Top Wealth Shares in the United States, 1916–2000 Top Wealth Shares in the United States, 1916–2000: Evidence from Estate Tax Returns

Abstract - This paper presents new homogeneous series on top wealth shares from 1916 to 2000 in the United States using estate tax return data. Top wealth shares were very high at the beginning of the period but have been hit sharply by the Great Depression, the New Deal, and World War II shocks. Those shocks have had per- manent effects. Following a decline in the 1970s, top wealth shares recovered in the early 1980s, but they are still much lower in 2000 than in the early decades of the century. Most of the changes we document are concentrated among the very top wealth holders with much smaller movements for groups below the top 0.1 percent. Con- sistent with the Survey of Consumer Finances results, top wealth shares estimated from Estate Tax Returns display no significant increase since 1995. Evidence from the Forbes 400 richest Ameri- cans suggests that only the super–rich have experienced significant gains relative to the average over the last decade. Our results are consistent with the decreased importance of capital incomes at the top of the income distribution documented by Piketty and Saez (2003), and suggest that the rentier class of the early century is not yet reconstituted. The paper proposes several tentative explanations to account for the facts.

Wojciech Kopczuk INTRODUCTION Columbia University, New York, NY 10027 he pattern of wealth and income inequality during the and Tprocess of development of modern economies has at- tracted enormous attention since Kuznets (1955) formulated NBER, Cambridge, MA his famous inverted U–curve hypothesis. Wealth tends to be 02138 much more concentrated than income because of life cycle savings and because it can be transmitted from generation to Emmanuel Saez generation. Liberals have blamed wealth concentration be- University of California, cause of concerns for equity and in particular for tilting the po- Berkeley, CA 94720 litical process in the favor of the wealthy. They have proposed and progressive taxation as an appropriate counter–force against wealth concentration.1 For conservatives, concentration of NBER, Cambridge, MA wealth is considered as a natural and necessary outcome of 02138 an environment that provides incentives for entrepreneur- ship and wealth accumulation, key elements of macro–eco-

National Tax Journal 1 In the early 1930s, President Roosevelt justified the implementation of Vol. LVII, No. 2, Part 2 drastic increases in the burden and progressivity of federal income and June 2004 estate taxation in large part on those grounds. 445 NATIONAL TAX JOURNAL nomic success. Redistribution through worth in the economy. Second, for each of progressive taxation might weaken those these groups, we decompose wealth into incentives and generate large efficiency various sources such as real estate, fixed costs. Therefore, it is of great importance claims assets (bonds, cash, mortgages, to understand the forces driving wealth etc.), corporate stock, and debts. We also concentration over time and whether gov- display the composition by gender, age, ernment interventions through taxation and marital characteristics. This exercise or other regulations are effective and/or follows in the tradition of Lampman harmful to curb wealth inequality. This (1962), who produced top wealth share es- task is greatly facilitated by the avail- timates for a few years between 1922 and ability of long and homogeneous series 1956. Lampman, however, did not analyze of income or wealth concentration. Such groups smaller than the top .5 percent and series are in general difficult to construct this is an important difference because our because of lack of good data. In this paper, analysis shows that, even within the top we use the extraordinary micro dataset of percentile, there is dramatic heterogene- estate tax returns that has been recently ity in the shares of wealth patterns. Most compiled by the Statistics of Income Divi- importantly, nobody has attempted to sion of the Internal Revenue Service (IRS) estimate, as we do here, homogeneous in order to construct homogeneous series series covering the entire century.4 of wealth shares accruing to the upper Our series show that there has been a groups of the wealth distribution since sharp reduction in wealth concentration 1916, the beginning of the modern federal over the 20th century: the top 1 percent estate tax in the United States. wealth share was close to 40 percent in The IRS dataset includes detailed mi- the early decades of the century but has cro–information for all federal estate tax fluctuated between 20 and 25 percent returns filed during the 1916–1945 period.2 over the last three decades. This dramatic We supplement these data with both decline took place at a very specific time published tabulations and other IRS mi- period, from the onset of Great Depression cro–data of estate tax returns from selected to the end of World War II, and was con- years of the second half of the century. centrated in the very top groups within We use the estate multiplier technique, the top percentile, namely groups within which amounts to weighting each estate the top 0.1 percent. Changes in the top tax return by the inverse probability of percentile below the top 0.1 percent have death, to estimate the wealth distribution been much more modest. It is fairly easy of the living adult population from estate to understand why the shocks of the Great data. First, we have constructed almost Depression, the New Deal policies which annual series of shares of total wealth ac- increased dramatically the burden of es- cruing to various sub–groups within the tate and income taxation for the wealthy, two percent of the wealth distribution.3 and World War II, could have had such a Although small in size, these top groups dramatic impact on wealth concentration. hold a substantial fraction of total net However, top wealth shares did not re-

2 The estate tax return data was compiled electronically and, hence, saved for research purposes thanks to Fritz Scheuren, former director of the Statistics of Income division at the IRS. 3 For the period 1916–1945, because of very high estate tax exemption levels, the largest group we can consider is the top 1 percent. 4 Smith (1984) provides estimates for some years between 1958 and 1976 but his series are not fully consistent with Lampman (1962). Wolff (1994) has patched series from those authors and non–estate data sources to produce long–term series. We explain in detail in the third part of the fifth section why such a patching methodology can produce misleading results. 446 Top Wealth Shares in the United States, 1916–2000 cover in the following decades, a period of either because the pay surge at the top rapid growth and great economic prosper- is too recent a phenomenon, or because ity. In the early 1980s, top wealth shares their savings rates are very low. We show have increased, and this increase has also that, as a possible consequence of democ- been very concentrated. However, this ratization of stock ownership in America, increase is small relative to the losses the top one percent individuals do not from the first part of the twentieth cen- hold today a significantly larger fraction tury and the top wealth shares increased of their wealth in the form of stocks than only to the levels prevailing prior to the the average person in the U.S. economy, recessions of the 1970s. Furthermore, this explaining in part why the bull stock increase took place in the early 1980s and market of the late 1990s has not benefited top shares were stable during the 1990s. disproportionately the rich.5 This evidence is consistent with the Although there is substantial circum- dramatic decline in top capital incomes stantial evidence that we find persuasive, documented in Piketty and Saez (2003) we cannot prove that progressive taxation using income tax return data. As they do, and stock market democratization had we tentatively suggest (but do not prove) the decisive role we attribute to them. that steep progressive income and estate In our view, the primary contribution of taxation, by reducing the rate of wealth this paper is to provide new and homo- accumulation of the rich, may have been geneous series on wealth concentration the most important factor preventing using the very rich estate tax statistics. We large fortunes to be reconstituted after the are aware that the assumptions needed shocks of the 1929–1945 period. to obtain unbiased estimates using the Perhaps surprisingly, our top wealth estate multiplier method may not be met shares series do not increase during the and, drawing on previous studies, we try 1990s, a time of the Internet revolution to discuss as carefully as possible how and the creation of dot–com fortunes, potential sources of bias, such as estate extra–ordinary stock price growth, and tax evasion and tax avoidance, can affect of great increase in income concentra- our estimates. Much work is still needed tion (Piketty and Saez, 2003). Our results to compare systematically the estate tax are nevertheless consistent with findings estimates with other sources such as from the Survey of Consumer Financ- capital income from income tax returns, es (Kennickell, 2003; Scholz, 2003), which the Survey of Consumer Finances, and also indicate hardly any growth in wealth the Forbes 400 list. concentration since 1995. This absence of The paper is organized as follows. The growth in top wealth shares in the 1990s second section describes our data sources is not necessarily inconsistent with the and outlines our estimation methods. income shares results from Piketty and The third section presents our estimation Saez (2003) because the dramatic growth results. We present and analyze the trends in top income shares since the 1980s has in top wealth shares and the evolution of been primarily due to a surge in top labor the composition of these top wealth hold- incomes, with little growth of top capital ings. The fourth section proposes explana- incomes. This may suggest that the new tions to account for the facts and relates high income earners have not had time the evolution of top wealth shares to the yet to accumulate substantial fortunes, evolution of top income shares. The fifth

5 We also examine carefully the evidence from the Forbes 400 richest Americans survey. This evidence shows sizeable gains, but those gains are concentrated among the top individuals in the list and the few years of the stock market “bubble” of the late 1990s, followed by a sharp decline from 2000 to 2002. 447 NATIONAL TAX JOURNAL section discusses potential sources of bias, tax returns. Therefore, by necessity, we and compares our wealth share results must restrict our analysis to the top two with previous estimates and estimates percent of the wealth distribution. Before from other sources such as the Survey 1946, we can analyze only the top one of Consumer Finances and the Forbes percent. As the analysis will show, the top richest 400 list. The final section offers a one percent, although a small fraction of brief conclusion. All series and complete the total population, holds a substantial technical details about our methodology fraction of total wealth. Further, there is are gathered in appendices of the longer substantial heterogeneity between the NBER working paper version of the bottom of the top one percent and the paper (Kopczuk and Saez, 2004). very top groups within the top one per- cent. Therefore, we also analyze in detail DATA, METHODOLOGY, AND smaller groups within the top one percent: MACRO–SERIES the top .5 percent, the top .25 percent, the top .1 percent, the top .05 percent, and the In this section, we describe briefly the top .01 percent. We also analyze the inter- data we use and the broad steps of our es- mediate groups: top 1–.5 percent denotes timation methodology. Readers interested the bottom half of the top one percent, top in the complete details of our methods are .5–.25 percent denotes the bottom half of referred to the extensive appendices at the the top .5 percent, etc. Estates represent end of the NBER working paper version of wealth at the individual level and not the the paper. Our estimates are from estate tax family or household level. Therefore, it is return data compiled by the Internal Reve- very important to note that our top wealth nue Service (IRS) since the beginning of the shares are based on individuals and not modern estate tax in the United States in families. We come back to this issue later. 1916. In the 1980s, the Statistics of Income Each of our top groups is defined relative division of the IRS constructed electronic to the total number of adult individuals micro–files of all federal estate tax returns (aged 20 and above) in the U.S. popula- filed for individuals who died in the period tion, estimated from census data. Column 1916 to 1945. Stratified and large electronic (1) of Table 1 reports the number of adult micro–files are also available for 1965, 1969, individuals in the United States from 1916 1972, 1976, and every year since 1982.6 For to 2002. The adult population has more a number of years between 1945 and 1965 than tripled from about 60 million in 1916 (when no micro–files are available), the IRS to over 200 million in 2000. In 2000, there published detailed tabulations of estate were 201.9 million adults and, thus, the tax returns (U.S. Treasury Department, top one percent is defined as the top 2.019 Internal Revenue Service, various years a).7 million wealth holders, etc. This paper uses both the micro–files and We adopt the well–known estate the published tabulated data to construct multiplier method to estimate the top top wealth shares and composition series wealth shares for the living population for as many years as possible. from estate data. The method consists In the United States, because of large in inflating each estate observation by a exemption levels, only a small fraction of multiplier equal to the inverse probability decedents has been required to file estate of death.8 The probability of death is es-

6 Those data are stratified and, hence, always contain 100 percent of the very large estates. 7 Those tabulations are also based on stratified samples with 100 percent coverage at the top. 8 This method was first proposed in Great Britain almost a century ago by Mallet (1908). Atkinson and Harrison (1978) describe the method in detail. 448 Top Wealth Shares in the United States, 1916–2000 timated from mortality tables by age and gages, etc.), corporate equities, equity in gender for each year for the U.S. popula- unincorporated businesses (farms, small tion multiplied by a social differential businesses), and various miscellaneous mortality factor to reflect the fact that the assets. It is important to note that wealth wealthy (those who file estate tax returns) reported on estate tax returns only in- have lower mortality rates than average. cludes the cash surrender value of pen- The social differential mortality rates are sions. Therefore, future pension wealth based on the Brown et al. (2002) differ- in the form of defined benefits plans, and entials between college educated whites annuitized wealth with no cash surrender relative to the average population and are value is excluded. Vested defined contri- assumed constant over the whole period butions accounts (and in particular 401(k) (see Appendix B of the NBER working plans) are included in the wealth defini- paper version for a detailed discussion tion. Social Security wealth as well as all and analysis of the validity of this assump- future labor income and human wealth tion). The estate multiplier methodology are obviously not included in gross estate. will provide unbiased estimates of the Estate tax returns include the full payout wealth distribution if our multipliers are of life insurance but we include only the correct on average and if probability of cash value of life insurance (i.e., the value death is independent of wealth within of life insurance when the person is living) each age and gender group for estate tax in our estimates. return filers. This assumption might not Therefore, we focus on a relatively nar- be correct for three main reasons. First, row definition wealth, which includes only extraordinary expenses such as medical the marketable or accumulated wealth expenses and loss of labor income may that remains upon the owner’s death. occur and reduce wealth in the years pre- This point is particularly important for ceding death. Second, even within the set owners of closely held businesses: in many of estate tax filers, it might be the case that instances, a large part of the value of their the most able and successful individuals business reflects their personal human have lower mortality rates, or inversely capital and future labor, which vanishes that the stress associated with building at their death. Both the narrow definition a fortune increases the mortality rate. of wealth (on which we focus by neces- Last and most importantly, for estate tax sity because of our estate data source), avoidance and other reasons, individu- and broader wealth definitions, including als may start to give away their wealth future human wealth, are interesting and to relatives as they feel that their health important to study. The narrow definition deteriorates. We will later address each is more suited to examine problems of of these very important issues, and try to wealth accumulation and transmission, analyze whether those potential sources of while the broader definition is more suited bias might have changed over time. to study the distribution of welfare.9 The wealth definition we use is equal For the years for which no micro data is to all assets (gross estate) less all liabili- available, we use the tabulations by gross ties (mortgages, and other debts) as they estate, age and gender and apply the estate appear on estate tax returns. Assets are multiplier method within each cell in order defined as the sum of tangible assets to obtain a distribution of gross wealth for (real estate and consumer durables), fixed the living. We then use a simple Pareto claim assets (cash, deposits, bonds, mort- interpolation technique and the composi-

9 The analysis of income distribution captures both labor and capital income and is, thus, closer to an analysis of distribution of the broader wealth concept. 449 NATIONAL TAX JOURNAL

6.324 7.425 8.716 9.704 9.879 9.899 9.922 9.922 9.674 8.823 7.914 7.510 7.766 7.960 8.040 8.329 8.171 8.056 8.137 8.544 9.458 (11) 11.598 11.328 10.015 10.357 10.146 10.248 10.053 10.035 10.205 10.440 12.959 13.969 13.830 13.968 15.072 15.403 15.526 15.604 15.542 15.775 16.343 16.784 CPI–U Inflation (2000 base)

–5.7 –5.7 –5.6 –5.0 –5.0 –5.6 –5.8 –6.2 –7.0 –7.5 –8.0 –8.3 –8.1 –8.1 –9.2 –9.0 –8.5 –7.6 –7.5 –7.8 –7.6 –7.5 –7.2 –6.6 –5.8 –5.2 –4.6 –4.6 –5.3 –6.0 –6.6 –7.4 –7.8 –8.3 –9.1 –9.7 (10) –11.4 –11.0 –11.5 –11.7 –10.2 –10.2 –10.4 Liabilities

2.7 2.7 2.6 2.3 2.3 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.3 3.2 3.9 5.0 6.3 6.5 6.4 6.5 6.1 6.4 6.9 7.0 7.3 7.6 7.4 7.0 6.6 6.1 5.9 5.9 5.8 5.9 5.8 5.6 5.6 5.6 5.6 5.4 5.3 5.3 5.2 (9) Life Reserves Insurance

(8) 38.4 38.4 38.0 37.3 36.2 34.1 32.9 32.2 31.3 30.6 29.9 29.1 28.2 26.1 27.5 27.6 27.5 27.7 28.3 29.2 30.3 30.3 30.1 30.4 29.8 28.9 28.5 28.5 28.2 28.0 29.0 30.7 31.5 31.2 30.3 29.7 29.2 28.5 27.3 25.8 24.9 24.9 24.5 Equity Non–Corp.

