5 Facts About Rising Income Inequality in the United States
Income inequality in the United States continues to rise, according to a new report from the Congressional Budget Office that utilizes data through 2021. Below are five facts about not only changes in income inequality over the past 40 years but also the influence of government policies on those trends.
1. Household income in the United States is unevenly distributed.
In 2021, average income before taxes and transfers among households in the lowest quintile (one-fifth of the population) was $22,500 and $418,100 for the highest quintile. What is more, the top 1 percent of households made more than six times as much total income as the bottom quintile of households.
2. The concentration of income toward high earners has become more pronounced since 1981.
Over the past four decades, average household income grew by 95 percent after adjusting for inflation; however, that growth largely stems from earners in the top part of the income-distribution. Average income in the highest quintile was 165 percent higher in 2021 than it was in 1981 — over four times the growth of average income in the lowest quintile (38 percent over the period). Meanwhile, the median household income grew by just 33 percent. Those statistics do not account for the effect of taxes or transfer programs such as Medicaid, the Children’s Health Insurance Program, and the Supplemental Nutrition Assistance Program; such programs provide cash payments or other forms of assistance to people with relatively low income or few assets.
3. Income is more evenly distributed once taxes and transfers are taken into account.
When the tax code and transfer programs are taken into account, income growth is still unequal, but it is more evenly distributed among Americans. In the case of the lowest quintile, the incorporation of taxes and transfers shows that income growth from 1981 to 2021 was 134 percent, rather than 38 percent without those factors incorporated.
4. The progressive tax code plays an important role in reducing income inequality.
Federal taxes are generally progressive, which means that higher-income households pay a larger share of their income than do lower-income households. After taxes, income inequality remains, but the disparity among groups is reduced.
5. Means-tested transfer programs benefit lower-income households.
Since 1981, benefits from means-tested transfer programs have increased as a share of income accrued by low, second, and middle quintile households. For the lowest quintile, transfers represented 65 percent of average household income in 2019 — an increase of 28 percentage points from the 1981 level. That number increased significantly in 2020 and stayed elevated in 2021, reaching 94 percent of average household income, primarily due to heightened transfer benefits from the federal response to COVID-19.
Income inequality remains, and has risen noticeably over the past few decades. While taxes and transfers decrease the income discrepancy between low- and high-income individuals, they do not close the gap. The unshared benefits of a developing economy have negative implications, such as poverty levels differing by race, ethnicity, and sex. Understanding not only the over time but also federal policy’s influence on that trend is essential to building a more inclusive and robust economy for the future.
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