"Capital income excluding capital gains—in other words,
interest, dividends, and rents—has generally been a
declining source of income among the highest-income
households. Its share dropped from 42 percent of market
income excluding capital gains in 1979 to 21 percent in
2002 and then increased to about 30 percent by 2007.Over the same period, the share of income from business
activities grew sharply, increasing from a low of 10 percent
of market income excluding capital gains in 1981 to
a high of 27 percent in 2005 before dipping slightly in
2006 and 2007.
Capital gains are the most volatile source of income, and
their importance as a share of household income for the
top 1 percent of the population has fluctuated. That fluctuation
appears to reflect movements in stock prices and
changes in tax law.
gains for the top 1 percent were equal to 20 percent to
30 percent of market income excluding capital gains; in
1986, they spiked to more than twice that share. The
ratio of income from capital gains to other market
income declined in the late 1980s and then began to pick
up in the mid-1990s before entering a period of rapid
growth starting in 1995. That ratio peaked at 35 percent
of market income in 2000 before falling to 16 percent in
2002 and then rebounding to 37 percent in 2007.
The fall in capital income and the increase in business
income may in part reflect a recharacterization of income.
Following the Tax Reform Act of 1986, which lowered
the top statutory tax rate on individual income below the
top rate on corporate income, many C corporations
(which are taxed separately from their owners under the
corporate income tax) were converted to S corporations
(which pass corporate income through to their shareholders,
where it is taxed under the individual income tax). As
a result, corporate dividend income and capital gains
from the sale of corporate stock were converted into S
corporation income, which is counted here as part of
business income. Business income jumped in the 1986–
1988 period as those conversions began, and it continued
to grow rapidly throughout the 1990s and 2000s as more
conversions occurred and new businesses were formed as
S corporations rather than C corporations.
The changing composition of income for the highestincome
households reflects a much longer trend. Over
the entire 20th century, capital income declined sharply
in importance for high-income taxpayers.
share of income for the top income groups was higher in
2007 than before World War II, as highly compensated
workers have replaced people whose income is from property
or securities at the top of the income distribution