(7) 21.1 17.8 15.3 15.6 14.4 14.3 16.9 17.7 18.4 20.7 22.5 25.2 29.6 34.6 27.6 20.8 13.4 14.8 16.9 18.4 22.0 20.4 17.7 18.1 16.3 13.4 11.8 12.1 12.7 14.4 14.5 12.7 11.6 11.5 12.5 13.8 14.1 13.5 14.9 17.8 19.2 18.4 19.2 Equity Corporate

Wealth Composition (percent) Wealth

(6) 19.5 20.3 21.2 20.5 20.9 23.1 23.9 23.7 23.6 22.8 22.4 21.8 20.2 19.0 21.9 25.7 30.7 29.7 27.4 25.7 22.6 22.2 22.7 21.8 22.6 24.4 25.8 26.8 27.8 28.3 28.0 26.7 25.3 24.4 23.4 22.1 21.9 22.6 22.5 22.1 22.1 22.5 22.4 Assets Fixed Claim

(5) 24.2 26.5 28.4 29.2 31.2 31.4 29.4 29.8 30.7 30.1 29.9 28.9 26.8 25.1 28.4 31.1 33.4 31.4 30.0 28.8 26.6 28.2 30.3 30.2 31.3 32.9 33.0 31.4 29.8 27.7 27.3 29.4 31.7 33.6 35.3 36.5 37.5 39.0 39.4 39.2 39.5 40.5 40.3 TABLE 1 TABLE Real Estate and Durables

(4) 50,127 45,481 43,346 43,868 39,521 41,432 44,374 45,110 46,153 47,709 49,342 53,005 59,191 64,401 56,701 50,792 45,674 48,052 49,016 50,006 55,205 53,080 51,758 53,464 53,288 52,287 50,802 53,485 58,543 64,306 65,533 61,526 60,320 62,993 65,524 65,431 67,507 68,539 71,036 76,109 79,514 79,090 80,595 (2000 $) Average Wealth Average

Personal Wealth

(3) 3,011 2,770 2,621 2,709 2,494 2,667 2,895 3,000 3,136 3,298 3,471 3,796 4,314 4,773 4,281 3,892 3,548 3,785 3,917 4,054 4,535 4,417 4,365 4,570 4,627 4,610 4,550 4,867 5,408 6,025 6,221 5,918 5,884 6,233 6,567 6,638 6,928 7,101 7,432 8,037 8,483 8,522 8,761 REFERENCE TOTALS FOR POPULATION, WEALTH, AND INFLATION, 1916–2002 AND INFLATION, WEALTH, FOR POPULATION, REFERENCE TOTALS Total Wealth Total (billions 2000 $)

(2) estate 0.454% 0.482% 0.571% 0.718% 0.770% 0.718% 0.716% 0.705% 0.734% 0.738% 0.763% 0.389% 0.399% 0.430% 0.380% 0.296% 0.416% 0.420% 0.423% 0.544% 0.608% 0.618% 0.604% 0.620% 0.620% 0.657% 0.663% 0.552% 0.700% 0.827% 1.176% 1.303% 1.341% 1.410% 1.494% 1.884% 1.861% 2.266% 2.611% tax returns covered by covered Population

Adult population (1) 60,063 60,914 60,477 61,758 63,117 64,360 65,237 66,498 67,945 69,137 70,348 71,615 72,882 74,112 75,505 76,620 77,683 78,764 79,915 81,064 82,156 83,216 84,344 85,486 86,832 88,173 89,560 90,999 92,376 93,697 94,933 96,183 97,552 98,941 100,224 101,452 102,626 103,611 104,623 105,603 106,687 107,748 108,710 (‘000s) (aged 20+) Population 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958

450 Top Wealth Shares in the United States, 1916–2000 - 16.918 17.189 17.361 17.552 17.762 17.993 18.299 18.830 19.376 20.190 21.280 22.535 23.527 24.280 25.785 28.621 31.226 33.037 35.185 37.859 42.137 47.825 52.751 56.022 57.814 60.300 62.471 63.658 65.950 68.654 71.949 75.834 79.019 81.390 83.832 86.011 88.419 91.072 93.167 94.657 96.740 100.000 102.846 104.472 –12.0 –12.7 –13.0 –13.4 –14.3 –14.9 –15.2 –15.6 –15.6 –15.0 –15.1 –15.5 –15.3 –15.1 –15.6 –17.0 –17.3 –16.8 –17.3 –18.1 –18.3 –17.9 –17.6 –17.5 –17.5 –18.0 –18.7 –19.3 –19.5 –19.4 –19.3 –20.0 –20.4 –20.3 –20.6 –21.3 –21.5 –21.0 –20.4 –19.8 –19.2 –19.8 –21.8 –24.2 5.1 5.1 5.0 5.0 5.0 4.9 4.8 4.8 4.7 4.4 4.3 4.4 4.2 4.0 3.8 4.0 4.0 3.7 3.5 3.4 3.1 2.9 2.7 2.6 2.6 2.5 2.3 2.2 2.2 2.2 2.2 2.3 2.4 2.4 2.5 2.6 2.6 2.6 2.5 2.5 2.4 2.4 2.6 2.9 23.6 23.1 22.6 22.4 22.2 21.5 21.1 21.4 21.2 20.2 20.4 20.9 21.0 20.7 21.9 24.8 25.7 25.1 25.5 26.4 26.8 26.7 26.5 25.9 24.9 23.5 21.7 20.4 19.7 19.2 18.5 18.3 17.7 16.6 16.1 16.2 16.2 15.6 15.0 14.4 13.5 13.5 14.2 14.9 21.6 22.0 23.4 24.2 24.2 25.7 27.5 26.4 26.2 28.5 26.9 23.7 23.5 25.0 22.4 15.6 13.4 15.2 14.2 12.1 11.8 12.8 12.3 11.5 12.1 11.8 11.9 13.2 13.4 13.5 14.9 15.1 16.6 19.5 21.4 22.0 24.1 27.9 31.9 35.1 38.3 37.9 33.0 26.9 22.3 22.8 22.8 23.0 23.8 24.2 24.2 24.9 25.3 24.6 25.0 26.2 26.4 25.8 26.1 28.2 29.1 28.3 28.1 28.0 27.5 26.8 26.9 27.8 29.1 30.7 32.0 32.7 33.3 33.7 33.2 33.6 33.8 32.8 31.9 31.7 30.8 29.2 27.7 26.2 25.0 24.8 26.5 28.8 39.4 39.7 39.1 38.7 39.0 38.5 37.5 38.0 38.1 37.3 38.6 40.3 40.2 39.6 41.4 44.4 45.1 44.5 46.0 48.2 49.1 48.8 49.2 49.6 48.8 49.5 50.7 50.8 50.9 50.9 50.5 50.7 49.9 49.0 48.8 48.7 47.8 45.7 43.3 41.6 40.0 41.2 45.6 50.8 ess all nominal values into real 2000 dollars. ess all nominal values into real 84,398 85,579 88,733 91,268 92,215 95,103 99,231 99,918 98,048 93,809 98,433 99,594 98,360 99,767 112,570 116,408 119,890 119,519 102,562 108,037 107,108 102,028 102,619 109,410 109,446 100,378 101,413 102,022 101,122 101,040 105,231 123,460 121,034 120,942 121,053 120,472 123,251 129,698 138,082 148,916 161,519 163,161 154,217 146,000 9,303 9,526 9,978 11,108 11,737 11,963 10,382 10,614 12,425 13,343 13,447 13,026 13,420 14,606 14,885 13,574 13,232 14,136 14,686 15,125 15,518 15,701 15,739 15,803 16,275 16,737 17,700 19,199 20,086 20,902 21,736 21,588 21,630 22,186 22,478 22,619 23,407 24,908 26,847 29,306 32,183 32,936 31,510 30,194 2.950% 2.700% 2.923% 4.069% 5.343% 6.517% 1.966% 1.800% 1.483% 1.178% 1.147% 1.125% 1.046% 1.192% 1.305% 1.312% 1.371% 1.504% 1.541% 1.598% 1.808% 1.930% 2.032% 2.206% 2.072% 110,223 111,314 112,450 113,754 115,096 116,796 118,275 119,724 121,143 123,507 125,543 127,674 130,774 133,502 136,006 138,444 141,055 143,609 146,305 149,142 152,105 155,268 158,033 160,665 163,135 165,650 168,205 170,556 172,552 174,344 176,060 178,365 180,978 183,443 185,685 187,757 189,911 192,043 194,426 196,795 199,255 201,865 204,323 206,811 tion column reports the percent shares of tangible assets (owner occupied real estate and tenant occupied buildings with four units or less, consumer durables), fixed claim assets (cash and saving deposits, all bonds, mortgages), bonds, all deposits, saving and (cash assets claim fixed durables), consumer less, or units four with buildings occupied tenant and estate real occupied (owner assets tangible of shares percent the reports column tion Liabilities include all debts (mortgages and consumer credit). than four units), and life insurance reserves. estate for buildings with more non–corporate equity (which includes tenant occupied net real corporate equity, Columns (5) to (10) add up 100%. The Consumer Price Index (CPI) series is used expr Notes: Population estimates based on census data from Historical Statistics of the United States and the U.S. Statistical Abstract. Historical Statistics of the United States and U.S. Statistical Notes: Population estimates based on census data from with net worth above the filing threshold. using the multiplier technique, by estate tax returns is defined by the population represented, by tax returns Population covered social security benefits and human wealth but including life insurance reserves. wealth is defined as net worth of the personal sector excluding all future composi Total Wealth estimates). year of end not (and year corresponding the during wealth average estimate series The 1945. is included (such as vested defined contribution and 401(k) accounts). value of pension reserves Only the cash surrender before sources other several from and 1945 since Accounts Funds of Flow the from estimated is series The 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

451 NATIONAL TAX JOURNAL tion tables to estimate the thresholds and our denominator. The total wealth and average wealth levels for each of our top average wealth (per adult) series are re- groups.10 For illustration purposes, Table ported in real 2000 dollars in Columns (3) 2 displays the thresholds, the average and (4) of Table 1. The CPI deflator used to wealth level in each group, along with the convert current incomes to real incomes is number of individuals in each group, all reported in Column (10). The average real for 2000, the latest year available. wealth series per adult along with the CPI We then estimate shares of wealth by deflator is plotted in Figure 1. Average real dividing the wealth amounts accruing wealth per adult has increased by a factor to each group by total net–worth of the of three from 1916 to 2000 but the growth household sector in the United States. The was very uneven during the period. There total net–worth denominator has been esti- was virtually no growth in average real mated from the Flow of Funds Accounts for wealth from 1916 to the onset of World War the post–war period and from Goldsmith II. Average wealth then grew steadily from et al. (1956) and Wolff (1989) for the earlier World War II to the late 1960s. Since then, period.11 The total net–worth denominator wealth growth has been slower, except in includes all assets less liabilities corre- the 1994–2000 period.12 sponding to the items reported on estate After we have analyzed the top share tax returns so that the definitions of wealth data, we will also analyze the composi- in the numerator and the denominator are tion of wealth and the age, gender, and as close as possible. Thus, our denomina- marital status of top wealth holders, for tor only includes defined contribution all years where these data are available. pension reserves, and excludes defined We divide wealth into six categories: 1) benefits pension reserves. Life insurance real estate, 2) bonds (federal and local, reserves, which reflect the cash surrender corporate and foreign), 3) corporate stock, value of all policies held, are included in 4) deposits and saving accounts, cash, and

TABLE 2 THRESHOLDS AND AVERAGE WEALTH IN TOP GROUPS WITHIN THE TOP 2% IN 2000 Number of Percentiles Wealth Threshold Upper Groups Individuals Average Wealth (1) (2) (3) (4) (5) Full Population 201,865,000 $163,161 2.00% $729,932 Top 2–1% 2,018,650 $920,073 1.00% $1,172,896 Top 1–0.5% 1,009,325 $1,472,456 0.50% $1,841,697 Top 0.5–0.25% 504,663 $2,314,011 0.25% $3,067,676 Top 0.25–0.1% 302,798 $3,989,132 0.10% $5,503,678 Top 0.1–0.05% 100,933 $6,717,885 0.05% $8,219,720 Top 0.05–0.01% 80,746 $12,675,629 0.01% $24,415,150 Top 0.01% 20,187 $63,564,151 Notes: Computations based on estate tax return statistics (see Appendix Section D in Kopczuk and Saez (2004)). Wealth defined as total assets less liabilities. It includes the estimated cash surrender value of life insurance. It excludes annuitized wealth, and future pensions with no cash surrender value, future labor income and social security benefits. Amounts are expressed in 2000 dollars. Source: Table 1 and Table B2, row 2000 in Kopczuk and Saez (2004)

10 We also use Pareto interpolations to impute values at the bottom of one or two percent of the wealth distribu- tion for years where the coverage of our micro data is not broad enough. 11 Unfortunately, no annual series exist before 1945. Therefore, we have built upon previous incomplete series to construct complete annual series for the 1916–1944 period. 12 It is important to note that comparing real wealth over time is difficult because it requires the use of a price index and there is substantial controversy about how to construct such an index and account properly for the introduction of new goods. That is why most of the paper focuses on top wealth shares, which are inde- pendent of the price index. 452 Top Wealth Shares in the United States, 1916–2000

Figure 1. Average Real Wealth and Consumers Price Index in the United States, 1916–2002

notes, 5) other assets (including mainly the wealth share of the top one percent equity in non–corporate businesses), 6) all from 1916 to 2000. The top one percent debts and liabilities. In order to compare held close to 40 percent of total wealth the composition of wealth in the top groups up to the onset of the Great Depression. with the composition of total net–worth in Between 1930 and 1932, the top one per- the U.S. economy, we display in columns cent share fell by more than 10 percentage (5) to (9) of Table 1 the fractions of real points, and continued to decline during estate, fixed claim assets, corporate equity, the New Deal, World War II, and the unincorporated equity, and debts in total late 1940s. By 1949, the top one percent net worth of the household sector in the share was around 22.5 percent. The top United States. We also present in Figure 1 one percent share increased slightly to the average real value of corporate equity around 25 percent in the mid–1960s, and and the average net worth excluding cor- then fell to less than 20 percent in 1976 and porate equity. Those figures show that the 1982. The top one percent share increased sharp downturns and upturns in average significantly in the early 1980s (from 19 to net worth are primarily due to the dramatic 22 percent) and then stayed remarkably changes in the stock market prices, and that stable around 21–22 percent in the 1990s. the pattern of net worth excluding corpo- This evidence shows that the concentra- rate equity has been much smoother. tion of wealth ownership in the United States decreased dramatically over the THE EVOLUTION OF TOP WEALTH century. This phenomenon is illustrated SHARES in Figure 3, which displays the average real wealth of those in the top one per- Trends cent (left–hand–side scale) and those in The basic series of top wealth shares the bottom 99 percent (right–hand–side are presented in Table 3. Figure 2 displays scale). In 1916, the top one percent wealth 453 NATIONAL TAX JOURNAL

