3 Charts About Income Inequality, Transfers, and Taxes

The Congressional Budget Office (CBO) has
released a study titled “The
Distribution of Household Income and Federal Taxes, 2011.” It’s
filled with tons of fascinating data and charts about how much
Americans make, and how taxes and transfers affect the final
distribution.

Between 1979 and 2011, CBO estimates, inflation-adjusted
after-tax income for the top 1 percent increased 200 percent. For
the rest of the top income quintile, the figure was 67 percent and
for the three middle quintiles, inflation-adjusted after-tax income
was 40 percent higher. For folks in the bottom income quintile,
inflation-adjusted after-tax income was 48 percent greater.

Quintile analysis of course is a series of snapshots that don’t
capture mobility between income quintiles; we’ll get to that in a
moment.

Here’s a breakdown of income quintiles, pre- and post-tax and
transfers, in 2011:

“Transfers” include “cash payments and in-kind benefits
from social insurance and other government assistance
programs. Those transfers include payments and benefits from
federal, state, and local governments.” What should be
surprising is that even households in the top 20 percent of income
pull down $11,000 on average in transfers even as they pay 23
percent in federal taxes on before-tax income.

Here’s how different quintiles saw income grow.

 

While all groups saw increases, the middle-three quintiles
gained less (40 percent each on average) than any other group.

Between 1979 and 2011, the Gini Index, a measure of income
inequality, increased whether talking about pre-tax or post-tax
income. In terms of straight “market income” (a measure of all
income from all non-transfer sources), it increased from below 0.5
to 0.59. Based on before-tax income, it went from 0.4 to 0.47. And
for after-tax income, it went from around 0.36 to 0.44.

CBO notes that federal tax and transfer policy reduced the
increase in after-tax inequality by 26 percent from what it would
have been otherwise, with the majority coming from transfers, not
taxes. That’s despite the aggressive—if often
unacknowledged—progressivity of the U.S. tax system, which is far
more progressive than systems of other developed countries. As
Veronique de Rugy has
pointed out in Reason and elsewhere, European
countries typically charge more of their residents more taxes at
all levels, especially in the form of value-added taxes (on the
flip side, those countries typically give more straight transfers
to citizens too). The U.S. system, argues de Rugy, hides many of
its costs because “it disproportionately relies on the top earners
to raise revenue, it exempts a large class of taxpayers from paying
any income taxes, and it conceals spending in the form of tax
breaks.” A more transparent system might have lower marginal rates
but fewer if any exemptions.

So, does increased income inequality reduce economic mobility?

Intelligence Squared recently hosted a debate on the issue,
featuring the Manhattan Institute’s Scott Winship, whose work is
often cited here. The entire debate is worth a listen but Winship’s
main point is that income mobility—the ability for an individual or
particular household—to move up or down the income ladder is
unrelated to whether the rungs of the ladder are being more widely
spread out. Winship is a critic of mobility rates—he thinks they
are too low—but he persuasively documents that those rates haven’t
changed over the past 30-plus years even as income inequality has
increased.
Read some his reasons here.