This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research

Volume Title: Shares of Upper Income Groups in Income and Savings

Volume Author/Editor: Simon Kuznets, assisted by Elizabeth Jenks

Volume Publisher: NBER

Volume ISBN: 0-87014-054-X

Volume URL: http://www.nber.org/books/kuzn53-1

Publication Date: 1953

Chapter Title: Front matter, Shares of Shares of Upper Income Groups

Chapter Author: Simon Kuznets, Elizabeth Jenks

Chapter URL: http://www.nber.org/chapters/c3054

Chapter pages in book: (p. -44 - 0)

Shares of

Upper Income Groups

in Income and Savings

Simon KuznetsUniversity of Pennsylvania

Assisted by

Elizabeth Jenks

NATIONAL BUREAU OF ECONOMIC RESEARCH, INC.

Copyright, 1953, by

National Bureau of Economic Research, Inc.

1819 Broadway, New York 23

All Rights Reserved

Typography by Oscar Leventhal, Inc.

Presswork and binding by H. Wolff

Library of Congress Catalog Card Number: 52-6110

52-6110

2,006,215of Rese

— --- —--_:•-_. - -

Simon Smith, 1901- - -

Shares of upper income group. in income and savings 1by1Simon Kuzneta assiatod by Elizabeth Jenka. 1New York1 -

National Bureau of Economic Research -

725 p. dlagr,., 24 cm. (PubUcatlons of the NationalBureau of Economic Re9earth, no. 56)

• "A preliminary and brief version" wu published in 1950 as Occa-sional paper 35 of the - National Bureau of - Economic

• Includes bibliographical roferenOms.1.S. - i. Title. National Bureau ci

Economic Publicatlona, no. 56) -

HC1IO.I 5K8 339.34 839.373

MATERiAL SUBMITTED BY PUBLISHER.

0

Publications of the

National Bureau of Economic Research, Inc.

Number 55

Shares of Upper Income Groups

in Income and Savings

OFFICERS

1953

Harry Scherman, Chair,nanC. C. Balderston, President

Percival F. Brundage, Vice-PresidentGeorge B. Roberts, Treasurer

W. J. Carson, Executive Director

• DIRECTORS AT LARGE

Donald R. Beicher, Westfield, New JerseyOswald W. Knauth, Beau fort, South CarolinaSimon Kuznets, University of Pennsylvania

H. W. Laidler, Executive Director, League for IndustrialShepard Morgan, New York City

C. Reinold Noyes, Princeton, New JerseyGeorge B. Roberts, Vice-President, National City Bank

Beardsley Rumi, New York CityHarry Scherman, Chairman, Book-of-the-Month Club

George Soule, Bennington CollegeN. I. Stone, Consulting Economist

J. Raymond Walsh, New York CityLeo Wolman, Columbia University

Theodore 0. Yntema, Vice President-Finance, Ford Motor Company

E. Wight Bakke, YaleC. C. Balderston, PennsylvaniaArthur F. Burns, ColumbiaG. A. Elliott, TorontoFrank W. Fetter, NorthwesternH. M. Groves, Wisconsin

DIRECTORS APPOINTED BY OTHER ORGANIZATIONS

Percival F. Brundage, American Institute of AccountantsFrederick C. Mills, American Statistical Association

S. H. Ruttenberg, Congress of Industrial OrganizationsMurray Shields, American Management Association

Boris Shishkin, American Federation of LaborDonald H. Wallace, American Economic Association

Frederick V. Waugh, Amnerican Farm Econo,nic AssociationHarold F. Williamson, Economic History Association

RESEARCH STAFF

Arthur F. Burns, Director of ResearchSolomon Fabricant, Deputy Director of Research

Geoffrey H. Moore, Associate Director of Research

Democracy

DIRECTORS BY UNEVERSITY APPOINTMENT

Gottfried Haberler, HarvardClarence Heer, North Carolina

R. L. Kozelka, MinnesotaPaul M. O'Leary, Cornell

T. W. Schultz, ChicagoJacob Viner, Princeton

Moses AbramovitzHarold BargerMorris A. CopelandDaniel CreamerDavid DurandMilton FriedmanMillard HastayW. Braddock HickmanF. F. HillDaniel M. Holland

Thor HultgrenSimon Kuznets

Clarence D. LongRuth P. Mack

Frederick C. MillsRaymond J. SaulnierLawrence H. Seltzer

George J. StiglerLeo Wolman

Herbert B. Woolley

RELATION OF THE DIRECTORSTO THE AND PUBLICATIONS

OF THE NATIONAL BUREAU OF ECONOMIC RESEARCH

• I. The object of the National Bureau 'of Economic Research is to ascertainand to present to the public important economic facts and their interpretation ina scientific and impartial manner. The Board of Directors is charged with theresponsibility of ensuring that the work of the National Bureau is carried on instrict conformity with this object.

2. To this end the Board of Directors shall appoint one or more Directorsof Research.

3. The Director or Directors of Research shall submit to the members ofthe Board, or to its Executive Committee, for their formal adoption, all specificproposals concerning researches to be instituted.

4. No report shall be published until the Director or Directors of Research shallhave submitted to the Board a summary drawing attention to the character of thedata and their utilization in the report, the nature and treatment of the problemsinvolved, the main conclusions and such other information as in their opinion wouldserve to determine the suitability of the report for publication in accordance withthe principles of the National Bureau.

5. A copy of any manuscript proposed for publication shall also be submittedto each member of the Board. For each manuscript to be so submitted a specialcommittee shall be appointed by the President, or at his designation by the Execu-tive Director, consisting of three Directors selected as nearly as may be one fromeach general division of the Board. The names of the special manuscript committeeshall be stated to each Director when the summary and report described in para-graph (4) are sent to him. It shall be the duty of each member of the committeeto read the manuscript. If each member of the special committee signifies hisapproval within thirty days, the manuscript may be published. If each member ofthe special committee has not signified his approval within thirty days of the trans-mittal of the report and manuscript, the Director of Research shall then notify eachmember of the Board, requesting approval or disapproval of publication, and thirtyadditional days shall be granted for this purpose. The manuscript shall then not bepublished unless at least a majority of the entire Board and a two-thirds majority ofthose members of the Board who shall have voted on the. proposal within the timefixed for the receipt of votes on the publication proposed shall have approved.

6. No manuscript may be published, though approved by each member of thespecial committee, until forty-five days have elapsed from the transmittal of thesummary and report. The interval is allowed for the receipt of any memorandumof dissent or reservation, together with a brief statement of his reasons, that anymember may wish to express; and such memorandum of dissent or reservationshall be published with the manuscript if he so desires. Publication does not,however, imply that each member of the Board has read the manuscript, or thateither members of the Board in general, or of the special committee, have passedupon its validity in every detail.

7. A copy of this resolution shall, unless otherwise determined by the Board, beprinted in each copy of every National Bureau book.

(Resolution adopted October 25, 1926 and revised February 6, 1933and February 24, 1941)

FOREWORD

The general design of this study was conceived and some calculationsinitiated in the late 1930's, in the course of work on National Income andIts Composition, 1919-1938 (1941). But while we recognized that dis-tinguishing the shares of upper groups would lend additional interest andvalue to the other analysis of our national income totals, it soon becameevident that the estimates needed would be so difficult as to delay by yearsthe report then under way. It was therefore decided to postpone thepresent study until after completion of National Income and Its Compo-sition. Work was resumed in 1941, but the pace was slow because attentionhad to be concentrated on other topics. Indeed, full emphasis on this studybecame possible only late in 1946, and the major part of the work occupiedthe next four years. The report was substantially completed in 1950.

Throughout these years I had the invaluable assistance of ElizabethJenks and Lillian Epstein. Miss Jenks carried the burden of the work, ofthe several revisions of estimates and analysis, and of the innumerabledetails attendant upon seeing the report through its various phases. Thestudy owes much to Miss Jenks' perseverance and patience, and to MissEpstein whose other duties allowed of only intermittent help.

In the course of work, aid in obtaining unpublished materials waskindly and promptly given by various data collecting agencies, particu-larly the Bureau of Internal Revenue, the Bureau of the Census, and theSurvey Research Center at the University of Michigan. I am indebted toThomas C. Atkeson and Marius Farioletti of the Bureau of InternalRevenue; A. Ross Eckler of the Bureau of the Census; and GeorgeKatona of the Survey Research Center. 0. C. Stine of the Bureau ofAgricultural Economics, Selma F. Goldsmith and Charles F. Schwartzof the National Income Division of the Department of Commerce, andDuncan McC. Holthausen and Ralph A. Young of the Research Divisionof the Federal Reserve Board were also helpful. And I am indebted tomy friends Hildegarde Kneeland and Clark Warburton for unpublishedestimates and data from their files.