4.11 7.21 6.62 6.63 7.06 6.54 6.20 7.00 6.82 6.72 6.76 6.33 7.03 6.75 7.49 7.94 6.62 5.47 6.00 5.32 5.34 6.05 5.23 5.10 4.84 4.71 4.65 4.56 4.33 4.23 3.78 3.69 3.39 3.36 3.48 3.72 3.56 3.94 3.54 3.85 3.86 (13) .05–.01% (12) 4.13 3.84 3.91 4.01 3.75 3.86 4.17 4.14 4.05 3.90 3.82 4.09 4.08 4.16 4.15 3.90 3.18 3.37 3.04 3.10 3.33 2.85 2.93 2.78 2.75 2.67 2.63 2.62 2.76 2.62 2.67 2.50 2.41 2.35 2.27 2.42 2.29 2.55 2.38 2.54 2.47 .1–.05%

6.11 4.11 6.40 5.84 5.96 6.03 5.93 6.15 6.55 6.34 6.39 6.31 6.05 6.45 6.23 6.31 5.85 5.07 5.18 4.83 4.71 4.83 4.52 4.57 4.47 4.45 4.37 4.17 4.39 4.60 4.51 4.42 4.30 4.09 4.04 4.10 4.22 4.41 4.28 4.49 4.38 (11) .25–.1%

) 10 4.11 5.23 5.02 5.19 5.40 5.35 5.43 5.70 5.35 5.46 5.32 5.29 5.46 5.10 4.93 5.31 4.84 4.28 4.34 4.08 4.08 4.04 3.91 4.00 3.94 3.96 4.03 3.85 4.35 4.33 4.36 4.25 4.15 4.17 4.15 4.31 4.18 4.35 4.29 4.48 4.32 ( .5–.25% Intermediate Groups

(9) 6.11 5.45 5.41 5.63 5.96 6.10 6.21 5.73 5.85 5.94 5.40 6.02 5.47 4.92 5.82 5.23 4.36 4.51 4.24 4.01 4.19 4.32 4.36 4.36 4.44 4.56 4.40 4.80 5.14 5.27 5.43 5.46 5.35 5.34 5.28 5.52 5.30 5.50 5.55 5.75 5.33 1–.5%

(8) 6.41 6.79 6.63 6.83 6.75 7.14 6.81 6.74 7.01 7.21 6.61 2–1%

6.11 (7) 9.69 8.85 9.49 7.48 6.38 6.84 8.23 7.79 8.26 8.87 9.15 8.25 6.03 6.91 6.57 6.54 7.25 6.14 5.56 4.96 5.02 4.13 4.23 4.31 3.69 3.84 4.07 3.65 3.33 3.49 3.60 3.74 3.99 4.15 4.14 4.03 11.32 10.07 10.16 10.77 0.01% TABLE 3 TABLE

9.67 9.67 8.69 8.35 8.64 7.92 7.61 7.76 7.04 6.69 6.96 7.31 7.31 7.93 7.69 7.99 7.88 (6) 16.11 11.50 11.89 11.88 11.37 11.21 16.90 15.47 18.38 16.61 13.68 13.39 13.66 14.95 14.55 14.59 17.19 15.62 16.65 18.71 14.87 12.91 13.30 10.40 0.05%

9.45 9.03 9.24 9.73 9.60 (5) 11.31 11.40 21.03 19.31 20.02 22.39 20.36 17.54 17.55 17.80 19.00 18.45 18.41 21.28 19.70 20.80 22.85 18.77 14.68 16.28 14.94 14.98 16.63 14.22 14.13 13.18 12.42 12.35 10.96 10.54 10.28 10.26 10.48 10.06 10.53 10.36 0.10% TOP WEALTH SHARES IN THE UNITED STATES, 1916–2000 SHARES IN THE UNITED STATES, WEALTH TOP

(4) 24.11 27.44 25.15 25.97 28.42 26.29 23.68 24.13 25.39 24.77 24.46 27.72 25.93 26.91 29.17 24.63 19.75 21.46 19.76 19.69 21.47 18.73 18.70 17.65 16.87 16.71 15.48 15.35 16.00 15.05 14.70 14.57 13.54 13.08 13.34 13.95 13.71 14.89 14.35 15.02 14.74 0.25% Top groups Top

(3) 32.67 30.17 31.17 33.82 31.65 29.12 29.81 29.49 30.85 30.08 29.75 33.19 31.03 31.84 34.47 29.47 24.04 25.80 23.84 23.76 25.51 22.64 22.70 21.59 20.83 20.74 19.34 19.46 20.35 19.38 19.06 18.81 17.69 17.25 17.49 18.26 17.89 19.25 18.64 19.50 19.06 0.50%

(2) 1% 38.12 35.58 36.80 39.93 37.61 35.22 36.02 35.22 36.70 36.02 35.15 39.21 36.50 36.76 40.29 34.70 28.40 30.31 28.09 27.77 29.70 26.97 27.06 25.95 25.27 25.30 23.74 24.26 25.49 24.65 24.49 24.28 23.04 22.59 22.78 23.77 23.18 24.75 24.18 25.25 24.39

(1) 2% 30.90 31.07 29.67 29.42 29.53 30.91 29.99 31.49 31.19 32.45 31.01 1916 1917 1918 1923 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1953 1954 1956 1958 1960 1962

454 Top Wealth Shares in the United States, 1916–2000 3.11 3.11 3.86 3.30 3.48 2.72 2.87 3.21 3.10 3.16 3.46 3.29 3.21 3.32 3.15 3.24 3.16 2.96 3.24 3.15 3.13 3.32 3.37 2.58 2.22 2.42 1.83 1.93 1.99 1.99 2.20 2.23 2.25 2.15 2.19 1.95 2.16 2.12 1.98 2.04 2.07 2.10 2.01 2.08 2.12 2.06 4.50 3.98 4.14 3.46 3.47 3.66 3.63 4.04 4.02 3.80 3.97 3.83 3.48 3.78 3.67 3.75 3.84 3.62 3.63 3.64 3.70 3.76 3.67 4.25 4.00 4.02 3.61 3.56 3.87 4.00 3.95 4.00 3.88 3.93 3.89 3.74 3.83 3.68 3.89 3.79 3.76 3.80 3.85 3.78 3.69 3.55 5.10 5.02 5.07 4.80 4.70 5.15 4.72 4.92 5.03 4.91 4.86 4.94 4.91 4.98 4.84 4.98 4.96 4.87 4.94 4.83 4.83 4.82 4.51 6.11 6.05 6.25 6.39 6.35 5.89 5.62 6.14 6.14 6.22 6.07 6.08 6.53 6.20 6.06 6.22 6.50 6.20 6.23 6.00 5.97 6.00 5.64 4.41 4.34 3.99 2.91 2.53 3.19 3.51 4.09 3.91 3.44 3.60 3.79 3.63 3.55 3.72 3.76 3.86 3.99 3.84 3.78 3.99 3.91 3.90 7.11 8.27 7.64 7.47 5.63 5.40 6.40 6.62 7.25 7.37 6.73 6.80 6.78 6.79 6.88 6.72 6.96 7.23 6.98 6.91 7.31 7.28 7.00 9.87 9.89 7.45 7.33 8.40 8.60 9.45 9.61 8.98 8.95 9.30 8.73 8.95 8.99 8.69 9.00 9.29 9.08 8.92 9.38 9.40 9.06 10.85 15.35 13.84 14.03 10.91 10.79 12.06 12.23 13.49 13.63 12.79 12.92 13.13 12.21 12.73 12.66 12.44 12.84 12.91 12.71 12.56 13.08 13.16 12.73 19.59 17.84 18.06 14.52 14.36 15.93 16.23 17.43 17.62 16.66 16.85 17.02 15.95 16.56 16.34 16.33 16.63 16.67 16.51 16.41 16.86 16.86 16.27 24.70 22.86 23.13 19.32 19.06 21.07 20.95 22.35 22.66 21.57 21.70 21.96 20.86 21.54 21.18 21.31 21.58 21.54 21.45 21.24 21.70 21.68 20.79 29.11 30.75 29.52 25.67 25.17 26.96 26.57 28.49 28.80 27.78 27.77 28.04 27.39 27.73 27.23 27.53 28.08 27.74 27.68 27.24 27.67 27.68 26.43 1965 1969 1972 1976 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Appendix Section D in Kopczuk and Saez (2004) for details. statistics. See Notes: Computations by authors based on estate tax return to each upper wealth group. Series display the top of total net–worth accruing period. in the pre–war population does not cover that group estimated only for the 1946–2000 period because tax return 2–1% are Series for Top

455 NATIONAL TAX JOURNAL

Figure 2. The Top 1% Wealth Share in the United States, 1916–2000

Figure 3. Average Real Wealth of Bottom 99% and Top 1% in the United States, 1916–2000

456 Top Wealth Shares in the United States, 1916–2000 holders were more than 60 times richer on decompose the top percentile into smaller average than the bottom 99 percent. The groups. Figure 4 displays the wealth shares figure shows the sharp closing of the gap of the top 1–.5 percent (the bottom half of between the Great Depression and the post the top one percent), and the top .5–.1 per- World War II years, as well as the subse- cent (the next .4 percentile of the distribu- quent parallel growth for the two groups tion). Figure 4 also displays the share of the (except for the 1970s). In 2000, the top one second percentile (Top 2–1 percent) for the percent individuals are about 25 times 1946–2000 period. The figure shows that richer than the rest of the population. those groups of high but not super–high Therefore, the evidence suggests that wealth holders experienced much smaller the twentieth century’s decline in wealth movements than the top one percent as a concentration took place in a very spe- whole. The top 1–.5 percent has fluctuated cific and brief time interval, 1930–1949, between five and six percent except for a which spans the Great Depression, short–lived dip during the Great Depres- the New Deal, and World War II. This sion. The top .5–.1 percent has experienced suggests that the main factors influenc- a more substantial and long–lasting drop ing the concentration of wealth might from 12 to eight percent but this four per- be short–term events with long–lasting centage point drop constitutes a relatively effects, rather than slow changes such as small part of the 20 point loss of the top technological progress and economic de- one percent. All three groups have been velopment or demographic transitions. remarkably stable over the last 25 years. In order to understand the overall pat- Examination of the very top groups in tern of top income shares, it is useful to Figure 5 (the top .1 percent in Panel A and

Figure 4. The Wealth Shares of Top 2–1%, 1–0.5%, and 0.5–0.1%, 1916–2000

457 NATIONAL TAX JOURNAL

Figure 5. The Shares of the Top Wealth Groups in the United States, 1916–2002

the top .01 percent in Panel B) provides a percent to four percent: those wealthiest striking contrast to Figure 4. The top .1 individuals, a group of 20,000 persons percent declined dramatically from more in 2000, had on average 1,000 times the than 20 percent to less than 10 percent average wealth in 1916, and had about after World War II. For the top .01 percent, 400 times the average wealth in 2000. It is the fall was even more dramatic from 10 interesting to note that, in contrast to the 458 Top Wealth Shares in the United States, 1916–2000 groups below the very top on Figure 4, the very smooth in the 1990s, suggesting that fall for the very top groups continued dur- the groups we consider are large enough ing World War II. Since the end of World so that sampling variability is small.14 War II, those top groups have remained fairly stable up to the late 1960s. They Composition experienced an additional drop in the 1970s, and a very significant increase in Figure 6 displays the composition of the early 1980s: from 1982 to 1985, the top wealth within the top one percent for 1929, .01 percent increased from 2.5 percent to a year when top wealth shares and stock four percent, a 60 percent increase. How- prices were very high. Wealth is divided ever, as all other groups, those top groups into four components: real estate, corpo- remained stable in the 1990s. Therefore, rate stock (including both publicly traded the evidence shows that the dramatic and closely held stock), fixed claims assets movements of the top one percent share (all bonds, cash and deposits, notes, etc.), are primarily due to changes taking place and other assets (including primarily within the upper fractiles of the top one non–corporate business assets).15 Figure 6 percent. The higher the group, the larger shows that the share of corporate stock is the decline. It is, thus, important to ana- increasing with wealth while the share of lyze separately each of the groups within real estate is decreasing with wealth, with the top one percent in order to understand the share of fixed claims assets slightly the difference in the patterns. decreasing (the share of bonds is slightly Popular accounts (see the third part increasing and the share of cash and de- of the fifth section below) suggest that posits slightly decreasing). In the bottom the computer technology in the recent of the top 0.5 percent, each of those three decades has created many new rich in- component represents about one third of dividuals. Those newly rich individuals total wealth. At the very top, stocks rep- are likely to be much younger than the resent almost two thirds of total wealth older rich. However, even if the new rich while real estate constitutes less than 10 are younger and, hence, less likely to die percent. This broad pattern is evident for than the old rich, our estimates based all the years of the 1916–2000 period for on estate tax data should not be biased which we have data:16 the share of stocks downward. This is because the estate increases with wealth and the share of real multiplier method corrects for changes in estate decreases. The levels, however, may the age distribution of top wealth holders. vary over time due mainly to the sharp Our estimates should, however, become movements in the stock market. noisier (as the sampling probability by Figure 7 displays the fraction of corpo- death is reduced). This phenomenon rate stock in net worth over the period should generate noisier series in the recent 1916–2000 for the top .5 percent, and for period but with no systematic bias as long total net worth in the U.S. economy (from as our multipliers correctly reflect the in- Tables 4 and 1, respectively). Consistent verse probability of death of the wealthy with Figure 6, the fraction of stock is much in each age–gender cell.13 However, the higher for the top .5 percent (around 50 series displayed in Figures 2, 4, and 5 are percent on average) than for total net

13 If fewer than expected of these young wealthy individuals die, the estimate is downward biased, but if more than expected die, the estimate is upward biased. 14 The estimates are independent across years as every person dies only once. 15 Debts have been excluded from the figure but they are reported in Table B3 of the NBER working paper version. 16 All these statistics are reported in Table B3 of the NBER working paper version. 459 NATIONAL TAX JOURNAL

