Sitting Well on Top: The 400 Richest Americans

When people talk about wealth inequality, you usually hear some statistic about how much the top 20%, 10%, or even 1% of Americans earn.

What rarely gets discussed is the top 0.00013% -- the 400 richest Americans.

The IRS releases data every year (albeit with a three-year lag) on how much income was earned by the top 400 taxpayers.

Four hundred people. Just enough folks to fit in an average apartment building. Or a 747, with room to spare. Not a lot of people. Barely enough to even call a group on a national scale.

Their share of total national income, however, might surprise you.

Source: IRS.

It bears clarifying that this chart doesn't show income growth. It's growth in 400 people's share of all income earned by the entire U.S. economy.

A few details:

  • The 400 top taxpayers' total income as a share of all national income has tripled, from 0.52% in 1992 to 1.59% in 2007.
  • Their share of interest income more than quadrupled, from 0.85% in 1992 to 4.04% in 2007. Dividends weren't close behind, rising from 1.4% to 4.14%.
  • Capital gains saw the smallest increase in share growth, merely doubling from 5.71% to 10.07%. Still, think about that. Four hundred people earn 10% of all capital gains.
  • The share of wages actually fell from 0.17% to 0.15%. Why? Income increasingly came from dividends and interest.
  • In dollar terms, average income increased from $46.8 million in 1992 to $344.8 million in 2007, or from about a million a week to about a million a day.
  • If you look at the period from 2000-2007, total income of the 400 richest Americans increased by $68 billion, while GDP of the entire economy increased by $4 trillion. Almost 2% of all the economic growth during that period, then, went to just 400 people.

And tax rates? Big drop:

Source: IRS.

I don't think you can look at any of this and conclude either bad or good. There are elements of both.

In one sense, it's natural for the most productive members of society to grow faster than the broader average. And the most important part of capitalism is that productivity is rewarded. The fact that some found an opportunity to make an ungodly amount of money underlines a fundamental advantage of the U.S. economy.

The question is whether wealth creation, particularly over the past several decades, has been fully meritocratic. In general, it is. Yet measures of income mobility -- the ability to earn your way from poor to rich -- rank the U.S. near the bottom among developed nations. In the U.S., nearly 50% of someone's earnings can be explained by his or her fathers' income, compared with less than 20% in Canada, Finland, Norway, Australia, and Denmark.

Since 1992, the average tax rate has gone down for all Americans, from 9.9% to 9.3%. But the drop for the top 400 has been far greater, with average rates falling by nearly half. This might tell us something about political influence and the budget deficit, but it doesn't provide insight into wealth inequality. Income measured in the first chart is, after all, pre-tax.

So what has changed over the past few decades that caused such a great shift? Two things stick out to me.

The first is the surge of the financial sector. As a share of gross domestic product, finance and insurance grew by a third over the past two decades, from 6% in the early '90s to over 8% today. Some of this was the growth of megabanks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) , but the real growth came in areas like hedge funds and private equity, where compensation is utterly ridiculous. The top 25 hedge funds managers earned a combined $25.33 billion in 2009 -- more than $1 billion each. And that wasn't an anomaly by recent standards. This type of pay has simply never occurred in non-financial industries, even (or especially) ones most of us would consider more important and innovative. As Warren Buffett remarked earlier this year, financiers "don't work that much harder and aren't much brighter than someone building a dam and a whole lot of other talents." He continued, "Market systems produce strange results. Wall Street markets are so big, there's so much money, that taking a small percentage results in a huge amount of money per capita in terms of the people that work in it. And they're not inclined to give it up."

To a lesser extent, though still important, is a general explosion in executive compensation. Average CEO compensation has increased from 42 times the average workers' pay in 1980 to more than 300 times in recent years.