The report was reviewed by a committee of the National Bureau staff.It benefited from comments by Ruth P. Mack, Thor }lultgren, and espe-

vi'

viii FOREWORD

cially those by Geoffrey H. Moore. A preliminary and brief version waspresented for discussion at the spring 1949 meeting of the Conferenceon Research in Income and Wealth. I profited greatly from the variouscritical suggestions made at that meeting.

Martha Anderson edited the volume, and contributed much to itsreadability. H. Irving Forman is responsible for the charts.

My sincere thanks go to one and all.

Simon Kuznets

CONTENTS

FOREWORD Vii

INTRODUCTION AND SUMMARY Xxvii

1 Aim of the Study xxvii

2 The Basic Procedure xxix

3 Variants and Definitions xxxii

4 Major Findings xxxv

5 Directions of Further Inquiry xxxix

Volume One

PART I

LEVEL OF AND CHANGES IN SHARES 1

CHAPTER 1 AVERAGE LEVELS OF INCOME SHARES, 1919-1938 3

1 Income Shares, Upper Groups of Total Population 3

2 Income Shares, Upper Groups of Nonfarm Population 15

3 Level of Shares by Type of Income 17

4 Type-Structure of Upper Group Incomes 25

5 Redistribution by Omitting or Equalizing Property Incomes 27

CHAPTER 2 CHANGES IN INCOME SHARES OVER TIME, SEVERAL

VARIANTS, 1913-1948 32

1 Changes since 1939 322 Changes in Decade Averages 43

3 Changes during Business Cycles 48

4 Changes in Inequality within Upper Groups 58

CHAPTER 3 CHANGES IN INCOME SHARES BY TYPE, 1919-1948 63

1 Changes since 1939 64

ix

X CONTENTS

2 Changes in Decade Averages 73

3 Changes during Business Cycles 83

PART II

CHARACTERISTICS OF UPPER INCOME GROUPS 93

CHAPTER 4 STATISTICAL DETERMINANTS OF UPPER INCOME

SHARES 951 Income Unit 95

a) From recipient to spending unit 96b) From spending unit to person 104c) From spending unit to 'equivalent adult' 107d) Concluding comments 109

2 Income Scope 110a) Total and money income 110b) Total and economic income 114c) Total income and net income, tax definition 115

3 Combination of Income Types 117a) Extent of combination: top group and all tax returns 117b) Effect of combination on share of top group 120c) Effect of combination on shares of groups below the top 127d) Implications 130

4 Mobility into and out of Upper Income Groups 131a) Evidence 131b) Mobility and share of top income group 139

CHAPTER 5 SOCIAL CHARACTERISTICS OF UPPER INCOME GROUPS 141

1 Sex and Age 142

2 Education, Occupation, and Industry 146

3 Size of Spending Unit 157

4 Place of Residence 159

5 Expenditure-Income Pattçrns 165

PART III

INCOME AND SAVINGS 171

CHAPTER 6 SHARES OF UPPER INCOME GROUPS IN SAVINGS 173

1 Setting of the Problem 173

2 Effect of Changes in Savings-Income Ratios onChanges in Shares in Individuals' Total Savings 179

CONTENTS xi

a) Proportional changes in R 179b) Absolute changes in R 180

3 Statistical Evidence on Savings-Income Ratios 182a) Various samples, total population 182b) Population subdivisions 191c) Brookings Special Sample for 1928-32 201

4 Factors Making for Stability of Savings-Income Ratiosat Upper Income Levels 205

5 Summary and Implications 214

APPENDIX 1 Basic Tables for Calculating Income Multiples andSavings-Income Ratios from the Sample SurveyData on Income and Savings 219

Volume Two

PART IV

DERWATION AND CHARACTERISTICS OF THE ESTIMATES 241

CHAPTER 7 COVERAGE OF FEDERAL INCOME TAX RETURNS 243

1 Tax Return Population 243

2 Tax Return Income 253

3 Net Deficit Returns 262

4 Relative Income Levels, Tax Return and Total Population 264

APPENDIX 2 267

Section A: Tabular Summary of the Analysis of Federal IncomeTax Returns by Individuals, 1919-1948 268

Section B: Special Notes on the Analysis for 1913-1918 274Section C: Statistics of Income Revisions 277

CHAPTER 8 THE BASIC VARIANT 279

1 Basic Variant, Total Population 2802 Coverage of Farm Population by Tax Returns 285

3 Basic Variant, Nonfarm Population 294

APPENDIX - 301

Section A: Sample Calculation of Income Share of Top1 Percent, Basic Variant, Total Population, 1929 302

Xli CONTENTS

Section B: Calculation of Hypothetical Proportion of FarmPopulation in Tax Return Population, 1929 303

Section C: Sample Calculation of Income Share of Top1 Percent, Basic Variant, Nonf arm Population, 19.29 305

Section D: Sample Calculation of Ratios for Table 78,Columns 2-5, 1929 307

CHAPTER 9 ADJUSTMENTS FOR SCOPE OF INCOME 308

1 Compensation of Nonfederal Government Employees 308

2 Imputed Rent S 318

3 Federal Income Taxes 325

4 Gains and Losses on Sales of Assets 339

APPENDIX 4 355Section A: Sample Calculation of Adjustment to Include

Compensation of State and Local GovernmentEmployees, 1929 356

Section B: Adjustment to Include Imputed Rent 360Section C: Sample Calculation of Adjustment to Exclude

Federal Income Taxes, 1929 362

Section D: Sample Calculation of Adjustment to Include Excessof Gains over Losses from Sales of Assets, 1929 364

CHAPTER 10 ADJUSTMENTS FOR UNIT AND BASIS OF

CLASSIFICATION 3661 Adjustment for Family Status, Preliminary 3662 Adjustment for Family Status, Final 381

3 Incompleteness of the Adjustment for Family Status 385

4 Adjustment for Income Base — Unwarranted Inclusions 3875 Adjustment for Income Base — Unwarranted Deductions 394

6 Adjustment for Income Base Suggested by Other Data 404

APPENDIX 5 411

Section A: Sample Calculation of Adjustment for FamilyStatus, 1929 412

Section B: Modification of Adjustment for Family Statusfor Limited Size of Tax Return Population 417

Section C: Adjustments for Maximum Effect of UnwarrantedInclusions and Deductions 422

CONTENTS xiii

Section D: Modification of Adjustment for UnwarrantedDeductions for Limited Size of Tax ReturnPopulation 430

CHAPTER 11 RELIABILITY OF ESTIMATES 435

1 Errors in Sampling Returns with Net Income under $5,000 435

2 Omissions from Income Tax Data — General Considerations 437

3 Omissions from Income Tax Data — Comparisons withSamples 441a) Comparison with NRC Distributions for 1935-36 442b) Comparison with BLS-BHE Survey for 1941 446c) Comparison with Census Samples for 1944, 1945,

and 1947 449

d) Comparison with Surveys of Consumer Financesfor 1945-47 452

4 The Evidence for 1944-48 4545 Sample Audit Study of 1948 Tax Returns 4626 Comparison with Goldenthal's Estimates 466

APPENDIX 6 469

Section A: National Resources Committee Distributions,

1935-1936 470Section B: OPA Revision of NRC Distributions for 1935-1936 480Section C: Tucker Modification of NRC Distributions for

1935-1936 489Section D: BLS-BHE Survey for 1941 492Section E: Census Samples for 1944, 1945, 1947, and 1948 499Section F: Surveys of Consumer Finances for 1945-1948 506

PARTY

BASIC REFERENCE TABLES 511

ADDENDUM: CORRECTIONS AND REVISIONS 699

INDEX 707

X1V CONTENTS

TABLES

1 Average Annual Income Shares of Upper Income Groups ofTotal Population and Average Annual Adjustment forVarious Factors, 1919-1938 4

2 Average Annual Income Shares of Upper Income Groups ofNonfarm Population and Average Annual Adjustment forVarious Factors, 1919-1938 16

3 Average Annual Shares of Upper Income Groups inCountrywide Totals of Various Types of Income: BasicVariant, Total Population, .1919-1938 18

4 Average Annual Shares of Upper Income Groups inCountrywide Totals of Various Types of Income: Basic•Variant, Nonfarm Population, 1919-1938 . 19

5 Absolute Inequality and Concentration Ratios, Based onAverage Annual Shares of Upper Income Groups in VariousTypes of Income: Basic Variant, Total Population,1919-1938 22

6 Absolute Inequality and Concentration Ratios, Based onAverage Annual Shares of Upper Income Groups in VariousTypes of Income: Basic Variant, Nonf arm Population,1919-1938 23

7 Average Annual Percentages of Various Types of Income inTotal Income, Upper Income Groups and Total Population:Basic Variant, Total Population, 1919-1938 26

8 Average Annual Percentages of Various Types of Income inTotal Income, Upper Income Groups and Norif arm Popu-lation: Basic Variant, Nonfarm Population, 1919-1938 27

9 Average Annual Shares of Income After Removal or EqualDistribution of Property Incomes: Basic Variant, TotalPopulation, 1919-1938 . 29

10 Average Annual Shares of Income After Removal or EqualDistribution of Property Incomes, Assuming Part of Entre-preneurial Income to be Property Income: Basic Variant,Total Population, 1919-1938 .

