $) wealth.

“The panel aspect of the FPDD provides insight into how total income and various components change as filers age and near death. Since the data also contain information on estate tax filings, we can examine if the changes in income prior to death vary by wealth at the end of life.”

Portfolio Variability at death

JMS: Conclusions  Wealthiest U.S. decedents ($1M+ in 2003) above 95th percentile in U.S. distribution of income. Volatile incomes in the years leading up to death  due to market fluctuations, tax-planning and spending needs income composed primarily of taxable and non-taxable investment income  Wage income & income from non-financial assets relatively small  portfolios heavily weighted toward financial assets, especially for those in highest wealth category. (For whom stocks = almost 50% of wealth)  Controlled a significant share of U.S. total wealth at death. contrast to life cycle models of savings, do not appear to be consuming out of savings, income shifting, moving investments from taxable income producing assets to those that generate non-taxable interest, which consequently means moving from high to low rate of return  Popular measures of well being that focus only on income may significantly understate the ability to consume of the wealthiest individuals in the U.S.

LO Comments  Years before death used to analyze portfolios & incomes Did they see it coming? Why does it affect behavior?  AGE is not used as a variable !! Some of sample is 65+, some not  Expect different income sources & portfolios  Expect different variability  JMS: Each observation - uniform weight Estate Multiplier Method thinks of death as The Grim Reaper’s probabilistic sampler from the population P M = f( age, sex, etc.) Sample weight = 1/ P M  Year specific impacts on assets & incomes not mentioned Dot-Com boom & bust in stock market? Recession?  What hypothesis is being examined? Theoretical framework could guide empirical choices Any charitable bequest or redeeming social values apparent?