Some say this is simply due to market forces. Shareholders pay top dollar for top executives. But at least among public companies, shareholders' willingness to exercise their voting rights is abysmal. As Benjamin Graham wrote in 1949, shareholders, "show neither intelligence nor alertness ... and vote in sheeplike fashion for whatever the management recommends no matter how poor the management's record of accomplishment may be." That's still as true today, if not more so. More specifically, executive pay is prone to a ratcheting effect where a CEO's compensation isn't based on internal metrics, but simply what other CEOs made. If one CEO gets a $20 million bonus, the CEO of a rival firm now deserves one. If one gets a private jet, they all need private jets. That's the nature of competition, but shareholders' silence and passivity has removed the checks-and-balances forces that, in a real marketplace, would keep compensation in check with reality. Rather than a market, it's become an arms race.

What do you think about the earnings of the top 400 Americans? Sound off in the comment section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns B of A preferred. The Fool owns shares of Bank of America. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (33) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 03, 2011, at 1:25 PM, willychallenger wrote:

    I think the Executive compensation Issue is mostly an economic one. Most shares lie in the hands of institutions, this class of shareowners dont have the economic incentive to demand compensation that is well aligned with shareholder interest. I think the US or any country for that matter should create a tax enviornment that will support and encourage wealth creation, raising or having higher taxes wont create that enviornment. A country with 100,000 tax defined millionares paying a 40% tax rate does not collect more revenue than a country with 1,000,000 tax defined millionares paying 15%.

  • Report this Comment On May 03, 2011, at 2:19 PM, NeedaClue7 wrote:

    Good article, but I have one issue with it. When a business enterprise distributes some of its earnings to its owners, what is the character of that distribution? According to you (and others, to be fair), it is income if it comes in the form of a dividend. If it comes in the form of a partnership distribution or a "draw" from a one-owner, unincorporated business, then it magically is treated as "non-income". Why do we persist in perpetuating the myth that dividends are "income".

    In your table of tax rates paid by the rich, one obvious influence is the reduction of tax rates on dividends (to 15%). The reduction should have been to 0%, but politics got in the way of sound tax and economic policy. Lower tax rates on dividends is also a large part of the reason why tax rates on the rich are supposedly lower than tax rates on the middle class (the other big reason is payroll taxes, which is also mischaracterized but we'll save that debate for later).

  • Report this Comment On May 03, 2011, at 3:43 PM, jabez1 wrote:

    Interesting article. I think it would be more informative if the total percent of the countries tax bill paid for by the 400 were shown vs the average percent covered by the rest.

  • Report this Comment On May 03, 2011, at 4:08 PM, boogaloog wrote:

    I agree with NeedaClue7 -- 0% dividend tax is "sound tax and economic policy". After all, paying disgustingly wealthy people with a dividend is completely different than paying them wages. Because money given away under a different label is really a completely different kind of money, isn't it? Not to mention that if we tax the wealthy less, their companies will have record cash on hand with which to hire the rest of us. Because right now companies don't have record cash on hand to stop our high unemployment ... right?

    I'm also so happy my CEO makes more than 500 times the median salary. I just wish we could tax him less, so he wouldn't be so financially strapped ... it would go a long way toward letting him hire more employees.

    And yes, I'm aware that my vote to cut executives pay has a significant effect on whether that really happens.

  • Report this Comment On May 03, 2011, at 5:26 PM, DJDynamicNC wrote:

    I'm not at all sure why dividends shouldn't be taxed as income. I purchase dividend stocks because they make me money. Currently I am reinvesting that money in additional dividend stocks, so that in forty years I can take those dividends and live off of them.

    You know, as income. Because income is money that I receive which I then use to buy things.

    Maybe there is some compelling case for treating money earned from investments in stock differently from money earned from investments in, say, education or my own private business, but it hasn't been made yet.

  • Report this Comment On May 03, 2011, at 5:28 PM, DJDynamicNC wrote:

    I should note that that last comment is directed at NeedaClue7's comment.