31

11 Changes in Shares of Upper Income Groups, SeveralVariants, Total and Nonf arm Population, 1939-1946 36

12 Changes in Shares of Upper Income Groups, BasicVariant Before and After Federal Income Taxes: Total andNonfarm Population, 1939-1948 39

CONTENTS XV

13 Range of Annual Variations in Shares of Upper IncomeGroups, Three Variants, 1919-1938 44

14 Average Level of Shares of Upper Income Groups, ThreeVariants, Total and Nonfarm Population, 19 19-28,1929-38, and 1939-48 46

15 Change per Year in Shares of Upper Income Groups duringBusiness Cycles, Basic Variant, Total and NonfarmPopulation, 1913-1946 50

16 Change per Year in Shares of Upper Income Groups duringBusiness Cycles, Economic Income Variant, Total andNonfarm Population, 1919-1946 54

17 Change per in Shares of Upper Income Groups duringBusiness Cycles, Disposable Income Variant, Total andNonfarm Population, 1919-1946 56

18 Change per Year in Shares of Upper Income Groups duringBusiness Cycles, Disposable Income Variant IncludingCorporate Savings, Total Population, 1919-1946 58

19 Changes in Relative Inequality (Concentration Ratio) inDistribution of Total Income within the Top 5 PercentGroup of Total and Top 7 Percent Group of Nonf armPopulation, Three Variants, 1919-1948 60

20 Changes in Shares of Upper Income Groups by Type, BasicVariant, Total and Nonfarm Population, 1939-1948 66

21 Changes in Decade Averages of Shares of Upper IncomeGroups by Type, Basic Variant, Total and NonfarmPopulation, 1919-1948 74

22 Change per Year during Business Cycles in Shares of UpperIncome Groups in Total Income Due to Inter-type andIntra-type Shifts, Basic Variant, Total and NonfarmPopulation, 1919-1946 - 84

23 Change per Year during Business Cycles in Shares of UpperIncome Groups in Countrywide Totals of Various IncomeTypes, Basic Variant, Total and Nonfarm Population,1919-1946 88

24 Shares of Top Groups in Arrays of Different Units, andAverage Number per Unit or per Family, Various Samples 98

25 Shares of Upper Groups in Different Concepts of Income,Various Samples or Tax Data 112

XV1 CONTENTS

26 Extent of Combination of Income Types, Top Group ofReturns and All Returns, Various Tax Data 118

27 Effect of Combination of Income Types and of Inequalityof Size Distribution within Each Type on Share of TopGroup of Returns in Total Income, Wisconsin and DelawareState Tax Returns 122

28 Distribution of Shares of Top Income Group in VariousIncome Types among Shares of Large, Small, and No Receipts 126

29 Effect of Combination of Income Types and of Inequalityof Size Distribution within Each Type on Shares of UpperGroups of Returns in Total Income, Wisconsin and DelawareState Tax Returns 128

30 Regression of Top Income Group Mean Expressed asRelative of Mean for Entire Distribution, Various Samples 133

31 Dispersion of Units in Top Income Group of a Given Yearamong Groups of Following or Preceding Years, VariousSamples 135

32 Effect of the Several Income Types upon Regression ofTop Income Group Mean, Two Samples 137

33 Percentage Distribution of Earners and Income Recipientsby Sex and by Age Classes, Top Group and Total: Minnesota,193 8-1939, and Census Samples, 1947-1949 143

34 Percentage Distribution of Earners in Each of EightOccupational Classes by Age Brackets, Top Group andTotal: Minnesota, 1938-1939 145

35 Percentage Distribution of Civilian Earners by Years ofSchool Completed, Top Group and Total: Census Sample(nonfarm), 1946 147

36 Distribution of Families by Occupation, Upper IncomeGroups and Total: Consumer .Purchases Study, 1935-1936 148

37 Percentage Distribution of Earners in Each Age Bracket byOccupation, Top Group and Total: Minnesota, 1938-1939 152

38 Percentage Distribution of Income Recipients and Heads ofFamilies by Occupation, Top Income Group and -Total:Census Samples, 1947-1949 155

39. Percentage Distribution of Income Recipients and Heads ofFamilies by Industry, Top Income Group and Total:Census Samples, 1947-1949 156

CONTENTS XV1I

40 Percentage Distribution of Persons and Spending Units inTop Income Group and in the Total, by Size of SpendingUnit: Sample Data, 1935-36, 1947, and 1948 158

41 Distribution of Families in Upper Income Groups and in theTotal, by Size of Community: Consumer Purchases Study,1935-1936 160

42 Percentage Distribution of Families in Upper Income Groupsand in the Total by Region: Consumer Purchases Study,1935-1936 163

43 Percentage Distribution of Spending Units in Upper IncomeGroups and in the Total by Size of Community: CensusSamples, Averages for 1947 and 1948 164

44 Expenditures per Capita (Including Gifts and Taxes) bySingle Persons and Nonrelief Families at Identical Levels ofIncome per Capita: Consumer Purchases Study, 1935-1936 166

45 Expenditures per Capita (Including Gifts and Taxes) byCommunity Size Groups at Identical Levels of Income perCapita, Nonrelief Families: Consumer Purchases Study,1935-1936 168

46 Expenditures per Capita (Including Gifts and Taxes) byOccupational Groups at Identical Levels of Income perCapita, Nonrelief White Families, Chicago: ConsumerPurchases Study, 1935-1936 169

47 Savings of Upper Income Groups as Percentages ofIndividuals' Total Income Receipts, Assuming ConstantSavings-Income Ratios for Given Upper Income Levels,1919-1945 176

48 Savings as Percentages of Income, Given Relative Levels ofIncome per Consuming or Spending Unit: Various Samples,1929-1950 187

49 Savings as Percentages of Income, Given Relative Levels ofIncome per Capita: Various Samples, 1929-1942 - 191

50 Savings as Percentages of Income, Given Relative Levels ofIncome per Consuming Unit and per Capita, Single Personsand Families: Various Samples, 1929-1942 193

51 Savings as Percentages of Income, Given Relative Levels ofIncome per Consuming Unit and per Capita, Farm andNonfarm Families: Various Samples, 1929-1942 195

XVIII CONTENTS

52 Illustrative Recalculation of Savings as Percentages ofIncome, Given Relative Levels of Income per Family:Consumer Purchases Study, 1935-1936 199

53 Summary of Analysis of Brookings Special Sample,1928-1932 203

54 Shares of the Top Income Group in Total Savings in Periodsof Change in the Over-all Savings-Income Ratio: Two Samples 216

55 Estimated Income Excluding Capital Gains or Losses,Single Persons and Families: Brookings Data, 1929 220

56 Estimated Savings, Farm Families, Nonfarm Families, andSingle Persons: Brookings Data, 1929, Assumption 1 221

57 Unadjusted Income Multiples per Consuming Unit, andSavings-Income Ratios: Brookings Data, 1929,Assumption 1 222

58 Savings-Income Ratios: Brookings Data, 1929,Assumption 2 224

59 Adjusted Income Multiples per Consuming Unit and perCapita, and Savings-Income Ratios: Brookings Data, 1929 226

60 Number, Income, and Savings of Units Classified by TheirCurrent Year Income: Brookiñgs Special Sample, 1928-1932 228

61 Income Multiples and Savings-Income Ratios of UnitsClassified by Their Current Year Income: BrookingsSpecial Sample, 1928-1932 230

62 Number, Income, and Savings of Units Classified by TheirAverage Income for 1928-1932, Brookings Special Sample 231

63 Adjusted Income Multiples per Consuming Unit and perCapita, and Savings-Income Ratios: Consumer PurchasesStudy, 1935-1936 232

64 Adjusted Income Multiples per Consuming Unit and percapita, and Savings-Income Ratios: Survey of Spendingand Saving in Wartime, 1941 234

65 Adjusted Income Multiples per Consuming Unit and perCapita, and Savings-Income Ratios: Survey of Spendingand Saving in Wartime, 1942, First Quarter 237

66 Income Multiples per Spending Unit, and Savings-IncomeRatios: Surveys of Consumer Finances, 1945-1950 238

67 Distribution of Federal Income Tax Returns betweenFamily and Nonfamily Types, 1913-1948 245

CONTENTS xx68 Number of Persons per Family Return by Net Income

Classes, Tax Definition, 1916-1946 24969 Population Covered by Federal Income Tax Returns,

