In a recent District Measured blog we analyzed the income distribution of D.C. residents. We wanted to expand on this analysis by looking at income characteristics of high income individuals in the District compared to their peers in other states in the nation. New York and California were chosen for this comparison because of a similar concentration of high income earners. High income earners, or wealthy individuals, are defined here as tax filers with Federal Adjusted Gross income greater than $ 1 million. Though small in numbers, they account for a disproportionately large share of overall income in these states and in the nation.
In D.C., in tax year 2012, they accounted for less than 0.5 percent of all filers but more than 22 percent of income. The share of overall income earned by these wealthy individuals varied from a low of 19 percent in California to a high of 25 percent in New York. For the U.S. as whole the share was 15 percent. These statistics clearly reveal that the concentration of income among wealthy filers is substantial and this has become the subject of intense debate and research.
Wealthy individuals generally derive income from various and often volatile sources of earnings related to the stock market and business profits. This makes our job of forecasting income tax revenue both difficult and interesting. In analyzing these different sources of income, we need to consider if specific sources of income are more important in the District and therefore need to be examined more closely when looking at broader macro-economic trends.
Here’s what the data for a typical millionaire tells us:
In the District, a millionaire has a relatively higher share of income associated with capital gains and rental/partnership income.
- Rental and Partnership income for a millionaire in the District, at $233,000, was nearly ten percent higher than the U.S overall and considerably higher than both California and New York.
- Income from Capital Gains as share was also highest for a District millionaire, at $369,000, followed closely by New York at $348,000.
- In contrast, Wages and Salaries are a relatively smaller source of income for District millionaires, at a “low” of $225,000. The District does not have the same concentration of high-paying finance and tech jobs, with large salaries and bonuses, that are a much larger source of income for wealthy residents in New York and California.
- Dividends were a larger source of income in the nation overall, than in the states shown here.
- Other Income, which includes interest income and other sources, was a smaller source of income for all places.
Note: Given the volatility of these income sources, we also looked at 2010 and 2011 data to see if the relative differences in share of earnings among the states varied significantly from those shown above. The share of capital gains declined in all these places in 2010 and 2011; 2012 was a particularly strong year for capital gains realizations due to federal tax law changes. The decline in the share of capital gains income was similar for all places. However, Rental and Partnership income remained a much higher source of income for the wealthy D.C. residents compared to these other areas.
What exactly is the data?
For each area the average millionaire is computed by taking the share of each source of income and multiplying that share by one million dollars. The shares computed are therefore averages for each one million dollars of income and not the total amount of income. As with all data that is averaged, there could be great variation among millionaires. We use the words income and wealth interchangeably here because wealthy individuals derive income from assets as well as labor. Data in this report is from the Statistics of Income (SOI) data published on the IRS website. The data can be accessed by clicking here.
Bob Zuraski contributed to this post