Figure 6. Wealth Composition of Top Groups within the Top 0.5% in 1929

worth (around 20 percent on average). price of corporate stock fell by 60 percent Both series are closely parallel from the and the top one percent fell by about 20 1920s to the mid 1980s: they peak just be- percent from 1965 to 1982). fore the Great Depression, plunge during Corporate profits increased dramati- the depression, stay low during the New cally during World War II, but in order Deal, World War II, up to the early 1950s, to finance the war, corporate tax rates and peak again in the mid–1960s before increased sharply from about 10 percent plummeting in the early 1980s. before the war to over 50 percent during This parallel pattern can explain why the war and they stayed at high levels after the share of wealth held by the top groups the war. This fiscal shock in the corporate dropped so much during the Great De- sector reduced substantially the share of pression. Real corporate equity held by profits accruing to stock–holders and ex- households fell by 70 percent from 1929 plains why average real corporate equity to 1933 (Figure 1) and the top groups held per adult increased by less than 4 percent a much greater fraction of their wealth from 1941 to 1949 while the average net in the form of corporate stock (Figure 7). worth increased by about 23 percent (see Those two facts mechanically lead to a Figure 1). Thus, top wealth holders, own- dramatic decrease in the share of wealth ing mostly stock, lost relative to the aver- accruing to the top groups. The same age during the 1940s, and the top shares phenomenon took place in the 1970s when declined significantly. stock prices plummeted and the shares of The central puzzle to understand is why top groups declined substantially (the real this explanation does not work in reverse 460 Top Wealth Shares in the United States, 1916–2000

Figure 7. Fraction of Corporate Stock within the Top .5% and total net–worth, 1916–2000

after 1949, that is, why top wealth shares in total net worth triples (from 12 to 38 per- did not increase significantly from 1949 to cent), the fraction of corporate equity held 1965 and from 1986 to 2000 when the stock by the top groups is virtually the same in market prices soared, and the fraction 1986 and 2000 (as displayed on Figure 7). of corporate equity in total net worth of Thus, the data imply that the share of all the household sector increased from just corporate stock from the household sector around 12 percent (in 1949 and 1986) to held by the top wealth holders fell sharply almost 30 percent in 1965 and almost 40 from 1986 to 2000. percent in 2000. Several factors may explain those strik- The series on wealth composition of ing results. First, the development of de- top groups might explain the absence fined contribution pensions plans, and in of growth in top wealth shares during particular 401(k) plans, and mutual funds the 1986–2000 episode. The fraction of certainly increased the number of stock– corporate stock in the top groups did not holders in the American population,17 and, increase significantly during the period thus, contributed to the democratization (as can be seen on Figure 7, it actually of stock ownership among American dropped significantly up to 1990 and then families. The Survey of Consumer Fi- recovered during the 1990s). Therefore, nances shows that the fraction of families although the fraction of corporate equity holding publicly traded stock (directly or

17 The Flow of Funds Accounts show that the fraction of corporate stock held indirectly through Defined Con- tribution plans and mutual funds doubled from 17 to 33 percent between 1986 and 2000. 461 NATIONAL TAX JOURNAL –6.3 –6.5 –8.4 –9.4 –9.8 –7.8 –9.4 –9.4 –5.7 –7.2 –7.7 –4.9 –5.9 –5.9 –6.3 –7.4 –8.2 –5.6 –5.4 –5.5 –5.9 –4.8 –7.5 –5.1 –11.3 –10.0 –15.6 –15.3 –13.1 –10.4 –10.9 –12.3 –12.5 –28.0 –18.2 –21.1 –13.0 –14.7 –14.1 –17.3 Debts 7.4 5.8 7.7 9.2 7.7 8.3 7.4 6.3 7.3 8.0 6.2 7.7 8.1 7.8 9.3 6.9 7.7 9.4 5.7 8.1 5.6 6.1 7.1 7.2 5.8 6.3 6.6 7.3 7.4 7.2 8.2 7.7 7.8 7.2 8.3 3.5 11.1 11.3 11.2 24.3 Other

0.3 0.3 0.3 0.7 0.8 1.2 1.4 1.6 1.0 1.2 1.2 1.3 1.0 1.5 2.1 2.5 2.5 2.5 2.2 1.4 1.5 1.9 2.1 1.9 1.2 1.1 1.4 2.2 0.5 0.5 0.5 0.6 0.5 0.4 0.4 0.3 0.3 0.3 0.6 0.5 Ins. Life Top 0.1% Top 41.4 49.4 47.4 52.1 58.8 50.2 54.6 58.4 53.4 56.0 64.9 66.4 65.1 65.1 54.8 51.0 48.6 56.9 52.1 58.4 56.3 50.6 56.3 51.7 52.4 59.4 61.7 53.6 53.6 52.7 53.3 54.1 54.6 61.1 61.8 63.6 64.4 67.0 70.1 70.0 Stock 37.5 31.1 33.4 30.3 26.3 32.0 30.5 28.2 32.4 29.2 25.4 21.5 25.1 27.2 32.6 34.9 39.8 36.2 36.5 34.6 35.0 34.8 34.0 34.5 41.5 34.1 34.1 31.5 32.8 33.5 32.6 30.8 30.7 26.0 23.8 23.1 22.1 21.0 18.8 20.8 Bonds 8.1 9.0 9.2 9.3 9.7 11.4 11.2 11.2 19.7 19.9 19.7 17.1 16.3 23.9 21.4 18.6 15.7 16.1 13.2 10.8 10.2 10.7 13.6 15.2 16.1 14.1 10.9 10.9 14.1 13.6 13.0 10.5 13.2 13.0 13.3 14.6 15.0 10.9 10.6 10.3 Real –6.7 –7.4 –9.4 –9.7 –9.2 –9.3 –7.8 –8.0 –7.9 –5.8 –6.3 –6.5 –6.8 –7.4 –7.9 –6.1 –5.7 –5.6 –5.9 –5.1 –7.5 –5.0 –10.8 –14.3 –14.1 –12.5 –10.3 –10.2 –10.6 –10.2 –12.5 –12.3 –24.2 –16.4 –18.3 –12.2 –10.6 –14.8 –13.7 –15.3 Debts 7.2 5.9 8.1 8.9 8.4 8.0 7.3 6.7 7.3 8.3 6.3 7.8 7.9 7.7 8.5 9.8 6.9 7.5 9.1 6.4 9.0 6.1 6.4 7.6 8.9 6.5 7.0 7.3 7.8 7.9 7.9 8.5 8.2 8.2 7.3 9.0 3.8 19.4 10.1 10.0 Other

0.3 0.3 0.4 0.8 1.1 1.7 2.1 2.2 1.8 1.9 2.0 1.7 1.3 1.7 3.4 4.2 3.9 3.7 3.5 1.9 1.9 2.4 2.8 2.6 1.3 1.2 1.4 2.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.5 0.4 0.4 1.1 0.7 Ins. Life Top 0.25% Top 39.1 44.0 43.5 48.9 53.7 45.7 48.6 51.6 49.1 50.7 58.9 62.3 62.1 61.7 50.8 46.0 44.6 50.7 47.1 53.9 52.4 48.8 52.6 48.0 48.9 53.9 55.3 49.8 50.4 49.5 49.7 50.4 50.9 57.0 57.7 60.3 61.2 63.9 65.7 66.8 Stock 36.5 32.4 33.5 30.0 27.5 32.0 31.8 29.5 32.8 30.3 27.2 23.5 26.2 28.1 33.6 36.9 40.2 37.7 37.8 35.5 35.6 35.0 33.9 34.5 40.7 35.1 34.6 31.8 32.7 33.2 32.5 30.9 30.8 26.2 24.5 23.5 22.3 21.4 19.0 21.3 Bonds 11.2 23.6 24.8 23.9 21.0 20.1 26.9 24.3 22.4 19.4 19.0 16.1 13.9 12.7 13.3 16.0 17.7 17.8 16.2 13.8 13.2 12.5 12.3 13.9 17.8 17.1 16.4 12.5 16.0 16.1 16.5 17.5 17.6 14.4 14.4 13.3 13.8 12.1 12.8 12.4 Real –8.1 –8.2 –9.7 –9.6 –8.4 –8.7 –8.5 –6.3 –6.5 –6.8 –7.0 –7.2 –7.7 –6.3 –6.0 –5.9 –6.0 –5.3 –7.1 –4.9 –11.7 –10.0 –10.4 –13.7 –13.6 –12.2 –10.6 –10.3 –10.7 –10.7 –12.4 –12.1 –22.0 –15.8 –17.0 –12.0 –10.5 –14.3 –13.1 –14.0 Debts 7.8 6.2 8.3 9.2 8.8 7.7 7.2 6.9 7.3 8.2 6.4 7.9 8.1 7.4 8.0 9.2 9.4 9.4 6.8 7.4 9.0 7.1 9.3 6.2 6.5 7.9 9.7 7.1 7.7 7.9 8.2 8.2 8.5 8.9 8.5 8.6 7.5 9.7 4.1 16.8 Other

0.3 0.4 0.5 1.0 1.3 2.0 2.4 2.5 2.4 2.3 2.4 2.2 1.6 2.4 4.0 5.1 4.9 4.5 4.3 2.0 2.1 3.0 3.2 3.2 1.3 1.2 1.4 3.2 0.8 0.8 0.9 0.9 0.8 0.7 0.7 0.6 0.5 0.5 1.0 0.9 Ins. Life

Top 0.5% Top 36.4 39.9 40.1 45.3 49.4 42.1 44.0 46.5 45.1 46.7 54.7 58.1 58.9 58.1 48.3 42.5 41.9 46.8 43.8 50.3 48.9 45.7 49.3 45.0 45.3 49.4 50.2 46.3 46.9 46.1 46.0 46.7 47.4 52.9 53.9 56.6 57.5 60.6 62.0 63.4 Stock TABLE 4 TABLE 35.5 32.3 33.3 29.9 28.1 32.1 32.5 30.6 33.2 31.3 28.5 24.1 26.6 29.1 34.4 38.6 40.4 38.5 38.7 36.3 36.3 35.5 34.1 34.4 40.6 35.7 35.1 31.9 32.7 32.9 32.4 31.1 31.0 26.4 25.2 24.0 22.7 22.0 19.8 22.1 Bonds 28.1 29.5 27.7 25.1 24.2 29.9 27.3 25.7 22.5 21.9 18.7 17.4 15.6 15.3 17.5 19.1 19.4 17.7 15.8 14.1 15.8 15.2 14.9 16.6 20.9 20.3 19.4 15.2 18.9 19.4 19.9 20.5 20.3 17.8 17.4 16.2 16.6 14.7 14.6 14.5 Real –6.4 –6.8 –6.9 –7.1 –7.4 –6.3 –6.0 –5.9 –6.0 –5.5 –6.9 –4.9 Debts 7.4 8.1 8.1 8.4 8.4 8.9 9.2 8.8 8.8 7.7 4.4 10.1 Other

0.9 0.9 1.0 1.0 0.9 0.8 0.8 0.7 0.6 0.6 1.0 1.1 Ins. Life Top 1% Top 42.7 41.9 41.7 42.2 42.9 48.2 49.2 52.1 53.1 56.5 57.7 58.9 Stock 32.9 32.9 32.6 31.6 31.5 27.0 25.8 24.7 23.5 22.8 21.1 23.4 Bonds 22.5 23.0 23.5 24.0 23.7 21.4 21.1 19.6 19.9 17.9 17.1 17.1 Real –6.0 –6.4 –6.5 –6.5 –6.8 –6.1 –5.7 –5.8 –5.9 –5.5 –6.8 –4.9 Debts 7.4 8.1 8.0 8.2 8.3 9.0 9.1 8.9 8.9 7.8 4.7 10.1 Other

COMPOSITION BY SOURCES OF WEALTH AND BY FRACTILES OF TOTAL WEALTH IN THE UNITED STATES, 1916–2000 IN THE UNITED STATES, WEALTH FRACTILES OF TOTAL AND BY SOURCES OF WEALTH COMPOSITION BY 0.9 1.0 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 1.0 1.3 Ins. Life Top 2% Top 39.1 37.8 37.2 37.7 38.4 42.9 43.8 47.0 48.0 51.6 52.9 53.5 Stock 34.1 34.3 34.4 33.2 33.1 28.7 27.7 26.3 25.2 24.6 23.7 26.3 Bonds Real 25.4 26.2 27.0 27.4 27.1 25.4 25.1 23.6 23.8 21.5 20.1 20.3 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1953 1954 1956 1958 1960 1962 1965