1913-1948 25270 Adjustments to Approximate Economic Income, Federal

Income Tax Returns, 1918-1948 25671 Exclusions and Additions in Passing from Net Income, Tax

Definition, to Economic Income, by Net Income Classes,1916-1948 258

72 Economic Income Covered by Federal Income Tax Returnsand Individuals' Total Income Receipts, 1913-1948 261

73 Relative Proportion of Net Deficit Returns, 1928-1948 263

74 Relative Income Levels, Tax Return and Total Population,1913-1948 265

75 Coverage of the Basic Variant, Total Population,1913-1948 282

76 Number and Income of Returns Showing Income fromFarming, and Number and Income of All Tax Returns,1918-39, 1941 286

77 Percentages that Population and Income on Farm ReturnsConstitute of Total Tax Return Population and IncomeCompared with Percentage that Income of Farm PopulationConstitutes of Total Income Receipts, 1918-39, 1941 292

78 Analysis of Relative Difference between Shares of UpperIncome Groups in Basic Variant for Nonfarm Populationand Those for Total Population, 19 13-1948 296

79 Shares of Upper Income Groups of Employees of NonfederalGovernments and of Total and Nonfarm Population,1937-1938 310

80 Adjustment for Inclusion of Compensation of NonfederalGovernment Employees and Factors Affecting Its Magnitude:Basic Variant, Total Population, 1917-1938 312

81 Adjustment for Inclusion of Compensation of NonfederalGovernment Employees and Factors Affecting Its Magnitude:Basic Variant, Nonfarm Population, 1917-1938 316

82 Adjustment for Inclusion of Imputed Rent and the Factorthat Determines Its Magnitude: Basic Variant, TotalPopulation, 1913-1947 320

xx

83 Adjustment for Inclusion of Imputed Rent and the Factorthat Determines Its Magnitude: Basic Variant, NonfarmPopulation, 1913-1947 323

84 Effect of Deducting Federal Income Taxes: Basic Variant,Total Population, 1914-1947 327

85 Effect of Deducting Federal Income Taxes: Basic Variant,Nonfarm Population, 1914-1947 330

86 Ratios of Shares of Upper Income Groups Before to SharesAfter Deduction of Federal Income Taxes: Basic Variant,Total Population, 1914-1947 332

87 Ratios of Shares of Upper Income Groups Before to SharesAfter Deduction of Federal Income Taxes: Basic Variant,Nonfarm Population, 1914-1947 336

88 Effect of Including Excess of Gains over Losses from Salesof Assets: Basic Variant, Total Population, 1917-1946 342

89 Effect of Including Excess of Gains over Losses from Salesof Assets: Basic Variant, Nonfarm Population, 1917-1946 345

90 Ratios of Shares of Upper Income Groups After to SharesBefore Inclusion of Excess of Gains over Losses from Salesof Assets: Basic Variant, Total Population, 1917-1946 348

91 Ratios of Shares of Upper Income Groups After to SharesBefore Inclusion of Excess of Gains over Losses from Salesof Assets: Basic Variant, Nonfarm Population, 1917-1946 350

92 Changes in Shares of Upper Income Groups Produced byPreliminary Adjustment for Family Status: Basic Variant,Total Population, 19 17-1946 368

93 Changes in Shares of Upper Income Groups Produced byPreliminary Adjustment for Family Status: Basic Variant,Nonfarm Population, 1917-1946 376

94 Changes in Shares of 4th and 5th, and 6th and 7th PercentageBands Produced by Final Adjustment for Family Status:Basic Variant, Total and Nonf arm Population, 1917-1946 382

95 Shares of Upper Income Groups Calculated for 1942 forJoint Returns and Returns of Men, Nonheads, Based onNet Income as Reported 386

96 Changes in Shares of Upper Income Groups Produced byAdjustment for Maximum Effect of Unwarranted Inclusions:Basic Variant, Total Population, 1919-1947 389

CONTENTS TI xxi

97 Changes in Shares of Upper Income Groups Produced byAdjustment for Maximum Effect of Unwarranted Inclusions:Basic Variant, Nonfarm Population, 1919-1947 391

98 Changes in Shares of Upper Income Groups Produced byPreliminary Adjustment for Maximum Effect of UnwarrantedDeductions: Basic Variant, Total Population, 1919-1943 396

99 Changes in Shares of Upper Income Groups Produced byPreliminary Adjustment for Maximum Effect of UnwarrantedDeductions: Basic Variant, Nonf arm Population, 1919-1943 399

100 Changes in Shares of 2nd and 3rd, and Lower PercentageBands Produced by Final Adjustment for Maximum Effectof Unwarranted Deductions: Basic Variant, Total andNonf arm Population, 19 19-1943 403

101 Distribution of Income by Different Income Bases: FederalTax Returns for 1936 and Wisconsin Tax Returns for 1929,1934-36 406

102 Adjustments for Maximum Effect of Unwarranted Inclusionsand Deductions, Basic Variant, Total Population, andThose Suggested by Other Data, Selected Years 408

103 Estimates from Samples Compared with Tabulations ofData from Returns, Net Income Classes under $5,000, 1934 436

104 Percentage Shares of Upper Income Groups Based onIncome Tax Data Compared with Those Based on NRCDistributions, 1935-1936 444

105 Percentage Shares of Upper Income Groups Based onIncome Tax Data Compared with Those Based onBLS-BHE Survey, 1941 447

106 Percentage Shares of Upper Income Groups Based onIncome Tax Data Compared with Those Based on theCensus Samples, 1944, 1945, and 1947 451

107 Percentage Shares of Upper Income Groups Based onIncome Tax Data Compared with Those Based on theSurveys of Consumer Finances, 1945-1947 453

108 Percentage Shares of Upper Income Groups, Total and perPercentile, Basic Variant, Total Population, 1941-1948 455

109 Percentage Shares per Percentile of Population in VariousTypes of Income, Percentage Bands by Total Income, BasicVariant, Total Population, 1941-1948 460

Xxii CONTENTS

109a Summary of Results of Sample Audit Study of 1948 Returns 463110 Percentage Share of the Top 1 Percent, Our Estimates

Compared with Goldenthal's, 1919-1936 467111 Number of and Population Represented by Returns with Net

Income, Tax Definition, by Net Income Classes, 1916-1948 513112 Net Income, Tax Definition, and Economic Income on Net

Income Returns, by Net Income Classes, 19 16-1948 524113 Income per Capita (dollars) on Net Income Returns, by Net

Income Classes: Basic Variant and Adjustments, 1916-1948 546

114 Income Receipts of Individuals, 19 13-1948 570115 Items Used in Varying the Scope of Population and Income

of the Analysis, 1913-1948 578

116 Percentage Shares of Upper Income Groups in Total IncomeReceipts: Basic Variant, Total and Nonfarm Population,1913-1948 582

117 Per Capita Income of Entire Population, of Upper IncomeGroups, and at Lower Partition Line of Each Income Group(dollars): Basic Variant, Total and Nonfarm Population,1913-1948 591

118 Percentage Shares of Upper Income Groups in TotalIncome Receipts, Basic Variant, Total Population,Adjusted for Various Changes in Scope of Income, 1913-1948 596

119 Percentage Shares of Upper Income Groups in Income ofNonfarm Population, Basic Variant, Nonfarm Population,Adjusted for Various Changes in Scope of Income, 19 13-1948 607

120 Percentage Shares of Upper Income Groups in TotalIncome Receipts, Basic Variant, Total Population,Adjusted for Changes in Unit and Income Used inClassification by Size, 19 17-1947 619

121 Percentage Shares of Upper Income Groups in Income ofNonfarm Population, Basic Variant, Nonfarm Population,Adjusted for Changes in Unit and Income Used inClassification by Size, 1917-1947 627

122 Percentage Shares of Upper Income Groups and Per CapitaIncome of Entire Population and of Upper Income Groups,Economic and Disposable Income Variants; Per CapitaIncome at Lower Partition Line of Each Income Group,Economic Income Variant: Total and NonI arm Population,1919-1946 635

CONTENTS Xxiii

123 Percentage Shares of Upper Income Groups in CountrywideAggregates of Various Types of Income, Basic Variant,Total Population, 1917-1948 646

124 Percentage Shares of Upper Income Groups in CountrywideAggregates of Various Types of Income, Basic Variant,Nonfarm Population, 1917-1948 657

125 Percentages of Various Types of Income in Total Income ofUpper Income Groups, Basic Variant, Total Population,1917-1948 668

126 Percentages of Various Types of Income in Total Income ofUpper Income Groups, Basic Variant, Nonf arm Population,1917-1948 684