    As regards the article, I think it's quite telling that the generally boring, financially equitable Canadian economy is doing so much better than our own. The recession is long since over in Canada. Henry Ford learned that paying his workers decent wages meant they could afford to buy his products, which in turn led to better profits for him AND for his employees. Sad that we seem to have forgotten that lesson.

  • Report this Comment On May 03, 2011, at 6:04 PM, TMFDiogenes wrote:

    I feel silly how long it took me awhile to pick up on the sarcasm in the previous post...

  • Report this Comment On May 03, 2011, at 6:05 PM, TMFDiogenes wrote:

    Boogaloong's post, rather, being the sarcastic one.

  • Report this Comment On May 03, 2011, at 6:31 PM, kbeck02 wrote:

    Someone needs to define "productive". When you cite big banks , hedge funds, and executive compensation, including the zillions they collect for trashing the companies they were supposed to be managing, and then walk off with millions, or billions, when they are, in essence fired, is this "productive" work? Or, is it just ripping off everyone in the US?

  • Report this Comment On May 03, 2011, at 11:15 PM, ynotc wrote:

    DJdynamicNC wrote "The recession is long since over in Canada" wouldn't have anything to do with Canada being a resource based economy would it?

    What will happen to Canada and other resource based economies when the resource cycle ends, which it eventually will.

    The U.S. could also be a resource based economy if we didn't have so many restrictions and regulations.

  • Report this Comment On May 04, 2011, at 1:38 AM, ershler wrote:

    ynotc,

    I agree with you Canada's natural resources play a significant role in their economy but I think your comment the US could be a resource based economy is BS. Simply compare the value of available natural resources to the population of countries like Canada and Australia vs the USA. If the US quadrupled oil production we would just manage to meet our own needs.

    I would expect to see something like this on Fox News (CNN and MSNBC are not very popular where I work).

  • Report this Comment On May 04, 2011, at 10:17 AM, Fatface20 wrote:

    I appreciate the witticism and agree with Boogaloong's post, This is a perfect example of why dividends SHOULD be taxed as income, not the contrary. Politicians are talking about removing the mortgage interest deduction, lets start w/ taxing income equally.

  • Report this Comment On May 04, 2011, at 11:11 AM, ithanley wrote:

    This is the most destructive process imaginable. The wealth of a nation is dependent on the productivity of its people. And the depression of the American worker for the benefit of non productive financial persons will eventually work to our destruction.

  • Report this Comment On May 04, 2011, at 11:29 AM, SFAmiler wrote:

    Hmmm...another class warfare article.

    How very uncharacteristic of Mr. Housel.

  • Report this Comment On May 04, 2011, at 11:55 AM, dmerns wrote:

    Thank you Boogaloog! Reading through the comments I was starting to get worried I had stumbled on to a tea party website until I got to yours.

  • Report this Comment On May 04, 2011, at 3:30 PM, TangoSukka wrote:

    +1 to boogaloog

  • Report this Comment On May 04, 2011, at 4:02 PM, drborst wrote:

    I might add that I really liked TMFDiogenes first comment, but found the second rather depressing. Did he really look at his post and decide it was necessary to explain which of the 6 previous posters was being sarcastic?

    And I have a question for Mr Housel, is there any data on which tax code these super rich used? If they used the standard tax forms while I had to pay AMT, I'll be really upset

  • Report this Comment On May 04, 2011, at 5:09 PM, slpmn wrote:

    I'm sure the super rich are thankful for and appreciate the time and effort spent defending their right to pay as little as they can in taxes by those who can only aspire to earn in a lifetime what they make in a month. You know their millions invested in marketing and lobbying has been money well spent when members of the underclasses shout "class warfare" in the defense of the upper class.

    Reduce the dividend tax to zero? Seriously? So the wealthiest in society can live literally tax-free while the rest of us who depend on wages for the bulk of our income pay the taxes that bulild and maintain the infrastructure that enabled the creation of and protects their pile of gold?