462 Top Wealth Shares in the United States, 1916–2000 –9.9 –7.8 –9.6 –9.1 –7.5 –9.4 –9.2 –7.9 –6.6 –7.9 –7.8 –5.3 –5.1 –6.6 –5.7 –6.7 –6.0 –5.9 –5.6 –6.8 –11.8 –10.4 13.8 10.3 13.1 21.2 20.7 20.1 16.8 18.3 23.5 17.2 25.7 23.7 20.3 13.6 13.5 14.9 15.8 15.8 15.6 12.8 15.8 21.0 0.8 0.7 0.8 1.2 1.0 1.0 0.9 1.1 1.2 2.2 1.0 1.0 1.1 0.9 1.0 1.2 0.8 0.9 0.9 0.7 0.6 0.8 65.6 64.2 52.9 41.7 45.4 45.1 50.5 52.1 42.7 42.6 36.6 35.4 43.4 52.8 53.9 45.7 46.5 51.7 52.7 56.1 51.6 47.8 18.8 19.1 26.7 19.9 19.9 21.5 21.1 18.7 20.8 22.7 21.2 27.1 24.5 22.0 22.4 27.9 21.3 21.2 20.7 21.3 22.5 19.8 10.8 13.6 16.1 25.0 23.4 24.0 18.3 19.2 21.0 23.1 22.2 20.7 18.4 15.9 14.2 16.9 21.3 17.0 16.2 15.1 15.1 17.4 –8.3 –9.5 –9.7 –9.0 –8.7 –9.4 –8.9 –8.1 –7.9 –8.1 –8.1 –6.6 –5.4 –6.5 –6.2 –6.5 –5.8 –5.9 –5.5 –6.7 –11.8 –10.4 13.1 10.4 12.7 20.2 18.4 18.6 17.3 19.3 22.2 17.3 24.0 21.8 19.9 15.1 14.6 16.9 16.9 17.3 16.6 13.9 17.2 20.0 1.1 1.0 1.1 1.5 1.3 1.1 1.4 1.3 1.5 2.3 1.4 1.2 1.4 1.2 1.4 1.4 1.1 1.3 1.1 1.1 0.9 0.9 61.5 60.3 48.2 38.4 41.3 40.8 44.2 45.6 40.3 38.7 34.1 32.7 38.6 47.9 47.5 40.4 42.4 46.5 47.9 51.3 47.5 46.2 20.3 20.5 27.4 21.2 22.9 23.5 22.4 20.6 21.8 24.6 22.2 27.8 26.5 23.3 25.9 28.7 23.0 22.9 22.5 22.8 22.8 20.0 14.4 16.2 20.0 28.4 25.1 27.7 23.3 22.6 23.0 25.2 26.2 24.5 21.7 19.1 16.0 19.2 22.7 18.4 17.7 16.9 17.2 19.5 –8.7 –9.1 –9.1 –9.2 –8.6 –8.5 –8.3 –8.1 –8.1 –7.0 –5.8 –6.9 –6.5 –6.6 –6.1 –6.0 –5.6 –6.6 –10.2 –10.1 –10.1 –12.6 12.5 10.3 12.3 19.3 19.1 17.8 17.7 19.0 21.4 17.6 22.9 21.9 19.8 15.7 15.9 17.7 17.9 18.2 18.0 14.0 19.0 20.8 1.4 1.3 1.4 1.8 2.1 1.7 1.7 1.6 2.0 2.6 1.8 1.6 1.7 1.5 1.6 1.7 1.5 1.6 1.4 1.5 1.1 1.2 58.0 56.5 44.5 35.3 36.1 37.6 40.6 41.5 36.5 35.4 31.8 30.2 35.2 44.2 44.0 37.1 38.5 42.8 44.6 48.3 44.4 43.9 21.2 21.9 27.4 22.4 23.1 23.8 23.5 22.8 23.4 24.9 23.7 28.2 27.4 24.3 26.3 29.2 24.6 24.0 23.2 23.7 22.8 19.6 17.1 18.8 24.4 31.2 28.6 31.7 25.6 24.4 25.3 28.0 28.1 26.2 24.0 21.4 17.9 21.3 23.9 20.0 19.0 18.5 18.3 21.0 –9.1 –9.7 –9.3 –9.6 –8.9 –8.7 –8.5 –8.3 –8.3 –7.1 –6.2 –7.0 –6.7 –6.6 –6.4 –6.2 –6.0 –6.8 –11.0 –10.2 –10.3 –12.1 12.7 10.6 12.5 18.8 18.6 18.3 17.8 19.0 20.5 17.4 22.1 21.0 20.1 16.7 17.2 18.5 19.0 19.6 19.4 14.9 20.1 22.0 1.8 1.6 1.7 2.1 2.5 2.1 2.2 1.9 2.3 2.7 2.1 2.0 2.1 1.9 2.0 2.1 2.0 2.0 1.8 1.9 1.4 1.6 53.5 51.3 40.4 32.1 33.0 33.5 37.2 37.5 33.5 31.9 29.0 27.8 31.8 39.7 39.7 33.5 34.6 38.6 40.5 44.5 41.5 39.9 22.3 24.3 27.4 23.6 23.6 25.1 24.9 24.1 24.9 26.4 25.1 28.9 28.5 25.5 26.9 29.1 25.4 24.5 23.8 24.6 22.9 20.8 19.9 21.3 28.3 34.4 32.0 33.1 27.2 27.1 27.8 30.3 30.2 28.5 25.8 23.3 20.3 23.8 25.7 21.9 20.9 20.3 20.0 22.5 –9.4 –7.2 –6.8 –6.4 –6.2 –6.8 –10.5 –10.5 12.4 10.6 12.2 20.9 20.4 16.1 21.0 22.7 2.3 2.0 2.3 2.6 2.1 2.3 2.0 2.1 48.7 46.3 35.8 34.6 36.8 40.6 37.7 36.9 25.9 27.8 30.8 27.5 26.5 27.3 25.3 23.3 23.6 24.7 31.7 24.1 23.2 22.5 22.1 23.9 Notes: Wealth is defined as all sources of (non–human) wealth net of debts and liabilities but excludes annuities, and claims on future pensions. of (non–human) wealth net debts and liabilities but excludes annuities, claims on future is defined as all sources Notes: Wealth and corporate bonds. Stock is stock. estate. Bonds is the sum of federal, local, foreign, Real is defined as real deposits, and notes. Other is equity in unincorporated business, miscellaneous assets. Cash is currency, less debts add up to 100%. The sums of all sources 1969 1972 1976 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

463 NATIONAL TAX JOURNAL indirectly through mutual funds and pen- were dramatically increasing (see the fifth sion plans) has increased significantly in section). By the year 2000, the fraction of the last two decades, and was just above wealth held in stock by the top one percent 50 percent in 2001.18 Second, the wealthy is just slightly above the fraction of wealth may have re–balanced their portfolios as held in stock by the U.S. household sector gains from the stock–market were accruing (40 percent versus 38 percent). Therefore, in the late 1980s and the 1990s, and, thus, in the current period, sharp movements of reduced their holdings of equity relative to the stock market are no longer expected to more modest families. In any case, the data produce sharp movements in top wealth strikingly suggest that top wealth holders shares as was the case in the past.20 did not benefit disproportionately from the bull stock market relative to the average Age, Gender, and Marital Status wealth holder.19 This might explain in part why top wealth shares did not increase Figure 8 displays the average age and in that period when top income shares the percent female within the top .5 per-

Figure 8. Average Age and Fraction Female in Top 0.5%, 1916–2000

18 In 1989, only 31.7 percent of American households owned stock, either directly or indirectly though pension and mutual funds, while 48.9 and 51.9 percent did in 1998 and 2001, respectively. See Kennickell et al. (1997) and Aizcorbe et al. (2003). 19 It is important to keep in mind that, because the wealth distribution is very skewed, the average wealth is much larger than median wealth. Obviously, the stock market surge of the 1990s did not benefit the bottom half of American families who do not hold any stock. 20 It should be emphasized, though, that the wealthy may not hold the same stocks as the general population. In particular, the wealthy hold a disproportionate share of closely held stock, while the general population holds in general only publicly traded stocks through mutual and pension funds (see e.g., Kennickell (2003)). Estate tax returns statistics separate closely held from publicly traded stock only since 1986. 464 Top Wealth Shares in the United States, 1916–2000 cent group since 1916.21 The average age in the so–called community property states displays a remarkable stability over time where each spouse owned half of all assets fluctuating between 55 and 60. Since the acquired during marriage. Starting in 1948, early 1980s, the average age has declined spousal bequests became deductible up to very slightly from 60 to around 57. Thus, 50 percent of the net estate. In 1981, spousal the evidence suggests that there have been bequests became fully deductible.24 Those no dramatic changes in the age composi- changes might have increased the amount tion of top wealth holders over time.22 In of spousal bequests made by wealthy in- contrast, the fraction of females among dividuals and, hence, potentially increased top wealth holders has almost doubled the fraction of women in the top wealth from around 25 percent in the early part groups.25 Two points should be noted. of the century to around 45 percent in the First, Figure 8 shows that most of the 1990s. The increase started during the Great increase in the female fraction in the Depression and continued throughout the top wealth groups happened before the 1950s and 1960s, and has been fairly stable changes in estate tax law regarding spou- since the 1970s. Therefore, there has been sal bequests (in 1948 and 1981) implying substantial gender equalization in the hold- that those tax law changes can explain at ing of wealth over the century in the United best a fraction of the trend. As we discuss States, and today, almost 50 percent of top below, estate tax rates at the top became wealth holders are female. It is striking, very high in the 1930s.26 As a result, in comparing Figure 2 and Figure 8, to note order to avoid “double estate taxation”, the negative correlation between the top wealthy husbands had an incentive to wealth shares and the fraction of women in pass their wealth directly to the next the top wealth groups. This suggests that generations instead of passing it to their the gender equalization at the top might widowed spouses. Such a phenomenon have contributed to the decline in top should have decreased the number of wealth shares measured at the individual wealthy widows, which should have re- level. It is conceivable that wealth concen- duced the number of wealthy widows at tration measured at the family level has not the top. Splitting wealth between spouses declined as much as wealth concentration using gifts before death was not a better measured at the individual level.23 tax strategy as it would have triggered Estate tax law regarding bequests to substantial gift taxes (following the in- spouses has changed over time and this troduction of the gift tax in 1932) before might have affected the gender composi- the marital deduction (for estates and tion at the top through behavioral responses gifts) was introduced in 1948. The main to estate taxation. Before 1948, bequests to reason why the number of women in the spouses were not deductible from taxable top groups increased so much during the estates with an exception of couples located Great Depression seems to be due to dif-

21 Those series are reported in Table 4. Series for all other top wealth groups are reported in Table B4 of the NBER working paper version. 22 Although, due to significant decreases in mortality over the course of the 20th century, top wealth holders nowadays have more years of potential lifespan ahead of them and are, therefore, younger relative to the average population than in the early part of the century. 23 We come back to this point in the third part of the fifth section when we compare our estimates with wealth con- centration measures at the family level obtained with the Survey of Consumer Finances for the recent period. 24 Similarly, 50 and 100 percent of spousal gifts became deductible in 1948 and 1981, respectively. In 1976, the marital deduction was modified to allow for the greater of 50 percent of estate or $250,000 to be deductible. 25 See Kopczuk and Slemrod (2003) for a detailed discussion of this point. 26 The top estate rate increased from 20 to 45 percent in 1932, and then to 60 percent in 1935, to 70 percent in 1936, and to 77 percent in 1941. 465 NATIONAL TAX JOURNAL ferences in wealth composition between has been the sharp increase in income genders. In the late 1920s, wealthy women and wage inequality over the last 25 held a smaller fraction of their wealth in years in the United States (see Katz the form of stock than wealthy men. As a and Autor (1999) for a recent survey). result, wealthy men lost a larger fraction As evidenced from income tax returns, of their wealth following the stock mar- changes have been especially dramatic ket crash of 1929 than wealthy women, at the top end, with large gains accru- thereby contributing to the increase in the ing to the top income groups (Feenberg fraction of women at the top. and Poterba, 1993; Feenberg and Po- Second, even tax law induced changes terba, 2000; Piketty and Saez, 2003). For in spousal bequests have a real impact on example, Piketty and Saez (2003) show the distribution of wealth across gender that the top one percent income share lines, and, thus, should not necessarily be doubled from eight percent in the 1970s regarded as unimportant. to over 16 percent in 2000.27 How can we The marital status of top wealth holders reconcile the dramatic surge in top income has experienced relatively modest secular shares with the relative stability of top changes. For males, the fraction of mar- wealth shares estimated from estate tax ried men has always been high (around data since the 1980s? 75 percent), the fraction widowed has Figure 9 casts light on this issue. It declined slightly (from 10 to 5 percent) displays the top .01 percent income share and the fraction single has increased (from from Piketty and Saez (2003), along with 10 to 15 percent). For females, the fraction the composition of these top incomes28 widowed is much higher, although it has into capital income (dividends, rents, declined over the period from about 40 interest income, but excluding capital to 30 percent. The fraction married has gains), realized capital gains, business increased from about 40 to 50 percent for income, and wages and salaries. Up to females and, thus, the fraction single has the 1980s (and except during World been stable around 10 percent. This rein- War II), capital income and capital gains forces our previous interpretation that the formed the vast majority of the top .01 increase in the fraction female at the top percent incomes. Consistently with of the wealth distribution has not been our top .01 percent wealth share series due solely to an increase in the number of presented in Figure 5B, the top .01 percent wealthy widows following increased spou- income share was very high in the late sal bequests, but might reflect increases in 1920s, and dropped precipitously during female empowerment in the family (fairer the Great Depression and World War II, distribution of assets between spouses) and remained low until the late 1970s. and in the labor market (reduction of the Thus, both the income and the estate income gender gap over time). tax data suggests the top wealth holders were hit by the shocks of the Great UNDERSTANDING THE PATTERNS Depression and World War II and that those shocks persisted a long time after Are the Results Consistent with Income the war. Inequality Series? Over the last two decades, as can One of the most striking and debated be seen in Figure 9, the top .01 percent findings of the literature on inequality income share has indeed increased dra-

27 See the series of Piketty and Saez (2003) updated to year 2000. 28 This group represents the top 13,400 taxpayers in 2000, ranked by income excluding realized capital gains although capital gains are added back to compute income shares. 466 Top Wealth Shares in the United States, 1916–2000

Figure 9. The Top 0.01% Income Share and Composition, 1916–2000

Notes: The Figure displays the top 0.01% income share (top curve). Estimates are based on families and not individuals. Taxpayers are ranked by income excluding capital gains but capital gains included in the share (Interest, Rents, Trusts, etc.). The Figure displays the composition of those top incomes into Capital Income (Dividends, Realized Capital Gains), Business Income (Sole Proprietorships, Partnerships, S–Corporations), and Salaries (Wages and Salaries, Pensions). Source: Piketty and Saez (2003), series updated to year 2000. matically from 0.9 percent in 1980 to 3.6 increase relative to the quadrupling of percent in 2000. However, the important the top .01 percent income share during point to note is that this recent surge is the same period. primarily a wage income phenomenon Therefore, the income tax data suggest and to a lesser extent a business income that the dramatic increase in top incomes phenomenon.29 Figure 9 shows that capi- is a labor income phenomenon that has tal income earned by the top .01 percent not translated yet into an increased con- relative to total personal income is not centration of capital income. Therefore, in higher in 2000 than it was in the 1970s the recent period as well, the income tax (around 0.4 percent). Adding realized data paints a story that is consistent with capital gains does not alter this broad our estate tax data findings of stability of picture: capital income including capi- the top wealth shares since the mid–1980s. tal gains earned by the top .01 percent The pattern of capital income including represents about one percent of total realized capital gains displayed in Figure personal income in 2000 versus about 9 is strikingly parallel to the pattern of the 0.75 percent in the late 1960s, a modest top .01 percent wealth share of Figure 5B: a

29 Gains from exercised stock options are reported as wage income on income tax returns. There is no doubt that the recent explosion in the use of stock options to compensate executives has contributed to the surge in top wage incomes in the United States. 467 NATIONAL TAX JOURNAL mild peak in the late 1960s, a decline dur- tion from income tax return data using ing the bear stock market of the 1970s, a the capitalization of income method. In recovery in the early 1980s, and no growth spite of the existence of extremely detailed from 1990 to 2000. and consistent income tax return annual Three elements might explain why the data in the United States since 1913, this surge in top wages since the 1970s did method has very rarely been used, and not lead to a significant increase in top the only existing studies have applied wealth holdings. First, it takes time to ac- the method for isolated years.31 The expla- cumulate a large fortune out of earnings.30 nation for the lack of systematic studies The top .01 percent average income in the is that the methodology faces serious late 1990s is around 10 million dollars challenges: income data provides infor- while the top .01 percent wealth holding mation only on assets yielding reported is around 60 million dollars. Thus, even income (for example, owner–occupied with substantial saving rates, it would real estate or defined contribution pension take at least a decade to the average top plans could not be observed), and there .01 percent income earner starting with is substantial and unobservable hetero- no fortune to become an average top .01 geneity in the returns of many assets, percent wealth holder. Second, it is pos- especially corporate stock (for example, sible that the savings rates of the recent some corporations rarely pay dividends “working rich” who now form the major- and capital gains are only observed when ity of top income earners are substantially realized on income tax returns).32 More lower than the savings rates of the “cou- recently, Kennickell (2001a,b) has ana- pon–clippers” of the early part of the cen- lyzed in detail the link between income tury. Finally, certain groups of individuals and wealth in order to calibrate sample report high incomes on their tax return weights for the Survey of Consumer only temporarily (e.g., executives who Finances. His analysis shows that the exercise stock–options irregularly, careers relation between capital income reported of sport or show–business stars usually on tax returns and wealth from the sur- last for just a few years). To the extent vey is extremely noisy at the individual that such cases became more prevalent level. Nevertheless, it would certainly be in recent years (as seems possible based interesting to use income tax return data on popular accounts), the sharp increase to provide a tighter comparison with our in the concentration of annual incomes wealth concentration results from estates. documented by Piketty and Saez (2003) We leave this important and ambitious may translate into a smaller increase in project for future research. the concentration of lifetime incomes and accumulated wealth. Possible Explanations for the Decline in The very rough comparison between Top Wealth Shares income and estate data that we have pre- sented suggests that it would be interest- We have described in the previous sec- ing to try and estimate wealth concentra- tion the dramatic fall in the top wealth