ADDENDUM TABLES

1 Correction of Nonf arm Population and of Percentage Sharesof Upper Income Groups in Income of Norifarm Population,Basic Variant, Nonfarm Population, 1913-1947 700

2 Population and Income Aggregates Revised to Take Accountof Latest Published Estimates, 1940-1947 703

3 Percentage Shares of Upper Income Groups Revised to TakeAccount of Latest Published Estimates of Population andIncome, 1940-1947 704

CHARTS

1 Lorenz Curve, Based on Average Annual Shares of UpperIncome Groups of Total Population in Dividends, 1919-1938 21

2 Income Shares of Upper Income Groups, Total Population,Three Variants, 1913-1948 33

3 Income Shares of Upper Income Groups, Nonfarm Population,Three Variants, 1913-1948 34

4 Relative Inequality in Distribution of Total Income withinthe Top Group (Concentration Ratio), Total and Nonf armPopulation, Three Variants, 1919-1948 61

5 Percentages that Population and Income on Farm ReturnsConstitute of Total Tax Return Population and IncomeCompared with Percentage that Income of Farm PopulationConstitutes of Total Income Receipts, 19 18-39 and 1941 293

xxiv CONTENTS

6 Relative Difference between Income Shares of Upper IncomeGroups in Basic Variant for Nonf arm Population and Thosefor Total Population, and Factors Determining ItsMagnitude, 1913-1948 298

7 Adjustment for Inclusion of Compensation of NonfederalGovernment Employees, Basic Variant, Total Population,1917-1938 313

8 Adjustment for Inclusion of Compensation of NonfederalGovernment Employees, Basic Variant, NonfarmPopulation, 1917-193.8 317

9 Adjustment for Inclusion of Imputed Rent, Basic Variant,Total Population, 1913-1947 321

10 Adjustment for Inclusion of Imputed Rent, Basic Variant,Nonf arm Population, 1913-1947 324

11 Effect of Deduction of Federal Income Taxes, Basic Variant,Total Population, 1914-1947 328

12 Effect of Deduction of Federal Income Taxes, Basic Variant,Nonfarm Population, 19 14-1947 331

13 Percentage Federal Income Taxes Are of Income ReceiptsExcluding Taxes, Basic Variant, Total Population, 19 14-1947 333

14 Percentage Federal Income Taxes Are of Income ReceiptsExcluding Taxes, Basic Variant, Nonfarm Population,1914-1947 338

15 Effect of Including Excess of Gains over Losses from Salesof Assets, Basic Variant, Total Population, 19 17-1946 343

16 Effect of Including Excess of Gains over Losses from Salesof Assets, Basic Variant, Nonfarm Population, 19 17-1946 346

17 Percentage Excess of Gains over .Losses from Sales of AssetsIs of Income Receipts, Basic Variant, Total Population,1917-1946 349

18 Percentage Excess of Gains over Losses from Sales of AssetsIs of Income Receipts, Basic Variant, Nonf arm Population,1917-1946 352

19 Preliminary Adjustment for Family Status, Basic Variant,Total Population, 1917-1946 . 370

20 Preliminary Adjustment for Family Status, Basic Variant,Nonf arm Population, 1917-1946 378

CONTENTS XXV

21 Final Adjustment for Family Status, Lower PercentageBands, Basic Variant, Total and Nonfarm Population,1917-1946 384

22 Adjustment for Maximum Effect of Unwarranted Inclusions,Basic Variant, Total Population, 1919-1947 390

23 Adjustment for Maximum Effect of Unwarranted Inclusions,Basic Variant, Nonfarm Population, 1919-1947 392

24 Preliminary Adjustment for Maximum Effect of UnwarrantedDeductions, Basic Variant, Total Population, 1919-1943 397

25 Preliminary Adjustment for Maximum Effect of UnwarrantedDeductions, Basic Variant, Nonfarm Population, 1919-1943 400

26 Changes in Shares Due to Final Adjustment for MaximumEffect of Unwarranted Deductions, Lower Percentage Bands,Basic yariant, Total and Nonfarm Population, 1919-1943 1.04

INTRODUCTION AND SUMMARY

1 Aim of the StudyA distribution of income among population groups classified by the sizeof the income each receives inevitably emphasizes income differences. Thereason for studying such size distributions is the presumption that the in-come differences revealed will contribute toward an understanding andappraisal of economic processes.

This general statement covers a wide variety of aims that may be pur-sued. The immediate aim of this investigation is to measure the level ofand changes in at least one segment of the size distribution of income inthis country. Scarcity of data and of testable results of past work in the fieldlimit both the possible scope and depth of description and analysis. Butwe view income here as one link in the circuit flow of productive resourcesand final products in the economy, and assume that even a partial recordof differences in income will be revealing if approached as consequencesof antecedent factors (production) and causes of subsequent results (ex-penditures and savings).

This statement of our aim suggests points that should facilitate properunderstanding of much of what follows.a) First, many terms we employ to describe differences in income andother aspects of the distribution may, because of use in studies aiming atappraisal rather than analysis, carry connotations foreign to their meaninghere. When we say 'income inequality', we mean simply differences in in-come, without regard to their desirability as a system of reward or unde-sirability as a scheme running counter to some ideal of equality ofeconomic opportunity. Likewise, when we say 'income equality', we aredescribing a situation in which each unit's income is equal to the totaldivided by the number of units — a situation directly opposite to that inwhich one unit gets all the income and the others none. By a group's'share' we mean the percentage its income constitutes of total income re-ceived by all units, nothing more. We do not mean its net draft upon agiven stock or pool, to the detriment of all other groups. For all we know,the given group may contribute more than its 'share' and can do so be-cause of its 'share' — in other words, the latter represents in fact a netcontribution.

xxvii

xxviii INTRODUCTION

This caution is important because misunderstandings may arise, andperhaps the author himself has unwittingly fallen victim to some. To avoidsuch connotations of commonly used terms completely, we could haveemployed quite unfamiliar, new terms; but it did not seem wise to en-cumber an already difficult subject with technical abracadabra. It seemedbetter to use familiar terms, and insist (as is done in the older, experi-mental, sciences which use such common terms as 'force', 'energy','matter', 'heat', and 'light') on their operational signilicance in measure-merit as the only proper one.b) Our estimates are for upper income groups alone because basic datathat would permit us to study the complete size distribution of income foran appreciably long period are lacking. Yet it may be asked whether mea-sures of income shares of a relatively small upper sector can contributesufficiently to the basic aim of the inquiry to warrant the labor and effortexpended.

The answer is 'yes', for two, somewhat distinct reasons. First, whateverinsight and understanding we may gain concerning the factors that de-termine the shares of upper income groups, and of the ways in which theirsize relative to the shares of the rest of the population affects the disposi-tion of income, have a carry-over value, i.e., with some qualifications theysuggest the factors influencing the shares of other groups in the incOmedistribution. From the demographic, social, and occupational character-istics of recipients in upper income groups we can infer the characteristicsof recipients in lower groups; we can make similar inferences as to theassociation of income level with income disposition. Second, even a smallupper group such as the one covered in this study is important becauseits savings constitute a large proportion of total savings by individuals, andits expenditures on at least some categories of consumer goods may alsoaccount for a high proportion of the total. Thus, despite its smallness, theupper sector studied here directly affects the apportionment of total in-come between expenditures and savings, an apportionment that has beenincreasingly stressed by economic analysis in recent decades.c) The final and most important point is that our aim is not sharplyfocused enough to provide a set of criteria with which unequivocal choicesamong definitions of income scope and unit can be made. We do not knowin what specific form to cast the size distribution of income so that it willreveal as completely as possible not only the factors that determine thesize of income (i.e., show differences in income as a consequence of strate-gically important factors) but also the effects of its size (i.e., show dif-ferences in income as determinants of patterns of expenditure and saving).

AND SUMMARY xxix

To illustrate: do we know enough about how persons determine theirconsumption expenditures and savings to know whether to include capitalgains and losses in income? And if we do not, how are we to decide whatitems we should include or how we should define the unit in a size dis-tribution?

Since to study different factors or their effects both income and unitmay well have to be defined differently, no single definition or variant ofthe size distribution may suffice. Nor, because the past has not been studiedadequately, do we know which variant is best adapted to the problem athand. As is common in empirical work, we travel in a circle not knowingprecisely what measures to. make or how to make them until we have al-ready completed and studied them. We break out of the circle in the com-mon way too: we make the best measures we can with the data, followingintuition and whatever vague notions we have, and attempt to provideestimates either in several variants or in sufficient detail so that others canconstruct their own variants. To say that the inquiry is concerned largelywith organizing data in such a way that they may be put to various useswould be easy though somewhat misleading: we do select the data andcast them in some form, depending upon how we think differences in in-come are most usefully measured for our purposes. But because our choiceof the form is determined by broad criteria and severely limited by thebasic data, this inquiry cannot go very far toward the analytical purposesthat are its ultimate goal. In that sense it is an unfinished venture, and muststop far short of the final formulation which cannot be made without com-plete knowledge. This is one reason, among others, why at the end of thisbrief summary we come back to questions this study does not answer, andthus to directions of further inquiry which it suggests and for which itconstitutes a preparatory step.