    Let's do that AND eliminate the estate tax so that the ultra wealthy and their progeny can live tax free into perpetuity while everyone else pays the bills. What is the economic justification for that? Is this the United States of America or feudal England?

  • Report this Comment On May 05, 2011, at 12:40 AM, mimihoohoo2 wrote:

    If a CEO generates 30% annualized returns then I think he should be paid lavishly. If a CEO just generates shareholder returns that are average in his industry and relative to the S&P 500, then he should get 200,000 and be put on notice that if things don't get better in the next 6 quarters he will be replaced. What has Steve Jobs been worth to Apple stockholders over the past decade? He has created billions of dollars of wealth, so I could care less how much he makes . . . Pay him a billion dollars, who cares? You cannot discuss executive pay in general terms: some should be paid average salaries; but those who double, triple, quadruple the stock price, these executives should be paid exorbitant sums commensurate with the new wealth they have created for stockholders.

  • Report this Comment On May 05, 2011, at 9:33 AM, DJDynamicNC wrote:

    @ynotc - I'm curious how you define a "resource based economy." Surely you can't mean an economy in which oil, gas, and mineral resource extraction represent less than 5% of the GDP of the nation in question - such as, for example, Canada. Right? Because that would be an awfully strange way to make that categorization.

    Particularly not when the country in question sees finance, retail, wholesale trade, manufacturing, health care provision, public assistance, construction, public administration, transportation and warehousing, professional and technical services, and education all clock in at larger shares of GDP.

    Why, to me that looks like a well balanced portfolio of economic activity, coupled with sound regulation, compassionate social policy, a positively boring banking sector that avoids speculation in favour of distributing capital to investments worth developing, and a refusal to engage in pointless warfare or to externalize the costs of industrial pollution. The result is a booming economy and a healthy labour market.

    Say what you like about Keynes, but it's hard to argue with results.

  • Report this Comment On May 05, 2011, at 9:34 AM, DJDynamicNC wrote:

    Oh, and I forgot to mention the equitable tax rate which results in clean, efficient, highly developed public services.

    Taxes. They get sh*t done.

  • Report this Comment On May 05, 2011, at 4:48 PM, KCinAustria wrote:

    My understanding of the idea behind dividends being taxed less (or not at all) is this: By owning stock in a company, I am a (minority) owner of that company. As the owner of that company, my company pays taxes on my business income (unless I'm GE...but that's another issue). Why should I, as the owner of the company, then have to pay taxes again to transfer that after-tax income from my (company's) vault to my (personal) wallet?

    I'm not saying I agree or disagree with the position, but that is the logic, as I understand it.

    FULL DISCLOSURE POLICY: I truly believe we need an incredibly simplified version of the tax code, both for businesses and individuals. I also believe I should have a higher tax rate than someone (rather, everyone) who makes less than me, and a lower tax rate than someone (er...everyone) who makes more than me. But I will never fault any person or company for trying to (legally) minimize the taxes they have to pay.

  • Report this Comment On May 05, 2011, at 9:29 PM, Bert31 wrote:

    I am interested in knowing how much of their money they give to charity.

  • Report this Comment On May 06, 2011, at 11:05 AM, verylargelarry wrote:

    KCinAustria -

    Interesting thoughts, and I wholeheartedly agree with the points in your Disclosure segment, but..

    You feel you are a minority owner of a company as a shareholder. I have no de facto influence on decisions to dilute shareholders positions (although that is capital neutral) to spin off segments of the company, to buy (or not to buy) back shares, increase or decrease dividends, or to give grand stock options to management. I am merely along for the ride, up or down. I am at the mercy of management's decisions and ethics. Of course, all CEOs operate with shareholders interests at heart, as long as those holders have positions large enough to send the prices down when they disagree with management. And only then.

