Eleanor Finch
The term 1 percent is often used to refer to the top 1% of earners or wealthiest individuals in a given population, typically representing those with the highest incomes and accumulated wealth. This group has gained significant attention due to the growing discourse surrounding income inequality and the increasing disparities between the highest earners and the rest of the population. The criteria for being part of the 1% can vary depending on location and local wage trends, with different thresholds for income and net worth. For example, in the United States, the threshold to be in the top 1% of earners was an annual salary of at least $597,815 in 2023, while in other areas, it may be lower or exceed $1 million. The 1 percent has been associated with individuals such as corporate executives, celebrities, and entrepreneurs, and the discussion has further extended to an even smaller subset, the 0.01 percent, highlighting the extreme levels of wealth inequality globally.
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What You'll Learn
The top 1% income is driven by owner-managers of small and medium-sized companies
The top 1% of earners are often the focus of discussions on income inequality, and this group is crucial for funding public services and welfare systems through their tax contributions. While the composition of the top 1% is not static, with individuals moving in and out of this category, it is evident that owner-managers of small and medium-sized companies play a significant role in this group's income dynamics.
Research by Smith, Yagan, Zidar, and Zwick reveals that the top 1% income group includes talented owner-managers, primarily of small and medium-sized enterprises (SMEs). These businesses are typically structured as S corporations, partnerships, or limited liability companies. The profits generated by these companies in the top 1% far exceed those of businesses owned by individuals in the 5-10% income bracket. The average company in the top 1% has approximately $7 million in sales and 57 employees. The impact of these owner-managers is evident in the significant drop in profits observed when they are no longer at the helm of their companies.
The success of these owner-managers in the top 1% can be attributed to their ability to leverage specific skills and adapt to market demands. Their companies tend to operate in industries such as physicians' and dentists' offices, professional and technical services, and specialty trade contracting. The income disparity between the top 1% and the rest of the population has been growing over time, with the top 1% earning 14.6% of all wages in 2021, up from 7.3% in 1979.
It is worth noting that the income distribution within the top 1% varies. For example, the top 0.1% of income earners tend to have even higher incomes and are concentrated in specific locations. Additionally, the threshold for being in the top 1% varies by location and local wage trends. While in some areas, an income of over $1 million is required, in others, a lower threshold applies.
The income dynamics of the top 1% are influenced by tax policies and business structures. Previously, the lower marginal tax rate for individuals compared to corporations provided an incentive for business owners to organize as partnerships or limited liability corporations, which are taxed at lower rates. This shift towards pass-through entities has impacted the taxation landscape, and policymakers are now considering ways to harmonize taxes to prevent tax code manipulation.
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The top 1% income varies across states and countries
The top 1% is a term used to refer to the wealthiest people in a given country or state. The income and wealth required to be part of this group vary significantly across different countries and states. For example, in Switzerland, an individual would need to have a wealth of $8.5 million or more to be considered part of the top 1%. In Monaco, a person's net worth must be in eight figures, with $12.9 million required to join the 1% club. In the United States, the threshold is lower, with $5.8 million in 2023, and $650,000 to $700,000 in annual income required to be in the top 1% of earners. However, this number can vary depending on the source and year of the data, and it can also depend on the cost of living in a specific state or region. For instance, a six-figure salary in New York City might only cover basic needs due to the high cost of living, while the same income could provide a more comfortable lifestyle in regions with a lower cost of living, such as the Midwest or South.
In China, the requirements to be part of the top 1% have been changing. In 2023, Chinese residents with assets of just under $1.1 million were considered part of the top 1%, and as recently as 2020, even $850,000 was enough. This is in contrast to India, where in 2020, anyone with the equivalent of $60,000 or more was considered part of the top 1% of the wealthiest residents. However, due to India's large population, this still translates to 14 million people.
The top 1% in Germany, France, and the United Kingdom had similar thresholds, with residents needing just over $3 million to be part of the top 1% in 2023. The income and wealth disparities between the top 1% and the rest of the population have become a significant political issue in recent years. According to the Economic Policy Institute (EPI), the income required to be in the top 1% varies considerably across states in the United States. For example, in West Virginia, an income of $435,302 is enough to qualify for the top 1%, while in other states, the threshold exceeds $1 million.
The top 1% is often associated with ultra-high-net-worth individuals, but this is not always the case. Knight Frank, a real estate consultancy, notes that many of the world's 1% do not fall into this category of ultra-high-net-worth individuals, who have assets of over $30 million. While the top 1% may not all be ultra-rich, they still hold a significant portion of the world's wealth. According to Credit Suisse, the top 1% alone accounts for almost half of all household wealth (47%), with this number dropping slightly in more recent reports.