2 The Basic ProcedureThe basic procedure is to compare the number and income of personsrepresented on federal income tax returns with the total population and itsincome receipts. Underlying data are available annually back to 1919, andwith some limitations, back to 1913. Since, except for a few recent years.tax returns cover only a small fraction of total population — the fractionat the highest income levels — our estimates of income shares are for onlya small upper sector.

From the same source material we can, with certain limitations, carrythrough the comparison for various types of income (employee compensa-tion, entrepreneurial income, etc.). We have also used other data — pri-manly sample studies of income — to shed some light on the effect of our

xxx INTRODUCTION

definitions ('income', 'unit', and the like) on the shares of upper incomegroups, as well as on their demographic and social characteristics. Fur-thermore, we attempt to explore the implications of the findings concern-ing changes in the income shares of upper groups for changes in theirshares in savings. But since we deal primarily with the comparison of fed-eral tax return data with countrywide estimates of individuals' incomes, andthe estimates of annual income shares of upper groups so derived, thedifficulties involved in such a comparison are central to the whole inquiry.

They arise from two somewhat distinct sources: (a) likely differencesin the size of errors attaching to the two bodies of data compared; (b)explicitly recognized differences between the latter in the concepts ofincome and income unit.a) Countrywide estimates of income flows to individuals are derivedfrom censuses and other data on income payments originating in theseveral industries. The errors in the aggregates are thus a compound of theerrors attaching to the, components of which the totals are a sum, and littlecan be said about them in a general way. But as these estimates have beenavailable for a number of years, have been tested by the various uses towhich they have been put, and those for recent years have been comparedwith results derived by other methods, we venture the conclusion that theerrors in the aggregates are fairly small — within a 5 percent range in recentyears — and that, on the whole, these aggregates are likely to run short,largely because it is impossible to cover all casual and part-time income.However, for countrywide totals of some income types, e.g., entrepre-neurial income, the relative error is probably wider.

The errors and biases in the income tax data are probably larger. Somepeople, of course, evade reporting completely by not filing; others under-state their income, or overstate the legally allowed exemptions and de-ductions. And as the data are a byproduct of the administration of a highlycomplex and changing tax law, it is not easy to be sure what types of re-ceipt are exempt from tax or even from reporting. Hence, in comparingthem with countrywide totals, we juxtapose a set of highly complex admin-'istrative data, subject to a downward bias of unknown proportions, toestimates derived essentially from census data, and doubtless subject toless understatement.

Some of the possible biases in the tax data were minimized by: (i) usingreported income, unreduced by exemptions or by deductions except in sofar as the latter represent true business costs; (ii) so defining the uppergroup as not to exhaust the tax return population, thereby reducing errorsdue to nonifling, since the latter are most prevalent at levels close to thoseexempt from reporting; (iii) using diverse supplementary data and several

AND SUMMARY XXX1

variant estimates. Even so, errors due to understatement of the income re-ported on the tax returns may well have been large — larger than those inthe countrywide income totals. In our opinion, however, they are not solarge for the upper income groups we cover as to affect seriously the levelsof and changes in their estimated shares. This opinion, supported explicitlyin Chapter 11 and implicitly in many places in the report, is confirmed bythe results of the recent random audit of 1948 returns. In any case, wecannot adjust for biases due to underreporting and must either use the dataor forego the opportunity to learn something, though we may be seeingthrough a glass, darkly. Our decision to go ahead was purely a matter ofjudgment, informed as it may have been, and subject to check by other in-vestigators for whose benefit the technical details that follow are provided.b) The federal income tax data are tabulated for most years during theperiod by broad classes of net income, as defined in the tax law, per return(for a few recent years, the classification is by adjusted gross income). Weare interested in a classification of persons by economic income per capita,i.e., income not inflated by capital gains and not reduced by capital lossesor allowable deductions that represent consumer expenditures (e.g., in-terest on mortgages of owner-occupied houses) rather than business costs.With the available detail we can estimate the number of persons repre-sented on tax returns and their economic income but only for the broadgroups of returns shown by size of net income, tax definition, per return.Hence in trying to approximate the successive upper groups in a sizedistribution of population based on economic income per person, theadjustments, which ideally should be made for each tax return separately,are applied only to the large blocks represented by the aheady formed netincome, tax definition, classes; the returns so adjusted are then rearrayedby economic income per capita.

Much of the calculational complexity of the study arises from this needto reshuffle the. distributions to make them conform to the desired base ofunit and income concept. But because we could not go behind the net in-come classes to the individual returns, we could not adjust them com-pletely. Consequently, the differences in income revealed by our estimatesare less sharp than they would be if we had worked with a size distributionof income in which each unit, properly defined, was classified by the de-sired concept or even if we had worked with groups classified by thedesired concepts of income and receivingunit. In.a classification of popula-tion by economic income per capita the use of groups formed by classify-ing returns by net income as defined in the tax law will necessarily blur ordamp the true spread of the income size. It is as if one tried to paint a finepicture with thick brushes and large blobs of somewhat mixed colors. For

xxxii INTRODUCTION

the same reason, our estimates of income shares of upper groups distin-guish few subgroups: shares for many more could .be calculated, but theadditional detail would be largely spurious because in most years net in-come classes, the basic units with which we have to work, are too few, ortoo affected (at the very top levels) by the use of an income base otherthan the one desired.

3 Variants and DefinitionsFor each net income class in the distribution of. tax returns we calculate thenumber of persons represented including dependents, economic income asdefined below, and per capita economic income. Arraying these classesfrom the highest per capita income down, we derive cumulative totals ofpopulation and income, then draw partition lines cutting off the top 1 per-cent of the population, top 3, top 5 — top in the sense that the populationabove each partitiOn line receives a per capita income higher than thatbelow. But to repeat, the array is of large groups constituted by net income,tax definition, or adjusted gross income, classes — not, unfortunately, ofindividual returns. The income of the top 1, 3, and 5 percent of popula-tion and, by subtraction, that of the 2nd and 3rd, and 4th and 5th per-centage bands from the top, is then expressed as a percentage of individ-uals' total income receipts.

This general procedure varies as we modify' the countrywide incometotal with which the income of the upper groups is compared, as we makethe adjustments in passing to economic income, and as we extend thescope of income. Before describing the several variants, we comment uponthe fundamental aspects of the procedure that were a matter partly ofchoice, partly of necessity: (a) the use of economic income as the mainconcept; (b) the reduction of returns to a per capita basis; (c) the use ofcurrent year income as the basis of classification.a) Economic income as used here is the sum of employee compensation,entrepreneurial income, rent, interest, and dividends. Employee compen-sation, in turn, includes wages and salaries net of employee contributions tosocial security but inclusive of benefits from social insurance and reliefpayments and of other labor income. For most years, however, it is almostidentical with wages and salaries. Economic income, then, comprises pay-ments that are associated with the participation of individuals or of theirproperty in production whose net result is measured in national income.It is not strictly current product evaluated in market prices. In a sense,all income payments are transfers rather than measures of productive con-tribution: wages paid by a business enterprise do not measure the marketvalue of the productive contribution if the firm sustains a substantial net

AND SUMMARY Xxxiii

profit or loss; interest may be paid even though not 'earned' in the givenyear. But it is fair to say that economic income thus defined is perhapsclosest to the comprehensive total that is part of national income viewedas a measure of current product. As already hinted, for some specific pur-poses a different definition of income might be more appropriate; andsome of the variants described below do employ a different definition. Inany case, a statistical inquiry into a size distribution must use some oneor a few concepts of income; and the choice in this case is governed largelyby tie-in with the national income concept and how widely it can be used.

b) We reduce returns to a per capita basis, i.e., divide income totals forgroups of tax returns by the number of persons represented instead of bythe number of returns because a tax return as is a unit of dubioussignificance in any size-of-income analysis. It does not represent the num-ber of income recipients, since there may be more than one recipient perreturn (and the number cannot be ascertained from the available data).Besides, a recipient is a unit of limited usefulness because many personsmay each receive minor amounts of property income and nothing else; andbecause, in any given year, some persons who customarily receive sizeableincomes may be unemployed. Excluding them from the total of recipientsis hardly justified, yet it is difficult to include them since they are notdirectly reported. Nor does the income tax return measure, in and of itself,a family or spending unit, however defined, since a family may file morethan one return, and more than one spending unit may be covered on onereturn. It seemed best, therefore, to reduce returns to a per capita basis;treat them as groups of persons characterized by given levels of per capitaincome; and compare them with the total population as the receiver ofaggregate income flowing to individuals.c) The procedure distinguishes groups that are at the upper levels ofeconomic income per capita in the given year. Since the income reportedon tax returns is for a year, not for a longer period, we must work with adistribution by income incidence in a given year, instead of with a dis-tribution by income status for a longer period. This means that an upperincome group in any given year, say, the top 1 percent, includes units(i.e., returns) thatmay be there in that year alone and may exclude unitsthat are in the top 1 percent the next year. We attempt to indicate how muchmobility there is, although the information is necessarily limited, and sug-gest that, by and large, a substantial proportion of the persons in a givenupper group tend to remain in it or move to neighboring groups. But whilethe upper groups thus distinguished have a resident core that enjoys highincome status, they have a migrating periphery whose relative income level

xxxiv INTRODUCTION

for a longer period is appreciably lower. This is an important qualification,which bars interpreting upper income groups as consisting year-in, year-out of the same single persons and families.