    All the visible problems of our economy are in our absurd tax laws, wrapping up decades of successes by special interest lobbying. My vote would be simplify. Cut taxes in half or more. If it could be used to pay your bills or buy your fourth vacation home, it is income. Tax it on a graduated scale. Capital gains are income, disguised by special interest legislation favoring wealthy segments of our society!

    Final silly thought. Could ynotc by cryptic code for young nazi?

  • Report this Comment On May 06, 2011, at 4:44 PM, KCinAustria wrote:

    verylargelarry -

    You're absolutely right that I have no tangible influence over the operations of the companies I own...which is why (among other things) I *try* to make sure that either the CEO is a major shareholder, and/or the company has a demonstrated history of doing things with it's cash that I would want to do myself: allocating it wisely (maintaining a high ROE), reducing debts, increasing dividends, buying back shares (especially if they're cheap), etc. Since I don't make the decisions, I do try to look for management that has a consistent history of making decisions I like. (I thankfully have influence over WHICH companies I own...usually I'm thankful for that, at least!)

    Not sure if we could cut everyone's taxes in half merely with a simplification of the tax code (while also balancing the budget), but we could certainly reduce them, and even the (tax-paying) playing field significantly, by cutting out so many of the loopholes.

    PS--Morgan, thanks for the article. I've been a Fool for years, but only recently started commenting. I nearly always find your articles interesting, thought-provoking, and worthy of discussion. I look forward to reading more of them!

  • Report this Comment On May 06, 2011, at 7:26 PM, onlyoneFool wrote:

    When the world around you is living the high life and instead you choose to save and invest for the future, it is nice to know that the reward for doing that is in the tax benefit dividend income provides when held over several years. My parents had the luxury of putting money in the bank and getting a significant percent interest on their money. I get mine through the years and years of investing in dividend stocks and then living below my means, driving a 5-7 year old vehicle, and eating out in three months what similar folks are doing in a week. Not just in the last 2-3 years, but all of my adult life.

    Why hasn't someone thought of rewarding the savers of the world, rather than sticking it to us to make up for all those out there who manage to spend more than they make? I'm not really bitter (it does read that way, though); in fact I'm happy, content, and sleep well at night. Oh yeah, and the kids are grown, college-educated and have no student debt, and know a little about saving and investing.

    Nobody, but nobody, would confuse me with the wealthy, or "super rich" or anywhere near the top 4 million.! Just had the good fortune to be taught early in life about money and investing.

  • Report this Comment On May 07, 2011, at 1:59 AM, ershler wrote:

    onlyoneFool,

    I think savers of the world are being rewarded. I have 401k's and IRA's to invest in and the taxes on most of my dividends and capital gains are half what they are on my salary.

  • Report this Comment On May 09, 2011, at 4:56 PM, Gato337 wrote:

    @ onlyoneFool & ershler

    I think the most important message from the graphs above is how much wealth you can gain and sustain through knowledgeable investment in the stock market. (400 people out of 300+million get 10% of the capital gains?) In other words - right now the stock market is mostly a game for the wealthy - a very profitable game. There are plently of exceptions, Im sure (like you onlyoneFool) who don't make $100,000+ a year and still manage to put a little into the market every year, but they are still in the minority.

    I am lucky enough to have a well-paid accountant as a father who taught me very early on how to save money and let it compound interest, and now that im in my 20s he's teaching me how to valuate companies and invest wisely (Foolishly, if you prefer!).

    But in college I noticed that most of my friends had no clue about saving and lived from paycheck to paycheck b/c they felt they didnt have the knowledge or power to budget/save enough money to put away, let alone invest in the stock market. I also noticed that their parents were generally just as bad about financial responsibility.

    As a senior in high school, we all were required to take a government class that included some economics in its curriculum. We ended up spending about 3 measly weeks on understanding how the U.S. economy works. I remember feeling like U.S. economics and the stock market were such huge enigmas that I would never want to invest on my own. I can't imagine how much more beneficial it would have been if we could have spent 3 months on it and focused more on how we, as individuals, can benefit from the stock market too.

