July 16, 2020

Income Inequality Has Been on the Rise Since the 1980s, and Continues Its Upward Trajectory

Income inequality in the US continues to rise, according to a report from the Congressional Budget Office. That report, which presents data from 2016, finds that average income among households in the lowest fifth of the income distribution was $21,000, while income for households in the highest fifth averaged $291,000. Below is background on the trends in income inequality since 1979, as well as an explanation of how government policies can affect those trends.

Household income in the United States is unevenly distributed.
In 2016, the top 1 percent of households accounted for four times as much income as the bottom 20 percent of households.
The concentration of income toward high earners became more pronounced between 1979 and 2016.
In that period, average household incomes grew by about 60 percent after adjusting for inflation; however, that growth wasn’t shared equally. Average incomes in the highest quintile (one-fifth of the population) were 99 percent higher in 2016 than they were in 1979; three times the growth in average incomes for the lowest quintile. Those statistics do not account for the effect of taxes or 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.
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 is more evenly distributed among Americans. In the case of the lowest quintile, the incorporation of taxes and transfers shows that income growth from 1979 to 2016 was 84 percent (rather than 33 percent without those factors incorporated).
Our progressive tax code plays an important role.
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.
Means-tested transfer programs benefit lower-income households.
Since 1979, benefits from transfer programs have increased as a share of income accrued by all income households. However, for the lowest income quintile, transfers represented 72 percent of average household income in 2016 — an increase of nearly 40 percentage points from the 1979 level.