30 Even in recent years after the explosion of executive compensation, few of the richest Americans listed on the annual Forbes 400 survey are salaried executives. Most of them are still either family heirs or successful entrepreneurs (see the third part of the fifth section below). 31 King (1927) and Stewart (1939) used this method for years 1921 and 1922–1936, respectively. More recently, Greenwood (1983) has constructed wealth distributions for 1973 using simultaneously income tax return data and other sources. 32 See Atkinson and Harrison (1978) for a detailed comparison of the income capitalization and the estate mul- tiplier methods for the United Kingdom. 468 Top Wealth Shares in the United States, 1916–2000 shares (concentrated within the very top levels need to increase their savings groups) that has taken place from the rates out of after tax income much more onset of the Great Depression to the late than lower wealth holders to maintain 1940s. Our previous analysis has shown their relative wealth position. Moreover, that stock market effects might explain the reduced after–tax rate of return might sharp drop in top wealth shares during the have affected savings rates of high wealth 1930s but cannot explain the absence of holders through standard incentive ef- recovery in top wealth shares in the 1950s fects. In the presence of high income and and 1960s once stock prices recovered estate taxes, wealthy individuals also by the end of the 1960s. At that time, the have incentives to give more to charities wealth composition in top groups was during their lifetime, further reducing top again very similar to what it had been in wealth shares.33 the late 1920s, and yet top wealth shares Second, starting with Sherman and hardly recovered in the 1950s and 1960s Clayton Acts enacted in 1890 and 1914, and were still much lower in the 1960s respectively, the U.S. federal govern- than before the Great Depression. There ment has taken important steps to limit are several possible elements that might monopoly power using antitrust regula- explain the absence of recovery of top tion. However, the degree of enforcement wealth shares. remained weak until the New Deal (see, The first and perhaps most obvious e.g., Thorelli (1955)). By curbing the power factor is the creation and the development of monopolies, it is conceivable that such of the progressive income and estate tax. legislation contributed to reduced wealth The very large fortunes (such as the top concentration at the very top. Perhaps .01 percent) observed at the beginning of more importantly, the Roosevelt adminis- the 20th century were accumulated during tration also introduced legislation to sever the 19th century, at a time where progres- the link between finance and management sive taxes hardly existed and capitalists of corporations. The Depression’s finan- could dispose of almost 100 percent of cial market reforms act broke the links their income to consume, accumulate, and between board membership, investment transmit wealth across generations. The banking, and commercial banking. As a conditions faced by 20th century fortunes result, the model of great financiers–in- after the shock of the Great Depression dustrialists which had created the very were substantially different. Starting in large fortunes of the Robber Barons of 1933 with the new Roosevelt administra- the late nineteenth and early twentieth tion, and continuously until the Reagan century was no longer a possibility after administrations of 1980s, top tax rates on the 1930s. DeLong (2002) discusses those both income and estates were set at very aspects in more detail and suggests that high levels. such regulations severely prevented These very high marginal rates applied the creation of new billionaires during only to a very small fraction of taxpay- the very prosperous post–World War II ers and estates, but the point is that they decades. were to a large extent designed to hit Finally, the post World War II decades incomes and estates of the top 0.1 and were characterized by a large democrati- 0.01 percent of the distribution. In the zation of higher education. Following the presence of progressive capital income G.I. bill, the number of college educated taxation, individuals with large wealth men increased very quickly after World

33 Lampman (1962) also favored progressive taxation as one important factor explaining the reduction in top wealth shares in his seminal study (see below). 469 NATIONAL TAX JOURNAL

War II.34 This undoubtedly contributed wealth share estimates depend crucially to the emergence of a large middle and on the validity of the estate multiplier upper middle income class in America method that we use. Thus, we first discuss which was able to accumulate wealth the potential sources of bias and how they and, hence, perhaps reduce the share of can affect the results we have described. total wealth accruing to the groups in the Second, we compare our results with pre- top percentile.35 vious findings using estate data as well as Although we cannot observe the coun- other data sources such as the Survey of terfactual world without progressive Consumer Finances (SCF), and the Forbes taxation or antitrust regulations, we note 400 Wealthiest Americans. We focus on that economic growth, in net worth and whether biases introduced by the estate incomes, has been much stronger starting multiplier methodology can affect our two with World War II, than in the earlier pe- central results: the dramatic drop in top riod. Thus, the macro–economic evidence shares since 1929 and the absence of in- does not suggest that progressive taxation crease in top shares since the mid–1980s. prevented the American capital stock from recovering from the shock of the Great Potential Sources of Bias Depression. This is consistent with Piketty (2003), who shows that, in the purest neo– The most obvious source of bias would classical model without any uncertainty, a be estate tax evasion. Three studies of capital income tax affecting only the rich evasion—Harris (1949), McCubbin (1994), does not affect negatively the capital stock and Eller et al. (2001)—have used results in the long–run. If credit constraints due to from Internal Revenue Service audits asymmetric information are present in the of estate tax returns for years 1940–41, business sector of the economy, it is even 1982, and 1992, respectively. Harris (1949) conceivable that redistribution of wealth reports under–reporting of net worth from large and passive wealth holders to of about 10 percent on average with no entrepreneurs with little capital can actu- definite variation by size of estate, while ally improve economic performance (see, McCubbin (1994) and Eller et al. (2001) e.g., Aghion and Bolton (1997) for such a report smaller evasion of about two to theoretical analysis). Gordon (1998) argues four percent for audited returns.36 Those that high personal income tax rates can numbers are small relative to the size of result in a tax advantage to entrepreneur- the changes we have presented. Thus, it ial activity, thereby leading to economic sounds unlikely that direct tax evasion can growth. A more thorough investigation have any substantial effects on the trends of the effects of income and estate taxation we have documented and can certainly not on the concentration of wealth is left for explain the dramatic drop in top wealth future work. shares. It seems also quite unlikely that evasion could have hidden a substantial ARE ESTIMATES FROM ESTATES growth in top wealth shares in the recent RELIABLE? period. From 1982 to 2000 in particular, the estate tax law has changed very little In this section, we explore the issue of and, hence, the extent of under–report- the reliability of our estimates. Our top ing should have remained stable over

34 The number of Bachelor’s degrees awarded relative to the size of the 23 year old cohort tripled from about five percent in the 1920s to over 15 percent after World War II (see U.S. Bureau of the Census 1975, series H 755). 35 For example, home ownership increased from 41 percent in 1920 to 62 percent in 1960 (see U.S. Bureau of the Census (1975, series N 243)). 36 Those studies underestimate estate tax evasion to the extent that audits fail to uncover all the evaded wealth. 470 Top Wealth Shares in the United States, 1916–2000 time as well. A closely related problem Assuming that our multipliers are right is undervaluation of assets reported on on average, the key additional assumption estate tax returns. We describe the issue required to obtain unbiased wealth shares of undervaluation in detail in appendix C is that, within age and gender cells and for of the NBER working paper version of the estate tax filers, mortality is not correlated paper, Kopczuk and Saez (2004), and we with wealth. A negative correlation would conclude that those adjustments appear to generate a downward bias in top wealth be too small to produce a significant effect shares as our multiplier would be too low on estimated top wealth shares. for the richest decedents. For example, if As we have discussed briefly in the those with very large estates are less likely second section of this paper, the estate to die than those with moderately large multiplier method requires precise as- estates, then the estate multiplier will sumptions in order to generate unbiased underestimate the very wealthy relative estimates of the wealth distribution for the to the moderately wealthy. living. We use the same multiplier within There are two direct reasons why such age, gender, and year cells for all estate a negative correlation might arise. First, tax filers, independent of wealth. We ap- extraordinary expenses such as medical ply the same social differential mortality expenses and loss of labor income or of rates for all years based on the Brown the ability to manage assets efficiently et al. (2002) differential between college may occur and reduce wealth in the years educated whites relative to the average preceding death, producing a negative population. This is not fully satisfactory correlation between death probability and for two reasons. First, wealthy individu- wealth. Smith (1999) argues that out–of– als (those who file estate tax returns upon pocket health expenses are moderate and, death) may not have exactly the same therefore, are not a major factor driving mortality rate as college educated whites the correlation of wealth and mortality. from Brown et al. (2002). The bias intro- However, his evidence is based on expen- duced, however, may be small, because ditures for the general population and it the social mortality gradient is steeper at is the end–of–life health expenditures that the lower end of the wealth distribution are most significant. It seems unlikely, than at the high end. Second, we use the though, that health–related expenses cre- same social differential rates for the full ate a significant dent in the fortunes of the 1916–2000 period although those rates super–rich but we were unable to assess might have changed over time. In appen- the importance of lost earnings due to dix B of the NBER working paper version health deterioration at the end of life.37 of the paper (Kopczuk and Saez, 2004), Second, even within the small group of we analyze in detail life insurance and estate tax filers, the top one or two percent annuities data compiled by the Society of wealth holders, it might be the case that Actuaries. Perhaps surprisingly, the data the most able and successful individuals, does not point to a significant narrowing of a given age and gender, have lower over time between mortality rates of the mortality rates. Although we cannot mea- general population and life insurance sure with any precision the quantitative policy holders. Therefore, our assumption bias introduced by those effects, there of constant social mortality differential is no reason to believe that such biases rates might be acceptable. could have changed dramatically over the

37 For some years, our data set contains information about the length of terminal illness. A simple regression of net worth on the dummy variable indicating a prolonged illness and demographic controls produced a significant negative coefficient, suggesting that this effect may play a role. 471 NATIONAL TAX JOURNAL period we study. In particular, they can- per donee) represents only about two to not have evolved so quickly in the recent three percent of gross estate, even at the period so as to mask a significant increase top. Thus, lifetime gifts do not seem to be in top wealth shares and, for the same rea- large enough to produce a significant bias son, they are unlikely to explain the sharp in our estimates for the recent period. decrease in top wealth shares following A more subtle possibility of bias comes the onset of the Great Depression. from a related tax avoidance practice which More importantly, however, for estate consists in giving assets to heirs without tax avoidance and other reasons, individ- relinquishing control of those assets. This uals may start to give away their wealth is mostly realized through trusts whose to relatives and heirs as they feel that their remainder is given to the heir but whose health deteriorates. Indeed, all estate tax income stream is in full control of the cre- planners recommend giving away wealth ator while he is alive. Like an annuity, the before death as the best strategy to reduce value of such a trust for the creator disap- transfer tax liability. Gifts, however, create pears at death and, thus, does not appear a downward bias only to the extent that on estate tax returns. This type of device they are made by individuals with higher falls in between the category of tax avoid- mortality probability within their age and ance through gifts and under–valuation gender cell. If gifts are unrelated to mortal- of the assets effectively transferred. The ity within age and gender cells, then they popular literature (see, e.g., Cooper (1979) certainly affect the wealth distribution of or Zabel (1995)) has suggested that many the living, but the estate multiplier will such devices can be used to effectively take into account this effect without bias. avoid the estate tax but careful interviews Three important reasons suggest that of practitioners (Schmalbeck, 2001) sug- gifts may not bias our results. First and gest that this is a clear exaggeration and since the beginning of the estate tax, gifts that reducing significantly the estate tax made in contemplation of death (within payments requires actually giving away two to three years of death; see appendix (either to charities or heirs) a substantial C of Kopczuk and Saez (2004) for details) fraction of wealth. Again, such a source must be included in gross estate and, thus, of reduction in wealth holdings reflects a are not considered as having been given real de–concentration of individual wealth in our wealth estimates. We expect that (though not necessarily welfare). a large fraction of gifts correlated with The key question we need to address mortality falls into this category. Second, is whether the wealthy derive substantial a well known advice of estate tax planners annuity income from trusts which the is to start giving as early as possible. Thus, estate multiplier method fails to capture those most interested in tax avoidance will because it disappears at death. There are start giving much before contemplation two indirect sources of data to cast light of death; in that case, gifts and mortality on the importance of trusts. First, trusts have no reason to be correlated.38 Last, are required to file income tax returns since 1976, the estate and gift tax have and pay annual income taxes on the in- been unified and the published IRS tabu- come generated by the assets in the trust lations show that taxable gifts (all gifts which is not distributed to beneficiaries.39 above the annual exemption of $10,000 Second, income from trusts distributed to

38 Gifts will have a real impact on the individual distribution of wealth although it might not change the dynastic distribution of resources. 39 Beneficiaries could be individuals or charitable organizations. Trusts face the top individual income tax rate (above a very low exemption level) on undistributed income in order to prevent (untaxed) accumulation of wealth within trusts. 472 Top Wealth Shares in the United States, 1916–2000 individuals has to be reported on those potential reductions in entrepreneurship individuals’ income tax returns. Therefore, incentives, savings, or increases in gifts statistics on individual and trust income to charities or relatives, do not bias our tax returns published regularly by the IRS estimates in general because they do have (U.S. Treasury Department, Internal Reve- real effects on the distribution of wealth. nue Service, various years b) can be used to Only outright evasion or avoidance of the assess the total value of income generated type we described in the previous section and distributed by trusts. The total income can bias our results, and those effects need distributed by trusts to individuals can then to evolve over time in order to counteract be capitalized to get an approximation of the trends we have described. We would total individual wealth in the form of trusts. expect that changes in the levels of estate This total wealth should be an upper bound taxation would be the main element af- of the annuitized trust wealth that the estate fecting avoidance or evasion incentives multiplier method fails to capture. Using a over time. 7.5 percent nominal rate of return on trust It is, therefore, important to consider assets (trust income includes both ordinary the main changes in the level of estate income and realized capital gains), total taxation over the period (see Appendix C wealth in trusts is only around 1.4 percent of Kopczuk and Saez (2004) and Luckey of our total wealth denominator in 1997, (1995) for further details). Since the begin- the last year for which statistics on trust ning of the U.S. federal estate tax, the rate income are available.40 Thus, trust wealth schedule was progressive and subject to is modest relative to the 21 percent share of an initial exemption. The 1916 marginal total wealth going to the top one percent or estate tax rates ranged from 0 to 10 per- even relative to the nine percent share going cent. The top rate increased to 40 percent to the top 0.1 percent in 1997.41 by 1924, a change that was repealed by Therefore, the popular view that the the 1926 Act that reduced top rates to 20 wealthy hold most of their wealth through percent. Starting in 1932, a sequence of trusts which escape estate taxation ap- tax schedule changes increased the top pears inconsistent with tax statistics. More rates to 77 percent by 1942, subject to a importantly, estimated trust wealth has $60,000 nominal exemption. The marginal declined overtime from around 3.5 per- tax rate schedule remained unchanged cent of total wealth in the 1936, to around until 1976, resulting in a fairly con- two percent in 1965, to about 1.5 percent tinuous increase of the estate tax burden in 1997. Hence, including annuitized trust due to “bracket creep.” Following the wealth to our estimates would not modify 1976 tax reform, the exemption was much our results and would likely rein- increased every year. The top marginal force our main finding of a secular decline tax rates were reduced to 70 percent of top wealth shares over the century. in 1977 and 55 percent by 1984. There were no major changes until 2001 Changes in Bias Over Time (the nominal filing threshold stayed constant at $600,000 between 1988 and It is important to emphasize that real 1997). Figure 10 reports the average responses to estate taxation, such as marginal tax rate in the top 0.1 percent

