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This study examines income mobility of individuals over the past decade (1996 through 2005) using information reported on individual income tax returns.

While many studies have documented the long-term trend of increasing income inequality in the U.S. economy, there has been less focus on the dynamism of the U.S. economy and the opportunity for upward mobility. Comparisons of snapshots of the income distribution at points in time miss this important dimension and can sometimes be misleading.

The key findings of this study include:

• There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.

• Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.

• Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.

• The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).

• Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.

The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility.

U.S. Census data, for example, show that the share of household income of the top 20 percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent.1  Similarly, Piketty and Saez (1998, 2007) find that the share of income of the top 10 percent of taxpayers increased from 31.7 percent in 1960 to 44.3 percent in 2005, while the share of the top 1 percent increased from 8.4 percent to 17.4 percent.  Economists have suggested a variety of factors as possible explanations for these trends, including increased returns to skill and education, greater globalization of labor markets, the decline in unionization, increased immigration, and changes in the supply of highly educated workers.

Using three different measures of income mobility that track changes in the incomes of a large sample of individual taxpayers over time, this study presents new evidence on income mobility over the decade from 1996 through 2005. Key findings include:

•  There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers (56 percent by one measure and 55 percent by another measure) moved to a different income quintile between 1996 and 2005. About half (58 percent by one measure and 45 percent by another measure) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

• Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. The median inflation-adjusted incomes of the taxpayers who were in the very highest income groups in 1996 declined by 2005.

• The composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.

• The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

Previous research on income mobility over the past several decades has generally found that about half of those in the bottom quintile move to a higher quintile and also that more than half of households move to a different income quintile within about 10 years.5   Sawhill and Condon (1992), for example, used the Panel Study of Income Dynamics (PSID) to examine the mobility of individuals between the ages of 25 and 54 for the periods 1967-1976 and 1977-1986.   Using a measure of relative mobility that compares households within their sample, they found that over 60 percent of individuals were in a different family income quintile a decade later.

Two 1992 Treasury studies (1992a and 1992b) examined mobility during the period from 1979 to 1988 using a panel that followed 14,351 income tax returns over the period and controlled for changes in the definition of income due to changes in the tax law.6    The Treasury data showed that 86 percent of taxpayers in the lowest income quintile in 1979 had moved to a higher quintile by 1988 and 15 percent of them had moved all the way to the top quintile.

Table 1: More than 50 percent of taxpayers in the bottom quintile moved to a higher quintile within ten years

This study examined income mobility of individual taxpayers age 25 and over for the period from 1996 through 2005 using information reported on individual income tax returns. The key findings are that there was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period and that the degree of income mobility among income groups is unchanged from the prior comparable period (1987 through 1996).

The analysis found that more than half of taxpayers (56 percent by one measure and 55 percent by another measure) moved to a different income quintile between 1996 and 2005. About half (58 percent by one measure and 45 percent by another measure) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005.  Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. In addition, the real incomes of two-thirds of all taxpayers increased over this period.  Further, the median incomes of those initially in the lower income groups increased more than the median incomes of those in the higher income groups.

The analysis also found that the composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent by different measures) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005.  Only about 25 percent of individuals in the top 0.01 percent in 1996 remained in the top 0.01 percent in 2005.