Income Inequality in Pennsylvania

Last year, to document income inequality trends from 1973 to 2004, The State of Working Pennsylvania 2007 relied on detailed data on the very highest Pennsylvania earners. The data analyzed was more extensive than data available or analyzed for any other state or for the United States as a whole.

This year, Keystone Research Center obtained similar detailed data on very high Pennsylvania earners in 2005. We also obtained such data for additional past years, including 2001. This enabled analysis of income inequality trends since the last economic recession in 2001.

Our new and updated numbers reveal a jaw-dropping rise in inequality since 2001, concentrated among the top 1% of Pennsylvania taxpayers.

While inflation-adjusted total personal income overall grew in Pennsylvania by 6% between 2001 and 2005, the top 1% of taxpayers captured nearly 80% of this growth (Figure 7).

The average income of the bottom 90% of Pennsylvania taxpayers actually declined by 4% from 2001 to 2005.

The average income of the top 1% of taxpayers rose by just under $250,000 between 2001 and 2005, an increase of 31% (Table 3).

Even the quarter million dollar increase enjoyed on average by the top 1% pales in comparison to the rise in income among the top 1% of the top 1%, the richest 1 out of every 10,000 Pennsylvania taxpayers. The average income of this group rose from $14.6 million in 2001 to $21.3 million, an increase of 47%.

In 2005, 5.8 million Pennsylvania taxpayers (the bottom 90% of taxpayers, or all those making less than $98,381) earned 65 cents of every dollar of personal income in Pennsylvania (Figure 8). This figure is down 4 cents from 2001, when this group claimed 69 cents of every dollar of personal income (Figure 9).

The next 5% of earners, those falling between the 90th and 95th percentiles, claimed 8 cents of every dollar of personal income in the state—a figure essentially unchanged from 2001.

The next 4% of earners, those falling between the 95th and 99th percentiles or some 235,000 taxpayers, claimed 12 cents of every dollar of personal income, a gain over 2001 of 1 cent.

The nearly 59,000 taxpayers who earned more than $343,355 in 2005, the top 1% of taxpayers, earned 15 cents of every dollar of personal income in Pennsylvania, a gain over 2001 of 3 cents.

These data stand in stark contrast to the late 1990s when tight labor markets drove up most incomes, not just those at the top. From 1997 to 2000, when inflation-adjusted total personal income grew by 9% in Pennsylvania, the top 1% of taxpayers captured just 10% of that growth (Figure 10).

Since income for most families depends on how many jobs they have (and how many hours they work) and on wage levels, given the wage and employment trends summarized earlier, it is unsurprising that the average income of the vast majority of Pennsylvania taxpayers declined by 4% between 2001 and 2005 (Figure 11). Slow job and wage growth in this period translated into slow—in fact, negative—income growth.

What these data do reveal, which other sources have not, is the sharp divergence between the welfare of most Pennsylvanians and that of a tiny minority of the very highest-income taxpayers. As Figure 11 illustrates, the bottom 90% of taxpayers lost ground between 2001 and 2005, while the next 9% made modest gains. But among the top 1% of taxpayers, the gains mushroom for each higher income group. At the pinnacle stand the top .01% of taxpayers who experienced an increase in their average income of 46% between 2001 and 2005—a gain of $6.7 million dollars.

Preview of Inequality Trends in 2006

As of the date of this publication in August 2008, 2005 taxable income data is the most recent data available from the Pennsylvania Department of Revenue (DOR). However the U.S. Internal Revenue Service (IRS) has published summary statistics for 2006 federal income tax filers in Pennsylvania. Although this data is not as detailed as that available from the Pennsylvania DOR, it does allow an early look at trends in inequality in 2006.

In examining the 2006 data we rely on the methodology used by economists Thomas Piketty and Emmanuel Saez, the authors of widely cited estimates of top incomes in the United States between 1913 and 2006. Their methodology for the United States relies upon publicly available IRS tables of U.S. personal income tax statistics and can be adapted to Pennsylvania using similar state-level tables published by the IRS. The one drawback is the Piketty and Saez methodology understates top incomes. Actual income data provided by the Pennsylvania Department of Revenue shows the top 10% of taxpayers (for convenience in exposition we focus here on the top 10% but the personal income shares of the other subgroups in the top 10% follow a similar pattern) captured 35% of Pennsylvania personal income in 2005 (Figure 12). The Piketty and Saez methodology applied to IRS data for Pennsylvania shows the top 10% capturing 31% of all personal income.

Although the Piketty and Saez methodology does understate top incomes, in seven of the eight years for which we have data on the change in actual top incomes, the IRS and DOR data correspond—that is, the increase or decrease in the share of income held by the top 10% of taxpayers in the IRS data parallels the increase or decrease in the income share derived from the DOR data.

The IRS data for 2006 suggests that inequality in Pennsylvania increased again. This increase took place even though the labor market improved somewhat in 2006, leading to healthier wage growth for some workers. The share of income captured by the top 10% of Pennsylvania families increased in the 2006 IRS data to its highest level at least since 1986.

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This page is an on-line summary of a portion of the full State of Working Pennsylvania 2008 report available for download from www.stateofworkingpa.org. © 2008 Keystone Research Center - www.keystoneresearch.org.