40 In 1997, trusts distributed $26.3 billion to beneficiaries (see Mikow (2000–01)), representing a total annuitized wealth of $350 billion, or 1.4 percent of the $25 trillion total personal wealth in 1997. 41 Income tax statistics show that about 75 percent of total trust income goes to top one percent income earners and about 40 percent goes to the top 0.1 percent income earners. Thus, it seems reasonable to think that about 40 percent of trust wealth, or about 0.6 percent of total individual wealth, is held by the top 0.1 percent, a small amount relative to the nine percent share of wealth held by that group in 1997. 473 NATIONAL TAX JOURNAL

Figure 10. Marginal Tax Rate and Wealth Share for the Top 0.1%, 1916–2000

group42 and the statutory marginal tax age variation that corresponds to hav- rate applying to the largest estates43 (left ing lived through different estate tax y–axis), along with the top 0.1 percent regimes. They found some evidence of wealth share (right y–axis). It is evident an effect, with estate tax rates at age of from this picture that the burden of estate 45 or 10 years before death more strongly taxation increased significantly over time. correlated with estates than the actual Somewhat surprisingly, the most signifi- realized marginal tax rates. Because the cant increases in the marginal estate tax source of their data are tax returns, they burden were brought about by holding were unable to distinguish between tax brackets constant in nominal terms rather avoidance and the real response. Holtz– than by tax schedule changes. Eakin and Marples (2001) relied on the There are very few attempts to measure cross–sectional variation in state estate the response of wealth to estate taxation.44 and inheritance taxes to estimate the effect Kopczuk and Slemrod (2001) used the on wealth of the living. They found that same micro–data that we do to estimate estate taxation has a significant effect on the impact of the marginal estate tax rates wealth accumulation. It should be pointed on reported estates. They relied on both out, though, that their data contained time–series variation and cross–sectional very few wealthy individuals. Taken at

42 These tax rates are computed by first evaluating the marginal tax rates at the mean net worth in Top .01 percent, .05–.01 percent and .1–.05 percent and then weighting the results by net worth in each category. These are “first–dollar” marginal tax rates that do not take into account deductions but just the initial exemption. 43 After 1987, there is an interval of a five percent surtax intended to phase out the initial exemption in which the marginal tax rate (60 percent) exceeds the marginal tax rate at the top (55 percent). 44 There is a larger literature that concentrates on gifts. See for example, McGarry (1999), Bernheim et al. (2001), Poterba (2001), Joulfaian (2003). 474 Top Wealth Shares in the United States, 1916–2000 face value, both of these studies find very top wealth shares. He reported the top similar magnitudes of response (see the one percent wealth shares for the adult discussion in Holtz–Eakin and Marples population for a number of years between (2001) suggesting little role for outright 1922 and 1956.46 His estimates are repro- tax evasion: the Holtz–Eakin and Marples duced in Figure 11, along with our series (2001) data is not skewed by tax evasion for the top one percent.47 Although the and avoidance while the effect estimated method, adjustments, and total net worth by Kopczuk and Slemrod (2001) reflects denominators are different (see appendix such potential responses. This would E of the working paper version), his esti- imply that trends in concentration due mates are generally similar to ours and to tax evasion and avoidance are not a in particular display the same downward major issue. trend after 1929. Regardless of these findings, given Smith (1984) used estate tax data to pro- that between 1982 and 2000 the estate tax duce additional estimates for the top 0.5 system has changed very little, we would percent and top one percent wealth shares expect that the extent of tax avoidance and for some years in the 1958–1976 period. evasion has also remained fairly stable. In contrast to Lampman (1962) and our Therefore, the absence of increase in top series, the top one percent is defined rela- shares since in the 1990s is probably not tive to the full population (not only adults) due to a sudden increase in estate tax eva- and individuals are ranked by gross worth sion or avoidance.45 (instead of net worth).48 We reproduce his top one percent wealth share, which looks Comparison with Previous Studies and broadly similar to our estimates and dis- Other Sources plays a downward trend which accelerates in the 1970s. No study has used post 1976 Another important way to check the estate data to compute top wealth shares validity of our estimates from estates is series for the recent period. A number of to compare them to findings from other studies by the Statistics of Income Division sources. We have presented a brief com- of the IRS have estimated wealth distribu- parison above with findings from income tions from estate tax data for various years, tax returns. After reviewing previous but those studies only produce distribu- estate tax studies, we turn to comparisons tions and composition by brackets and do with wealth concentration estimations not try in general to estimate top shares.49 using other data sources. An exception is Johnson and Schreiber (2002–03) who present graphically the top Previous Estate Studies one percent and .5 percent wealth share for Lampman (1962) was the first to use in 1989, 1992, 1995, and 1998. Their estimates a comprehensive way the U.S. estate tax are very close to ours, and display very statistics published by the IRS to construct little variation over the period.

45 Of course, technological advances in estate tax avoidance remains a possibility, especially given that many changes relating to valuation issues are driven by judicial rather than legislative activity. It is striking to note, however, that the many books on estate tax avoidance published over time seem to always propose the same type of methods (see again Cooper (1979) and Zabel (1995)). 46 Lampman (1962) does not analyze smaller groups within the top one percent adults. 47 Those statistics are also reported in Table 5. 48 See Smith and Franklin (1974) for an attempt to patch the Lampman series with estimates for 1958, 1962, 1965, and 1969. 49 See Schwartz (1994) for year 1982, Schwartz and Johnson (1994) for year 1986 and Johnson and Schwartz (1994) for year 1989, Johnson (1997–1998) for years 1992 and 1995, and Johnson and Schreiber (2002–03) for year 1998. 475 NATIONAL TAX JOURNAL

Figure 11. The Top 1% Wealth Share: Comparing Various Estimates

Survey of Consumer Finances discusses this issue formally. He shows The Survey of Consumer Finances (SCF) that for realistic parameters (on the Pareto is the only other data that can be used to distribution and the number of married estimate adequately top wealth shares in individuals relative to singles), for a given the United States because it oversamples top share estimated at the family level, the the wealthy and asks detailed questions corresponding top share at the individual about wealth ownership. However, the level will be about 20 percent higher if all the survey covers only years 1962, 1983, 1989, rich are unmarried or have spouses with no 1992, 1995, 1998, 2001 and cannot be used wealth, and will be about 20 percent lower if to compute reliably top shares for groups all the rich are couples with wealth equally smaller than the top 0.5 percent because of split between spouses. Thus, changes of small sample size.50 It should also be noted wealth distribution within families, which that all the information in the SCF is at the leave unchanged family based wealth family level and not the individual level. shares, can have relatively large effects on Top shares estimated at the individual level individually based wealth shares. However, might be different from top shares estimated the magnitude is not large enough to explain at the family level, and the difference de- the dramatic decline of the very top shares pends on how wealth is distributed among over the century solely by equalization of spouses within families. Atkinson (2003) wealth between spouses within families.51

50 The 1962 survey is called the Survey of Financial Characteristics of Consumers and is the predecessor of the modern Surveys of Consumer Finances. 51 The negative correlation, however, between the pattern of the top one percent wealth share in Figure 2 and the fraction female in the top .5 percent in Figure 8 suggests that equalization of wealth between spouses might have played a role in reducing individually based wealth concentration. 476 Top Wealth Shares in the United States, 1916–2000

31.6 31.5 30.0 30.0 35.3 34.1 (6) SCF Net Worth Households Scholz (2003)

(5) 36.7 44.2 33.3 36.4 29.8 27.1 31.2 31.8 34.4 31.1 29.1 19.9 30.9 31.9 35.7 Net Worth Wolff (1995) Wolff Households Patched SCF–Estates

(4) 34.0 37.2 31.3 38.1 28.9 25.7 28.1 27.0 30.1 31.9 29.0 28.6 18.9 Individuals Total Assets Total Patched Estates Wolff–Marley (1989) Wolff–Marley

(3) 26.6 28.2 25.4 27.4 21.9 19.2 TABLE 5 TABLE Estates Net Worth Individuals Smith (1984)

(2) 31.6 36.3 28.3 30.6 23.3 20.8 24.3 24.0 26.0 Adults Estates Net Worth COMPARING TOP 1% WEALTH SHARE WITH PREVIOUS ESTIMATES 1% WEALTH TOP COMPARING Lampman (1962)

(1) 36.02 36.76 30.31 25.95 24.65 22.59 23.77 23.18 24.75 24.18 24.39 24.70 22.86 23.13 19.32 21.07 22.66 21.96 21.18 21.54 21.70 20.79 Adults Estates Net Worth Kopczuk-Saez

1922 1929 1933 1939 1945 1949 1953 1954 1956 1958 1962 1965 1969 1972 1976 1983 1986 1989 1992 1995 1998 2000 Scholz (2003) based on SCF data. Notes: Lampman (1962, Table 94, p. 204) estimates are based on all estate tax returns filers and Pareto interpolation to optain top 1% share. interpolation to optain top 1% share. filers and Pareto based on all estate tax returns 94, p. 204) estimates are Notes: Lampman (1962, Table 1, Smith p. (1984, 422) Table ranks individuals by total assets (not net worth) and defines top 1% group relative to total population (not only adults), and reports share of net- worth for this group. series.” A1, pp. 78-79, col. (1)) “Wolff–Marley (1995, Table in Wolff W2) completed and corrected 6, p. 786, row and Marley (1989, Table Wolff estimates by Lampman (1962) and Smith (1984). to total population (not only adults). Estimates based on previous 1% defined relative Top series and SCF estimations. “Wolff–Marley” A1, pp. 78-79, col. (6)) “New Household Series” based on previous (1995, Table Wolff Author Unit Data Wealth

477 NATIONAL TAX JOURNAL

Kennickell (2003) provides detailed gap in top shares estimates based on the shares and composition results for the two datasets, of similar magnitude than 1989–2001 period, and Scholz (2003) the one between our estimates and Scholz provides top share estimates for all the (2003) estimates.53 As discussed above, an years available from the SCF. Kennickell important source of discrepancy comes and Scholz results are very close. We re- from the fact that the SCF is based on produce the top one percent wealth share families while estate estimates are indi- from Scholz (2003) in Figure 11. The SCF vidually based. Johnson and Woodburn produces estimates of top wealth shares (1994) try to correct for this and find a larger than estimates from estates: the top reduced gap, although, in absence of good one percent share from estates is between information on the distribution of wealth 20 and 25 percent while to the top one within rich families, the correction method percent share from the SCF is slightly might be very sensitive to assumptions above 30 percent. We discuss below the (see below). reasons that have been put forward to Scheuren and McCubbin (1994) de- explain this difference by various studies. scribe other potential sources creating bi- However, the important point to note is ases. In addition to the tax avoidance and that, as our estate estimates, those of the under–valuation issues that we describe SCF do not display a significant increase above, they show that SCF wealth might in top wealth shares between 1962 and be higher than estate wealth because the 2001. There is an increase from 1992 to value of closely held businesses might 1995, but this increase has in large part drop substantially when the owner–man- disappeared by 2001. As a result, the top ager dies. Thus, the SCF wealth measure one percent shares from the SCF in 1983 of businesses incorporates human wealth and 2001 are almost identical.52 In particu- that is by definition excluded from estates. lar, it is striking to note that the top one Therefore, the SCF and estates may not percent share did not increase at all during measure the same wealth concept even the bull stock market in the second half though both measures are interesting. of the 1990s. Therefore, two independent The estate represents wealth that can be sources, the estate tax returns and the SCF, transferred while the SCF includes in arguably the best data sources available to part human wealth that is destroyed at study wealth concentration in the United death. States, suggest that wealth concentration The composition data reported in Ken- has not increased significantly since the nickell (2003) do not report total stock mid–1980s, in spite of the surge in stock ownership separately. However, we can market prices. add together the categories of publicly A few studies have compared the estate traded stock directly held, mutual and tax data with the SCF data in order to other investment funds, and cashable check the validity of each dataset and po- pension funds. In 2001, both the top one tentially estimate the extent of tax avoid- percent wealthiest families and the aver- ance. Scheuren and McCubbin (1994) and age family held about 35 percent of their Johnson and Woodburn (1994) present wealth in that form. This suggests, consis- such a comparison for years 1983 and tently with our composition results, that 1989 respectively. They find a substantial the development of retirement pension

52 Kennickell (2003) reports standard errors of around 1.5 percentage points around the top one percent share estimates. Thus, the small movements in the SCF top one percent share might be due in large part to sampling variation. 53 The statistics they report do not allow a precise comparison of the gap in the top one percent wealth share. 478 Top Wealth Shares in the United States, 1916–2000 funds and mutual funds has contributed ing together the earlier estate series by to the equalization of publicly held stock Lampman (1962) and Smith (1984) and ownership in the United States. We note, the modern SCF estimates.54 These series however, that the SCF data for 2001 show represent the top one percent households that the top one percent hold a much (not individuals) and are reproduced in larger fraction than the average (34 percent Figure 11. A close examination reveals versus 19 percent) in the form of business that patching together data from differ- assets (which include sole proprietorships, ent sources is a perilous exercise. The partnerships, as well as closely held corpo- Wolff (1994) series suggest that there has rations). Further systematic comparisons, been a tremendous decline in wealth asset by asset narrowly defined, of the concentration in the 1960s and 1970s SCF and estate tax returns would be very from 34 to 20 percent, followed by an useful to understand better the quantita- equally large surge in concentration tive importance of each of the sources of to above 35 percent in 1989. Our series discrepancy we have mentioned. based on an homogeneous estate tax More recently, Wolff (1996) uses the SCF data show that the evolution of concen- 1992 data to estimate how much estate tax tration has actually been much less dra- would be collected by applying average matic during that period. As can be seen mortality rates to the SCF population. He from Figure 11, Wolff–Marley’s estimate finds that expected collections estimated for 1976 is based on estate tax data from the SCF should be about four times while the 1962 and 1983 estimates are larger than actual estate tax collections for based on the SCF. Thus, the failure to ac- those who died in 1992, suggesting mas- count for the large gap between the SCF sive tax evasion and avoidance. Poterba and estate estimates that exists in any (2000), however, repeats, the Wolff (1996) given year generates a dramatic distortion study for 1995 and finds that estate taxes in the time pattern of the Wolff–Marley estimated from the SCF are just 10 percent series. higher than what was actually collected. Eller et al. (2001) tries to reconcile this Forbes 400 Richest Americans discrepancy and shows that the results The popular view is that the personal are quite sensitive to assumptions made computer revolution of the 1980s, and the about mortality rates, as well as marital development of the Internet in the 1990s, and charitable bequests, but find a range created many new business opportuni- of estimates much closer to Poterba (2000) ties and the extremely quick creation of than to Wolff (1996). Our top wealth share new fortunes (the so called dot–comers). estimates are about 25 percent lower than From this perspective, our finding of no the SCF top wealth shares, suggesting that increase in wealth concentration dur- there might be some under–reporting of ing the 1990s seems surprising indeed. estates, but that the difference is actually To pursue this question further, we use much closer to the small gap found by the Forbes magazine annual survey of Poterba (2000) than the very large gap the top 400 richest Americans, available found by Wolff (1996). since 1982.55 This systematic source has Finally, Wolff (1994) has produced series certainly been highly influential in creat- of top one percent wealth shares by past- ing the feeling that the last two decades

