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Income inequality in the US continues to rise, according to a report from the Congressional Budget Office. That report, which presents data from 2018, finds that average income before taxes and transfers among households in the lowest fifth of the income distribution was $22,500, while income for households in the highest fifth averaged $321,700. Below is background on the trends in income inequality since 1979, as well as an explanation of how government policies can affect those trends.
In 2018, the top 1 percent of households accounted for four times as much income as the bottom 20 percent of households.
Over the past four decades, average household income grew by 68 percent after adjusting for inflation; however, that growth wasn’t shared equally. Average income in the highest quintile (one-fifth of the population) was 111 percent higher in 2018 than it was in 1979 — almost three times the growth in average income in the lowest quintile. Those statistics do not account for the effect of taxes or programs including 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.
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 2018 was 91 percent (rather than 40 percent without those factors incorporated).
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.
Since 1979, benefits from transfer programs have increased as a share of income accrued by all households. However, for the lowest income quintile, transfers represented 68 percent of average household income in 2018 — an increase of over 35 percentage points from the 1979 level.
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