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The top 1% income has increased since 1979
The top 1% of earners have seen their incomes increase significantly since 1979. This group's income has risen at a much faster rate than the rest of the population, with the top 0.1% experiencing even more substantial gains. The Economic Policy Institute (EPI) reports that the top 1% of earners took home 14.6% of all wages in 2021, a substantial increase from their 7.3% share in 1979. Over the same period, the bottom 90% of earners have seen their share of wages decrease, receiving 58.6% of all wages in 2021 compared to 69.8% in 1979. This disparity is reflected in the growth rates of wages, with the top 1% and 0.1% experiencing surges of 206.3% and 465.1%, respectively, while the bottom 90% saw a more modest increase of 28.7%.
This trend is not limited to wages, as wealth inequality has also increased since 1979. Between Q1 1990 and Q2 2024, the wealth held by the top 1% increased from 16.5% to 23.3%, while the bottom 50% saw their share of wealth decline from an already low 3.5% to 2.5%. This pattern of wealth concentration among the top earners is also evident in tax data. According to the Institute for Fiscal Studies, the highest-income 1% of adults receive around 14% of national income, a share that has increased over time.
The income disparity is influenced by various factors, including location and wage trends. For example, in some areas, an income of over $1 million per year is required to be in the top 1%, while in other regions, the threshold is lower. Additionally, the top 1% of income taxpayers have become more geographically concentrated since the turn of the century, with the highest-density constituencies now containing half of this group.
The increase in income for the top 1% has also been influenced by policy choices. Lower tax rates on partnership and dividend income, which make up a significant portion of the top 1% 's total income, have contributed to the growing disparity. Additionally, the deregulation of the financial industry and policies favoring business competitiveness over wage growth have resulted in an upward redistribution of income.
While there are signs that wealth inequality may have leveled off in recent years, the income gap between the top 1% and the rest of the population remains significant. The top 1% continues to hold a substantial share of total income and wealth, highlighting the persistent inequality that has widened since 1979.
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The top 1% income is affected by local wage trends
The top 1% of income earners has become more geographically concentrated since the year 2000. Almost half of the top 0.1% of income tax payers are based in London, and over 40% are aged 45-54. The threshold to be in the top 1% varies by location, with some areas requiring an income of over $1 million per year, while others have a lower threshold. For example, in West Virginia, an income of $435,302 is enough to qualify for the top 1%.
Partnership and dividend income, which are taxed at lower rates than normal salaries, account for a significant portion of the total income of the top 1%. This is a policy choice that benefits business owners over employees. Additionally, the rich benefit immensely from the tax code's preferential treatment of income from investments, as Americans who are not ultra-rich get most of their income from wages and salaries.
The top 1% is extremely important for funding public services and the welfare system, as they pay a large portion of tax revenues. However, income inequality has become a major political issue in recent years, driven by rising disparities between the highest earners and everyone else. Policies that enable shared prosperity and broad-based wage growth are key to addressing this issue.
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The top 1% income is affected by the cost of living
The top 1% of earners in the US have an average annual income of $819,324, although this varies depending on location and local wage trends. For instance, in West Virginia, you can be in the top 1% with a pre-tax income of $420,000 to $435,302, while in California or Connecticut, you would need a seven-figure salary. The income threshold for the top 1% in other states ranges from under $500,000 to over $1 million.
The cost of living is a significant factor influencing the income required to be part of the top 1%. For example, the five wealthiest states in terms of top income lost population to other states through domestic migration between 2020 and 2023, while three of the lowest-income states—Arkansas, Kentucky, and West Virginia—gained population. This suggests that individuals may be considering the cost of living when deciding where to live, opting for locations with a lower cost of living to stretch their income further.
The top 1% of earners have seen substantial income growth in recent decades, with the Economic Policy Institute (EPI) reporting that the wages of the top 1% of earners grew by 172% between 1979 and 2022, after adjusting for inflation. In contrast, the bottom 90% of earners experienced more modest wage growth of 33% during the same period. This disparity in income growth contributes to the growing income inequality issue.
The top 1% of income taxpayers are not a static group, with a quarter of those in the top 1% in one year falling out of that category the next. This turnover within the top 1% underscores the impact of factors such as the cost of living and job opportunities in maintaining a top 1% income level. Additionally, the income of the top 1% is influenced by tax policies. For instance, partnership and dividend income, which make up a significant portion of the top 1%'s income, are taxed at lower rates than regular salaries, benefiting business owners over employees.
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Frequently asked questions
The top 1% refers to the highest-income 1% of adults, who receive around 14% of the national income.
This depends on where you live. For example, in Switzerland, you would need a wealth of $8.5 million or more, whereas in the US, a household typically needs to bring in around $650,000 to $700,000 per year. In China, assets of just under $1.1 million were considered part of the 1% in 2023.
The income inequality between the top 1% and the rest of the population has been increasing. From 1979 to 2021, the top 1% of earners doubled their share of all wages from 7.3% to 14.6%, while the bottom 90% of earners saw their share fall from 69.8% to 58.6%.
The top 1% disproportionately hold jobs as physicians, managers/executives, lawyers, salespeople, and financial specialists. Small business ownership is the most common path to joining the top 1%.
The top 1% is often discussed in conversations about wealth and inequality, particularly in politics and protests. This group is also important for funding public services and the welfare system as they pay a large portion of tax revenues.