54 These series are a revised and extended version of the earlier Wolff–Marley series constructed in the same way and presented in Wolff and Marley (1989). 55 Kennickell (2003) also examines the Forbes 400 data for the years corresponding to the SCF surveys between 1989 and 2001. 479 NATIONAL TAX JOURNAL had been extraordinary favorable to the popular view that the richest individuals creation of new fortunes. in the United States control a sizeable share The Forbes 400 represents an extremely of total wealth and, more importantly, that small fraction of the U.S. adult popula- this share has increased significantly over tion—about the top .0002 percent in 2000, the last two decades. The top .01 percent that is, a group 50 times smaller than our share we estimated has been around top .01 percent group. We have used the four percent since the mid–1980s. This is Forbes 400 survey to estimate the top .0002 compatible with a top .0002 percent share percent (corresponding almost exactly to slightly above one percent as in the early the top 400 individuals in 2000) wealth 1980s but not with a top .0002 percent share. This share is displayed in Figure share equal to 3.5 percent as in the peak 12.56 It shows that the fraction of wealth of 2000.57 Therefore, it appears that our top controlled by the top fortunes tripled from wealth share series from estates have failed just above one percent in the early 1980s to capture the increase due to the surge in to above 3.5 percent at the peak in 2000. the Forbes 400 top fortunes.58 From 2000 to 2002, the share came down to For the early 1980s, McCubbin (1994) just below three percent in 2002. Thus, the analyzed estate tax returns of Forbes 400 Forbes data are indeed consistent with the decedents and found that wealth reported

Figure 12. Very Top Shares from Forbes 400 Richest Americans, 1983–2002

56 Those statistics are also reported in Table 6. 57 More precisely, if wealth is Pareto distributed with parameter a, then the ratio of the top .01 percent wealth share to the top .0002 percent wealth share is (.01/.0002)1–1/a = 3.7 for a = 1.5, which is about the Pareto parameter that can be obtained for the wealth distribution in 2000 from Table 2. 58 If just a few billionaires are responsible for the surge, it is possible that they were simply not sampled (by death). Given that these types of fortunes accrued to relatively young individuals and that death probability (adjusted by the socioeconomic status) does not even reach one percent by the age of 60, it seems possible that a few–year long surge of wealth of a few individuals can remain unnoticed. 480 Top Wealth Shares in the United States, 1916–2000

(9) 2.525 3.194 3.514 4.085 3.913 3.438 3.596 3.791 3.631 3.549 3.715 3.761 3.857 3.988 3.836 3.778 3.987 3.910 3.896 Share in 2000) Top .01% Top (top 20,000 Top Estate Share Top

(8) 3,400 3,957 3,799 3,905 3,926 4,979 4,592 5,232 5,110 4,839 4,726 4,901 5,001 5,205 5,785 6,569 6,431 6,787 8,219 7,066 6,993 in 2000) (rank 102 to 404 Top .0002–.00005% Top

(7) 10,414 11,864 11,909 11,335 12,560 17,129 15,946 17,702 17,360 18,649 18,930 20,001 20,976 22,841 24,424 31,042 35,017 45,355 50,202 39,428 38,184 in 2000) (top 101 Top .00005% Top

Ratio to Average Wealth Average Ratio to

4,922 5,933 5,826 5,763 6,084 8,017 7,430 8,349 8,173 8,291 8,277 8,676 8,994 9,614 (6) 10,444 12,687 13,577 16,429 18,715 15,157 14,791 in 2000) (top 404 Top .0002% Top

(5) 0.510 0.593 0.570 0.586 0.589 0.747 0.689 0.785 0.767 0.726 0.709 0.735 0.750 0.781 0.868 0.985 0.965 1.018 1.233 1.060 1.049 in 2000) (rank 102 to 404 Top .0002–.00005% Top TABLE 6 TABLE

(4) 0.521 0.593 0.595 0.567 0.628 0.856 0.797 0.885 0.868 0.932 0.946 1.000 1.049 1.142 1.221 1.552 1.751 2.268 2.510 1.971 1.909 in 2000) (top 101 Top .00005% Top Very Top Wealth Shares Wealth Top Very

(3) 0.984 1.187 1.165 1.153 1.217 1.603 1.486 1.670 1.635 1.658 1.655 1.735 1.799 1.923 2.089 2.537 2.715 3.286 3.743 3.031 2.958 in 2000) (top 404 VERY TOP SHARES FROM FORBES 400 RICHEST AMERICANS SHARES FROM FORBES 400 RICHEST TOP VERY Top .0002% Top

411 510 518 536 613 834 801 933 899 909 923 977 (2) 1,115 1,013 1,285 1,674 1,948 2,582 3,000 2,313 2,150 Forbes 400 Average Wealth Average (millions 2000 $)

(1) 164.2 204.1 207.3 214.5 245.1 333.6 320.4 373.1 359.5 363.4 369.3 390.6 405.2 446.0 514.0 669.5 779.3 1033.0 1200.1 925.1 860.0 Forbes 400 Total Wealth Total (billions 2000 $) Notes: Data source is the Forbes 400 Richest American list published annually in October by Forbes Magazine since 1982. is the Forbes 400 Richest Notes: Data source 1). Table the total wealth and average of Forbes 400 richest (in 2000 dollars, CPI from Columns (1) and (2) report 1, col. (3)) for the top .0002%, .00005%, and .0002–.00005% estimated using Forbes list. in Table of total wealth (reported the share Columns (3) to (5) report Americans in 2000. to the 101 richest to the 404 richest americans in 2000. The top .00005% corresponds The top .0002% corresponds Americans with wealth rank 102 to 404 in 2000. to the The top .0002–.00005% corresponds the ratio of average wealth in top .0002%, .00005%, and .0002–.00005% to United States Columns (6) to (8) report 1). col. (4) in Table (from 3, col. (7)). Table (from tax returns estimated from the top .01% wealth share Column (9) report 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

481 NATIONAL TAX JOURNAL on estate tax returns was on average 35 ally accrued to the top quarter of the list, percent lower than on the Forbes list. The and most of those gains happened in the discrepancy was attributed mostly to the second half of the 1990s. Therefore, taken fact that the estate tax returns include at face value, the Forbes data, combined only the assets and property owned by with the absence of a significant increase the individual decedent while the Forbes in top wealth shares in the estate tax data survey also includes wealth distributed to and the SCF, suggest that among the top the spouse, and the full value of trusts set fractiles of the wealth distribution, only up to distribute wealth to family relatives the very top (perhaps a group limited but whose creator retains control. It would to just the hundred richest individuals be extremely useful to repeat this study in the country) has experienced sizeable for the full period 1982–2002 in order to gains since the mid–1980s, while the other understand the reasons for the growing groups of high wealth holders actually discrepancy that has taken place since did not experience much gains relative the mid–1980s between top estates and to the average wealth holder in the U.S. the Forbes 400.59 population. It is interesting to divide further the The number of fortunes created by group of the Forbes 400 into the top 100 the development and expansion of new and the next 300 richest (for year 2000). technology sector is certainly greater Those top groups correspond to the top than a few hundred. This fact can be .00005 percent and top .0002–.00005 per- consistent with our findings only if, at cent, using our usual notation. The share the same time those new fortunes were of wealth accruing to those two groups is created, fortunes of similar magnitude reported in Figure 12. It displays a strik- were being destroyed. Analyzing in more ing contrast: the share of wealth of the top detail the rise and fall of the new technol- 100 has been multiplied by a factor 4.3 ogy companies over the last two decades from 1983 to 2000 while the share of could be an interesting way to cast light wealth of the next 300 richest individuals on this issue, and understand why the has only been multiplied by a factor 2.1 results from estate tax returns or the SCF during the same period.60 It is also im- seem so much at odds with the popular portant to note that the share of the two perception of the 1990s decade and the groups is closely parallel during the 1980s, Forbes 400 data. a decade of relatively modest growth for Our top wealth shares series from es- the Forbes shares, and that the bulk of tates show a sharp drop in the very top the divergence between the two Forbes wealth shares from 1916 to 2000, although groups is concentrated in just 3 years, the Forbes data suggest that our estimates 1996 to 1999, which are the years of the have missed the surge in wealth of the fastest growth of the stock market (see very wealthiest richest Americans. How Figure 1). It would be interesting to use the do the very richest Americans of today Forbes data to analyze to what extent the compare with the richest individuals from new technology stock market “bubble” the beginning of the twentieth century? can account for this phenomenon. In Forbes proposed a list in 1918 of the 30 sum, three quarters of all the gains to the richest Americans. The richest person at Forbes 400 from 1983 to 2000 have actu- the time was John Rockefeller, who held

59 It should also be noted that the Forbes 400 estimates are often educated guesses with potentially large er- rors. The Forbes 400 survey might also miss some wealthy individuals. The SCF survey does include a few individuals missed by Forbes with wealth above the Forbes 400 lower bound. 60 The threshold corresponding to the bottom of the top 400 has actually increased “only” by 75 percent from 1983 to 2000. 482 Top Wealth Shares in the United States, 1916–2000 an estimated fortune of $1.2 billion (cur- and are much lower today than in the rent dollars), and, thus, held 0.54 percent pre–Great Depression era. We have ten- of total net worth. How does this compare tatively suggested that steep progressive with the wealth of the richest Americans in income and estate taxation, by reducing 2000, the very peak of the stock–market? the rate of wealth accumulation, may have As population has grown by a factor 3.33 been the most important factor preventing from 1918 to 2000, to provide a meaningful large fortunes from being reconstituted. comparison, we need to add the fortunes Many other factors such as business and of Bill Gates, Lawrence Ellison, Paul Al- finance regulations, the emergence of len, and one third of Warren Buffet—the a large middle class in the post World four richest Americans in 2000. They total War II period, and the equalization of $166.33 billion, which is 0.52 percent of wealth across genders might have also total net worth, almost exactly the same contributed to reducing individual wealth as John Rockefeller in 1918. Thus, even the concentration. peak of the stock market bubble did not Surprisingly, our top wealth shares produce top fortunes larger relative to the series do not increase during the 1990s, a average than the one accumulated by John time of extra–ordinary stock price growth Rockefeller by 1918, and our top shares and perceived as having been extremely results suggest that there were many more favorable to the creation of new fortunes. wealthy individuals below him than there Our results are consistent with findings are today below Bill Gates. from the Survey of Consumer Financ- es (Kennickell, 2003; Scholz, 2003) which CONCLUSION also display hardly any significant growth in wealth concentration since 1995. This This paper has presented new homo- absence of growth in top wealth shares geneous series on top wealth shares from is also consistent with the top income 1916 to 2000 using estate tax return data. shares results from Piketty and Saez (2003) Although many studies have analyzed because the recent dramatic growth in top wealth inequality in the United States, income shares has been primarily due to none had presented consistent concentra- a surge in top labor incomes, with little tion estimates over such a long period on growth of top capital incomes. Examina- an almost annual basis. We have found tion of the widely known Forbes 400 rich- that the shocks of the Great Depression, est Americans survey shows a dramatic the New Deal, and World War II have gain for those wealthy individuals but produced a dramatic decrease in the top most of the gains are concentrated within wealth shares. This decrease has been the top 100 and in the few years of the concentrated within the upper part of stock market “bubble” of the late 1990s. the top percentile, the top .1 percent of Our composition series suggest that by the wealth distribution, with much more 2000, the top one percent wealth holders modest changes for lower wealth groups do not hold a significantly larger fraction within the top one percent. This evidence of their wealth in the form of stocks than is consistent with the dramatic decline in the average person in the U.S. economy, top capital incomes documented in Pik- explaining in part why the bull stock etty and Saez (2003). The large shocks market of the late 1990s has not dispro- that large wealth holders experienced in portionately benefited the rich. the first part of the century seem to have It is striking that top wealth shares have had a permanent effect: top wealth shares increased so little in spite of a surge in increased very modestly during the stock top income shares. Such a pattern might market booms of the 1960s and 1990s, not last for very long as top wage earn- 483 NATIONAL TAX JOURNAL ers will start to accumulate substantial Atkinson, Anthony B. wealth holdings. Our proposed interpre- “Measuring Top Incomes: Methodological Is- tation also suggests that the decline of sues.” Oxford Nuffield College. Mimeo, 2003. progressive taxation observed since the Atkinson, Anthony B., and Allan J. Harrison. early 1980s in the United States61 could Distribution of Personal Wealth in Britain. Cam- very well spur a revival of high wealth bridge: Cambridge University Press, 1978. concentration during the next few de- Bernheim, B., Douglas, Robert J. Lemke, and cades. Analyzing savings behavior of John Karl Scholz. the rich would be an important step to “Do Estate and Gift Taxes Affect the Timing cast additional light on the links between of Private Transfers?” NBER Working Paper income and wealth inequality. No. 8333. Cambridge, MA: National Bureau of Economic Research, 2001. Brown, Jeffrey R., Jeffrey B. Liebman, and Acknowledgments Joshua Pollet. We are extremely grateful to Barry John- “Estimating Life Tables That Reflect Socio- son for facilitating our use of the micro es- economic Differences in Mortality.” In The tate tax returns data and for his enormous Distributional Aspects of Social Security and help and patience explaining it. We thank Social Security Reform, edited by Martin Ed Wolff for providing us with additional Feldstein and Jeffrey B. Liebman, 447–57. and unpublished data from Wolff (1989). Chicago and London: The University of We thank two anonymous referees, Tony Chicago Press, 2002. Atkinson, Alan Auerbach, David Joul- Cooper, George. faian, Arthur Kennickell, Thomas Piketty, A Voluntary Tax? New Perspectives on Sophis- Karl Scholz, James Poterba, Joel Slemrod, ticated Tax Avoidance. Studies of Government Scott Weisbenner, and numerous seminar Finance. Washington D.C.: The Brookings participants for very helpful comments Institution, 1979. and discussions. Jeff Liebman and Jeff DeLong, J. Bradford. Brown kindly shared their socioeconomic “Robber Barons.” In Series of Lectures on Eco- mortality differential measures. Financial nomics: Leading World Experts at the Carnegie support from NSF Grant SES–0134946, the Moscow Center, edited by Tatyana Maleva Sloan Foundation and from the Social Sci- and Anders Aslund. Moscow: Carnegie ences and Humanities Research Council of Endowment for International Peace, 2002. 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