The three variants, developed by the general procedure just outlined,are now described.

i) Since the upper income groups segregated by us in the tax data rep-resent overwhelmingly nonf arm units, they and their income can be com-pared not only with the number and income of the total population but alsowith those of the nonf arm.

For purposes of measurement upper income groups are defined as thetop 5 percent of the total population (subdivided into the top 1, 2nd and3rd, and 4th and 5th percentage bands); and top 7 percent of the nonfarmpopulation (subdivided into the top 1, 2nd and 3rd, 4th and 5th, and 6thand 7th percentage bands). All groups below are designated 'lower incomegroups'.

ii) As already indicated, the available tax data can be treated, withoutloss of detail, so that for each net income class, the economic income andnumber of persons represented can be approximated. The estimates ofupper group shares derived from them are designated the 'basic' variantbecause they are derived directly and in full detail. It is for the basic variantalone, whether for the total or for the nonfarm population, that we canestimate upper group shares not only in individuals' total income receiptsbut also in the countrywide totals of the five component types:compensation, entrepreneurial income, rent, interest, and dividends. Inderiving the shares in these various types, the upper group is classifiedthroughout by its total income, not by its receipts of the given income type.

Further adjustments, made to bring the estimates closer to a true dis-tribution by economic income per capita, allow for the nonreporting ofstate and local government salaries prior to 1938, for the omission ofimputed rent on owner-occupied houses and, most important, for theeffects of classifying the tax data by an inappropriate income base andunit. The resulting estimates, designated the 'economic income' variant,are available for the upper groups of both total and non-farm population,but the adjustments cannot be allocated among the several income types.

Both the basic and the economic income variants employ economic in-come as their base concept. We can modify economic income by deductingfederal income taxes paid (the major part of direct taxes paid by individ-uals) and by including the net balance of realized gains and losses fromsales of assets. The latter is not included in the national income total, noris it properly a part of the economic income of individuals since it does not

AND SUMMARY XXXV

represent the participation of individuals or their property in production.The deduction of taxes and inclusion of gains and losses from sales ofassets thus turn the concept away from economic toward disposable in-come. Hence the estimates so derived (for both total and nonf arm popula-tion) are called the 'disposable income' variant. The term is somewhatmisleading since a true approximation to disposable income would haveto take account of other direct taxes, gifts, gambling gains and losses, andthe like.

With the detail available (much of whIch is given in Part V), it is pos-sible to derive other variants, e.g., economic income after deducting federalincome taxes but before including gains and losses from sales of assets,and disposable income adjusted roughly to include undistributed netprofits or losses of corporations.

4 Major FindingsOf the major findings, of the study, we present five here: (a) the averagelevels and structure of income shares of upper income groups; (b) somecharacteristics of the latter that may shed some light on the causes andconsequences of their relative income position; (c) the recent decline inthe income shares of upper income groups; (d) short term changes inthese shares associated with business cycles; (e) implications of changes inupper income shares for changes in shares of upper income groups in totalsavings of individuals.a) Our estimates are fairly complete for 1919-46; a few go back to 1913,and those in the basic variant extend through 1948. In trying to describethe average level and structure of upper group shares we are confronted bythe fact that they have declined drastically since 1939.Hence an average forthe entire period would be quite unrepresentative. We therefore confine theaverages to the interwar period 1919-38, and qualify them by comparingthem with the levels in recent years.

For the two interwar decades the average shares in the economic incomevariant (i.e., in income excluding gains and losses from sales of assets andbefore taxes) of upper groups of total population (in this summary, weomit shares of the nonfarm population) were: top 1 percent of population,15 percent of income; top 5 percent of population, 30 percent of income.In the basic variant, where the true income range is somewhat understated,the average share of the top 1 percent was 13 percent of income; of the top5 percent of population, 25 percent of income. The degree to which therecent decline modified the income structure of the country can be seenfrom the basic variant estimates for 1947 and 1948, the latest pair of yearsfor which estimates can be calculated: the top 1 percent of the population

xxxvi INTRODUCTION

received 8½ percent of income; the top 5 percent of population, 18 per-cent of income.

Both during the interwar decades and in recent years, upper groupshares were largest in the countrywide totals of property income, particu-larly dividends. Thus, for 1919-38 the top 1 percent of population receivedon the average 65 percent of total dividends paid to individuals; the top 5percent, 77 percent. Their shares were lowest in countrywide employeecompensation, averaging about 6½ percent for the top 1 percent and 17percent for the top 5 percent group. For recent years the shares of theupper groups in interest and dividends, as well as in employee compensa-tion, declined, but the contrast persisted. In general, the upper groups re-ceived an appreciably larger proportion of their income from propertythan did the lower groups or the population as a whole.

In interpreting these findings we must bear in mind that the top 1 and5 percent groups reach well down the income scale. Thus the lowest unitsin the top 1 percent group received incomes which, on a per capita basis(economic income variant), ranged during 1919-38 from somewhat over$2,100 in 1933 to $4,200 in 1929, and rose to $5,600 in 1946, the mostrecent year for which the series is available. This means that a family of3 would be included in the top 1 percent group in 1933 if it received$6,300 or more, in 1929 if it received $12,600 or more, and in 1946 ifit received $16,800 or more. For the lowest units in the top 5 percentgroup per capita incomes ranged during 1919-38 from about $1,250 toabout $2,000, rising to somewhat over $2,300 in 1946.b) The size of the shares and even their changes depend upon the unitused in the distribution (the recipient, family, consuming, unit, etc.), thescope of income distributed (the items included or excluded, e.g., incomein kind, and gains and losses from sales of assets), the extent to whichseveral types of income from various sources combine to swell the totalincome of a given unit, and the length of the period for which income ismeasured (a year, 2 years, etc.). In interpreting differences in income onemust take account not only of these statistical characteristics of the sizedistribution but also of the demographic and social characteristics of therecipients in the upper groups, i.e., their sex, age, education, size of fam-ily, place of residence (rural, urban, cities of different size), occupation,industrial attachment, and the like.

The effects of these characteristics cannot be summarized readily nor,for lack of continuous and adequate data, can our conclusions be ex-pressed in simple estimates that can be applied to modify differences inincome as shown above. But, in general, it may be said that: (i) the use of

AND SUMMARY Xxxvii

a single year's income tends to exaggerate perceptibly upper group shares:if upper groups were classified by their income for a longer period theirshares would be perceptibly smaller; (ii) upper groups have more recip-ients at productive ages and with higher formal education and longerexperience than lower groups; (iii) upper groups have relatively moreconsuming units whose place of residence entails high living costs. Hencea size-of-income distribution based on average income for several years,covering only the experienced and highly trained members of the activepopulation, and adjusted for differences among groups in their cost ofliving, would yield upper group shares materially smaller than those citedabove.

c) The decline in upper group shares since 1939 is especially striking inview of the rather narrow range of movement during the preceding twentyyears. Thus, in the basic variant (that for which we have the most recentestimates), the share of the top 5 percent ranged during 1919-38 from22.1 to 26.8 percent of income — only 4.7 percentage points; and no sus-tained movement was perceptible, the successive quinquennial averagesbeing 23.6, 25.5, 25.7, and 23.9 percent. From 1939 to 1944 it droppedfrom 23.7 to 16.8 percent — almost 7 percentage points in five years; andin 1947 and 1948 its level was only slightly higher — 17.6 and 17.8 per-cent respectively. During the last decade, then, the share of the top 5 per-cent declined about a quarter. Similarly, the share of the top 1 percent,again in the basic variant, declined from about 12 percent in 1939 and1940 to about 8½ in 1947 and 1948.

