by William McBride
June 19, 2012
Wage and salary income is far and away the largest source of personal income, one that is relatively immune to fluctuations in the economy. In contrast, capital gains are extremely volatile, fluctuating dramatically with the stock market and the economy. Business income is also relatively volatile and has been increasing as a share of total income over the last two decades. These two factors alone explain much of the recent collapse in income tax revenues, as the Great Recession crushed both profits and the stock market. Tax revenues are expected to rebound, as profits and the stock market have seen significant growth since 2009. Wage and salary income makes up the majority of total income for all those making $1 million or less. For those making more than $1 million, total income is split evenly between business income, investment income, and wage and salary income. Business and investment income is concentrated among high-income earners because it is inherently risky, and, as explained by basic finance theory, risk and reward go together.