Ted Cruz says top 1 percent earn more of national income than any year since 1928

Barack Obama and U.S. Sen. Ted Cruz, R-Texas, lately have aired similar concerns about the future of working-class Americans, though they differ over what to do.  

In his January 2015 State of the Union address, the Democratic president said he wants to work with Congress to offer free community college to students while creating other education, child care and retirement savings programs to help the middle class. Funding, he’s proposed, would come from a $320 billion tax increase on the nation’s highest earners and financial institutions including investment banks.

After Obama’s speech, Cruz told Fox News he was disappointed with Obama’s goals to increase government spending and taxes, which he described as hurting hardworking Americans.

Then Cruz said the country’s rich and powerful "have gotten fat and happy" on Obama’s watch. "Today the top 1 percent earn a higher share of our national income than any year since 1928," Cruz said.

Take that, Mister President!

And was Cruz right?

Cruz cites West Coast economist

By email, Cruz spokesman Phil Novack indicated Cruz does not agree with Obama, who said in his speech he wants to reduce the top 1 percent’s after-tax income. Novack said Cruz, rather than increase taxes on the wealthy, believes the only way to "jumpstart the economy is by championing pro-growth policies like energy development and a flatter, simpler tax structure."

And, Novack said, Cruz drew his comparison to 1928 from a report by the Pew Research Center citing research by Emmanuel Saez, a University of California, Berkeley economics professor who studies wealth and income inequality.

Saez helps steer the World Top Incomes Database, sponsored by the Paris School of Economics, a research center and conglomerate of French universities offering graduate degrees and post-graduate fellowships in economics.

The database, in place since 2011, shows the distribution of top incomes for more than 20 countries using data from millions of tax returns collected over about 100 years. By email, Saez said he and economists including Thomas Piketty built the database from sources including public-use files of individual tax returns. The public-use micro-files are blurred to preserve each payer’s confidentiality, Saez said.

A closer look

To check on changes over time for ourselves, we built a chart from the database.

The resulting data, covering 1913, the earliest checkable year, to 2012, shows 1928 and 2012 to be the top two years where the top 1 percent of the richest Americans (the richest of the rich) earned the greatest share of the nation’s income, which the government breaks down into 15 categories including wages, salaries and self-employment income plus income from dividends and interest.

In 1928, the top 1 percent of earners, then comprised of about 1.2 million residents, together held 19.6 percent of the nation’s income. In 2008, the year Obama was elected president, the top 1 percent possessed nearly 18 percent. The 1 percent collectively saw its share of the nation’s income escalate nearly 5 percent through the first three years of Obama’s presidency. And in his fourth year, 2012, the 1 percent (nearly 314 million residents) controlled 19.34 percent. According to the database, that was the greatest share these wealthiest Americans had held since 1928, as Cruz said. (No. 3 goes to 1927, when the top 1 percent had 18.7 percent of U.S. income.)

Top 15 years the richest American taxpayers had the greatest share of U.S. income

1913 through 2012

Year

Top 1% income share

1928

19.6

2012

19.34

1927

18.68

1916

18.57

1929

18.42

2007

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18.33

1914

18.16

2006

18.06

1926

18.01

1913

17.96

2008

17.89

2005

17.68

1936

17.64

1917

17.6

1925

17.6

Source: "The World Top Incomes Database," 2011 (accessed Jan. 30, 2015)

By email, Saez told us Obama and Congress (which shifted to Republican control in his tenure) did little to address wealth inequality up until 2012 as the country recovered from the Great Recession -- which officially lasted from December 2007 to June 2009.

In a Sept. 3, 2013, report, Saez wrote that in 2012, average real  incomes per family in the top 1 percent of earners nationally increased by 19.6 percent, while average incomes among the rest of us grew 1 percent. The report said the entire surge in top 1 percent incomes in 2012 could be a result of income re-timing -- when people hold off on making payments so they can report a higher income to take advantage of lower tax rates.

By email, Saez said he expects the top 1 percent’s income share for 2014 to prove slightly lower than in 2012 as a result of tax increases approved by Congress and Obama in 2013 raising the nation’s marginal income-tax rate from 35 to 39.6 percent for married couples earning more than $450,000 annually, starting in 2013. That deal, which also whittled tax deductions for high-earning businesses and individuals, helped the government avoid the "fiscal cliff, a term describing the looming impact of tax cuts initiated by President George W. Bush expiring at the end of 2012 at the same time congressionally mandated spending reductions were due to kick in.

Questions about income-inequality research

The World Top Incomes Database and Saez’s work have become popular sources for politicians to cite when discussing income and wealth inequality. Still, some experts have raised doubts about what goes into the Piketty-Saez inequality measurements.

By email, Gary Burtless, an economist with the Brookings Institution, a Washington, D.C., think tank, said the Saez-Piketty data understate income growth by the bottom 99 percent. That is, he noted, Piketty and Saez limit their focus to pre-tax private income including wages, self-employment earnings, dividends, interest, rental payments and, in some cases, capital gains.

The result, Burtless said, is the database doesn’t consider other sources of income such as Social Security, unemployment benefits, food stamps, government reimbursement of medical bills and untaxed fringe benefits such as employer contributions to health and retirement plans. "If we include these income items, the bottom 99 percent of income recipients has enjoyed much faster increases in income" than what’s "shown by Piketty and Saez," Burtless wrote.

Burtless suggested the best statistics on U.S. income inequality come from the nonpartisan Congressional Budget Office. "That's because CBO constructs 3 measures of income -- ‘gross market income,’ ‘pretax income’ (gross market income plus cash and no cash government transfers), and ‘after-tax income’ (pre-tax income minus federal income, payroll, and excise taxes)," Burtless said in his email." CBO data indicates that from 2009 to 2010, the top 1 percent’s share of income increased from 13.3 percent to 14.9 percent. (To refresh, Piketty and Saez say their research shows the top 1 percent’s share of income escalating from 16.68 percent to 17.45 percent.)

Next, we talked to Robert Litan, another economist with the Brookings Institution, about why income inequality escalated so quickly in Obama’s first term. By email, Litan said reasons for the rising share of the top 1 percent’s income include "rising CEO pay relative to workers, extraordinary success of tech entrepreneurs in particular, made possible by Internet + globalization, and successful financiers, especially hedge fund managers." A June 12, 2014 article by the liberal Economic Policy Institute also highlights inequality in earnings and compensation between CEOs and typical workers.

Burtless and Litan also told us by email Congress and Obama could not have done much to affect the percentage increase of the top 1 percent’s income based on Piketty-Saez measurements. "The Congress and president have a bigger direct impact on after-tax income than on pre-tax income because their decisions directly affect the tax burdens and government transfer payments of families in different positions in the income distribution," Burtless said.

Our ruling

Cruz said: "Today the top 1 percent earn a higher share of our national income than any year since 1928."

Cruz accurately recapped calculations of income by respected researchers though this statement fails to note there are some income streams not part of the cited calculations that would tend to help those of us in the bottom 99 percent, relatively speaking. Also, tax changes that took effect in 2013 may slightly be reducing how much of the nation’s income is held by the top 1 percent.

Mark this statement Mostly True.

MOSTLY TRUE – The statement is accurate but needs clarification or additional information.

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