Why So Many Rich People Don’t Feel Very Rich

Our post last week on whether the salary of Robert Gibbs, who is leaving his post as White House press secretary, is “modest” provoked some interesting reader comments. Several readers chimed in to say that even if it most likely placed Mr. Gibbs comfortably in the top 10 percent of earners, an annual salary of $172,000 probably didn’t feel like a lot of money, given where he lives, similarly educated counterparts in the private sector, etc.

But there seems to be a broader fissure underlying this discussion: why don’t people at the 90th percentile of the income distribution feel particularly rich?

The answer is simple: because any Americans who are richer than this cohort are so much richer. At the request of The New York Times, the Tax Policy Center estimated Americans’ income percentiles for households across American in 2010. The numbers were calculated by Rachel Johnson, a research associate at the center, and were rounded to the nearest $100. Click the interactive chart below to see where these income breaks fall.

Income Percentiles for 2010, by type of household
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Source: Rachel Johnson, Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-7). Note: Distribution excludes dependents and units with negative income.

As you can see, for the bottom 90 to 95 percent of Americans, the income distribution is relatively flat. For an American household in bottom 30 percent of the distribution, a move upward of five percentiles (to the 35th percentile) would mean an increase in cash income of a just few thousand dollars. Same goes for a family at the 40th percentile, and at the 60th percentile.

But notice what happens on the right side of the graph, around the percentiles in the mid-90s, when the line suddenly kinks upward. The line gets much steeper because at the very top of the income scale, the monetary divisions between percentiles grow much greater. Those in the middle earn a little less than people a few percentiles up from them, whereas those at the top earn a lot less than their counterparts in nearby, higher percentiles. For example, those who aspire to hop from the 30th percentile to the 35th percentile would need in increase their cash income by $4,000 annually (or by about 17 percent); those who aspire to hop from the 91st percentile to the 96th percentile would require an increase of $324,900 (or 171 percent).

In other words, at least in dollar terms, there is much greater inequality at the very top of the income scale than at the bottom or in the middle. Whether this translates to much greater differences in standards of living at the top is debatable, as an extra $1,000 for a poor family likely makes a much bigger impact on that family’s quality of life than an extra $1,000 for a wealthy family.

Still, when evaluating their own incomes, most families are trying to keep up with the Joneses: they envy the wealthier neighbor whose lifestyle they aim to match. And in dollar terms, the rich are falling far shorter of their respective Joneses than the middle-income and lower-income are.

So when the 95th-percentilers think of their incomes in the context of what their richer neighbors are earning, this cohort doesn’t feel very rich. (Indeed, the gap between the rich and the very rich has been growing in the last few decades. Exactly why the gap has been growing is unclear, but has likely been influenced by a combination of tax policy, deregulation and technological advances that allow people to control more capital.)

It is perhaps no wonder, then, that so many people who are statistically rich call themselves “upper middle” or even “middle class.” They are much, much richer than lots of poor people, but also much, much poorer than some very visibly rich people. From their perspective, they truly are in the middle. It’s the income version of China’s “Middle Kingdom” syndrome.