The decline in the shares in the economic income variant, and particu-

larly in the disposable income variant, is even more striking. From 1939to 1946, the latest year available, the share of the top 5 percent in theeconomic income variant declined from 28.1 to 20.2 percent; in the dis-posable income variant, from 27.1 to 17.9 percent, well over three-tenths.Likewise, the share of the top 1 percent in the economic income variantdeclined from 13.3 in 1939 to 9.7 percent in 1946, and from 12.3 to 7.8percent in the disposable income variant. Finally, if we adjust the sharesin the basic variant by subtracting federal income taxes, the drop is from22.7 in 1939 to 15.2 percent in 1948 for the share of the top 5 percent,and from 10.9 to 6.4 percent for the share of the top 1 percent. Recentsample data do not indicate any significant rise in upper group shares from1948 to 1950.

This recent decline in upper group shares, which for its magnitude andpersistence is unmatched in the record, obviously has various causes. Themost prominent are the reduction of unemployment and the marked in-

Xxxviii INTRODUCTION

crease in total income flowing to lower income groups (particularlyfarmers and wage earners); shifts in the saving and investment habits ofupper income groups which may have curtailed their chances of gettinglarge receipts from successful. venture capital and equity investments;lower interest rates; and steeper income taxes. But conjectures alone arepossible, and the discussion in the report is limited to a statement of facts.The exploration of causes would entail close study of the complete sizedistribution of income and transcends the practical limits of this inquiry.d) During business cycles in the interwar period upper group shareschanged, on the whole, within fairly narrow limits. Changes in the shareof the top 1 percent were irregularly related to business cycles. Changes inthe shares of upper groups below the top 1 percent tended to move counterto business cycles, as did the share of the top 5 percent group as a whole.Thus, in the economic income variant, while the share of the top 5 per-cent averaged 30 percent of income, there was an average decline per yearof 0.4 percentage points during expansions, an average rise per year of1.5 percentage points during contractions, and an average rise per yearof 1.8 percentage points in the rate of change from expansion to con-traction. As these movements are of percentage shares, not of the absoluteamounts of income received, the decline in upper group shares during ex-pansions means only that while incomes of both the upper 5 percent andthe lower 95 percent groups rose, as is usual in that cyclical phase, therelative rise in the former tended to be smaller than that in the latter.

The counter-cyclical movement of upper group shares is partly con-firmed by the evidence for recent years. Their recent decline is associatedwith the war-induced expansion, and both culminate in 1944. However,their recent drop far exceeds that in earlier cyclical expansions, and theirrecovery is relatively muche) Unless changes in the income shares of upper groups are accompaniedby marked changes in the percentage of income saved by those groups orby the lower groups, a rise or decline in their income shares will be accom-panied by a rise or decline in their shares in total savings. One can con-jecture, for example, that the recent striking drop in the income shares ofupper groups was accompanied by a marked decline in their shares intotal savings of individuals. This may well have been the case. But therecent period was one of war impact and postwar recovery, when legal andother pressures produced marked fluctuations in the savings habits of in-dividuals, i.e., in the savings-income ratios at lower, and perhaps even, atupper income levels. It seems fairly clear that during the war years, whentotal savings and savings-income ratios were high, the share of upper in-

AND SUMMARY xxxix

come groups in total savings must have declined appreciably. However, inthe postwar years, when the over-all savings-income ratio dropped sharply,it is quite possible that the share of upper groups in total savings roseagain, perhaps to prewar proportions. These must remain conjectures —to be corroborated or refuted by further study.

More attention is given to how savings are affected by changes in uppergroup shares in income during business cycles. Savings-income ratios forupper groups fluctuated during business cycles much less relatively thanthose for lower groups. This, together with the stability (or mild counter-movement) of income shares of upper groups, leads to the inference thattheir savings constituted a fairly stable proportion of the total income ofindividuals. Consequently, the extreme variability during business cyclesof the savings-income ratio for the total population must have been duelargely to violent changes in the savings-income ratios for lower groups;and, another important consequence, the share of upper groups in totalsavings of individuals must have declined during cyclical expansions whensavings were relatively large, and risen during cyclical contractions whensavings were relatively small.

Shifts in the proportion of the total savings flow contributed by upperand by lower groups are important in so far as these components differ intheir sensitivity to changing economic conditions, and particularly in sofar as savings of upper groups seek different investment channels and em-ploy different intermediary financial institutions from those of lowergroups. Savings seeking investment must, therefore, be examined in termsof not only the proportion originating within the upper and the lowergroups respectively but also of the types of investment opportunity intowhich, given the legal and other institutional conditions as well as thepreferences of the savers, they would easily flow.

5 Directions of Further inquirySince the data we used required numerous and necessarily imperfect ad-justments, and information for testing our hypotheses and findings wasscanty, and since the source material did not permit us to cover any exceptthe upper sector of the income size distribution, future investigationsshould be directed toward: (a) further testing of the findings for the sectorthat was covered; (b) extending the analysis to cover other sectors or theentire income size distribution.a) En comparing federal income tax return data with estimates of individ-uals' total income receipts, we followed in the footsteps of precedinginvestigators, and it is hoped that future investigators will, as informationaccumulates, go on from where we left off. Both sets of data are con-

xl INTRODUCTION

tinuous. The population coverage of federal income tax returns haswidened enormously in recent years, and as far as one can see, likely toremain wide for years to come; moreover, a random audit of returns, firstmade for those filed for 1948, may well become standard practice. Also,the estimates of aggregate income fldw to individuals will naturally im-prove in accuracy and detail. Hence the comparison should, as time passes,yield more reliable estimates of upper group shares and cover a muchlarger proportion of the total population than the 5 percent that can now bestudied continuously since 1919. Continued use of the two sets of datain measuring income shares would not only subject findings for the pastmore checks but also provide a basis for even better estimates andanalysis for the future.

In these bodies of data, which in the future may have more detail onsocial characteristics of income recipients, and in the sample studies ofincome and its disposition, further attention is likely to be paid both to thedeterminants of income differences and to their consequences upon usesof income for consumer expenditures and savings. Our analysis of suchlinking of income shares with their antecedents and consequences is nec-essarily incomplete — partly because data for the earlier years are scarce,partly because there are practical limits to the time and effort that can bespent on a single inquiry. The flow of new sample survey and adminis-trative data in recent years, the accumulation of studies, and rising interestin the problem promise considerable advance in our understanding of howdifferences in income are related to the characteristics of income recipientsand the patterns of income disposition. One of the first tasks in this area isto account for the, recent marked decline in upper group shares in income,and to evaluate the likelihood of its persistence.

Tax return, data can be compared with independently derived estimatesof individuals' aggregate incomes for each state as well as for the countryas a whole. Though the results are bound to be subject to a wi,der margin oferror than those for the country as a whole the analysis would be worthwhile. Similar analyses could be undertaken, for other countries, therebyextending the range of our observations in space, and perhaps even overtime,

b) No matter how accurately we estimate upper group shares in incomeand how closely we analyze their determinants and consequences, thestudy is incomplete unless we take account of all groups in the size dis-tribution. Upper groups are part and parcel of society as a whole; theiractions and reactions intertwine with those of other groups; and their in-come position can be understood only within a completely studied whole.

I

AND SUMMARY xli

In fact, we operate throughout this study with general notions concerningthe entire size distribution; and at many places actually use data for it,even though they are perforce discontinuous and scanty. But the maindirection of further inquiry is obviously to extend the estimates and anal-ysis to cover the entire size distribution of income.

The chief difficulty is lack of detailed data for a sufficiently long period.Even the continuous sample studies for recent years are based upon toofew cases to permit close analysis; and as one goes back to earlier years,even such limited data are available for only one or two years. A reallythorough analysis of the size distribution of income, on a continuous basisand for a period long enough to permit transitory elements to be differen-tiated from more persistent elements, may not be possible for years to.come. And if the study must be limited, it should concentrate on low in-

• come groups because it is at the extremes that the causes and effects ofincome size are most conspicuous.

Such a study would be a natural supplementation of this inquiry. Muchof what has been found here is directly relevant to an analysis of groups atthe bottom of the income scale. Their shares may vary over time muchmore than those of upper gEoups, and during the short term of businesscycles they would move with the latter and counter to upper group shares.Statistical and social characteristics seem just as relevant for interpretingthe low average level of incomes at the bottom of the scale as the highlevel incomes at the top. Likewise, the temporal stability of savings-incomeratios at upper income levels bears with it the complementary consequenceof high variability at very low income levels.

In all these respects a study of shares in income and savings of groupsat the bottom of the income size distribution would in a sense be a con-tinuatioñ of this investigation, both supplementing and testing our find-ings. It could not use income tax data effectively; on the other hand, sam-ple field studies are likely to cover these groups more fully. Also, theattention of society, directed at such of these lower groups as need assis-tance, has yielded and will continue to yield data not forthcoming foreither the middle or the upper ranges of the income size distribution.