    I propose that to reform the stock market into the money-making freedom and opportunity machine that we all want it to be, we need to educate our kids about economics and investing at an early age. Kind of like a modernized "Home-Ec" class, where kids are taught how to budget, save, and invest in the stockmarket. If we can successfully demystify the stock market for 18year olds, we will significantly increase their chances of reaching retirement with a stable (if modest) nest egg of income.

  • Report this Comment On May 09, 2011, at 7:23 PM, mythshakr wrote:

    RE: Apple CEO compensation

    Steve Jobs is the lowest paid CEO in the country. He gets $1.00/year and no stock incentives. The dollar is so that he is a full time compensated employee and therefore eligible for company health insurance. Just kinda throws the whole compensation argument sideways doesn't it, when it comes to people already worth hundreds of millions of dollars. They're just plain old greedy.

  • Report this Comment On May 09, 2011, at 9:18 PM, ikkyu2 wrote:

    This cat is out of the bag. You make 400 people this wealthy, they are modern day royalty. Their wishes, including their wishes to stay wealthy, are respected, because whatever doesn't respect them - lawmakers, company boards, shareholders, opponents - is purchased and discarded.

    To all who offer suggestions: who bells cat?

  • Report this Comment On May 10, 2011, at 9:41 AM, OnTheContrary wrote:

    Corporate executives are overpaid because they belong to the same club as the directors and fund managers who control most of the stock, and the reason people are foolish enough to trust their money to fund managers is that corporations pay paltry dividends (and also because the risk now outweighs the reward in fixed income thanks to the Fed's counterfeiting ways), so they feel compelled to move out on the risk curve to try to beat inflation, which is ridiculously undercounted in this country. Another reason is that people have been brainwashed into thinking that only specialists with degrees in finance can manage their money.

    In my grandfather's day, you simply invested any extra from your paycheck in solid bonds or dividend paying corporations of your choice. No need for financial experts, or employer run 401K plans. And because you were investing your own money, you paid attention to what management was doing and didn't just rubber stamp attempted looting and depredation of the corporate treasury.

    With the anti-investment tax policy of this country all that has changed to favor the cancerous growth of the financial industry. Taxation of dividends is a double taxation of investment, which has already been taxed at the corporate level. Naturally this discourages investment in precisely the most well-run and stable companies. Taxation of capital gains discourages prudent risk taking and thus also discourages investment.

    Because investment or ones savings is nonetheless essential given the government's commitment to chronic inflation (without which it could nave become so bloated, thanks to tax bracket creep), people have been cozened into turning their funds over to "professionals", and when they lose money faster thereby than if they had simply let it sit in cash, they are reassured that their fund is outperforming the average fund, and we are all in this together.

    Taxation on dividends and capital gains should be zero, to encourage self-responsible investing, prudent, honest, and reasonably compensated corporate management, and to cut off the Wall Street flimflam artists at the knees.

  • Report this Comment On May 30, 2011, at 10:21 AM, kirkydu wrote:

    An extremely important piece. It is time for the richest fraction of a 1% to chip in more. Not only to smooth out the budget, but to make sure the programs that don't get cut are the ones that improve a young person's chances of getting ahead, i.e. education, elementary school food programs, after school programs...

  • Report this Comment On August 02, 2011, at 11:24 PM, kevomaha wrote:

    The theory is that if you give the wealthy more money ( tax them less) they will invest it domestically, which in turn will magically create jobs. If GDP has shifted to the financial sector primarily and the growth is in emerging markets, would not the jobs be few ( hedge funds require few people ) and overseas? In everyplace I have worked, the only thing that drove job growth is demand for product, and then it was a last resort....so how is this supposed to work? My radio controlled right winger buddies just keep repeating this and cant seem to provide details...anyone?

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