Center on Budget and Policy Priorities, December 14, 2007: Income Inequality Hits Record Levels, New CBO Data Show
Realafter-tax incomes jumped by an average of nearly $180,000 for the top 1percent of households in 2005, while rising just $400 for middle-incomehouseholds and $200 for lower-income households, according to new datafrom the Congressional Budget Office (CBO).[1]
Thisstarkly uneven growth brought income inequality to its highest levelsince at least 1979, when CBO began gathering these data. Takentogether with prior research, the new data indicate that income is nowmore concentrated at the top than at any time since 1929. [2]
Other highlights of the CBO data show that as of 2005:
- The share of the nation۪s totalafter-tax income going to the top 1 percent of households hit thehighest level on record (with data back to 1979).
- The share of national after-tax incomegoing to the middle fifth of households (the middle 20 percent) was thesmallest on record.
- Similarly, the share of national after-income tax going to households in the bottom fifth was the smallest on record.
In addition, the share ofnational after-tax income going to the top 1 percent of households morethan doubled between 1979 (when it stood at 7.5 percent) and 2005 (whenit reached 15.6 percent). The $180,000 average income gain for these households in 2005 is more than three times the average middle-income household۪s total income.
Income Growth in Recent Decades Occurring Mostly at the Top
Over the 26-year period for which thenew CBO data are available, income gains among high-income householdshave dwarfed those of middle- and low-income households. The CBOfigures show:
- The average after-tax income of the top1 percent of the population more than tripled, rising from $326,000 toover $1.07 million for a total increase of $745,000, or 228 percent. (Figures throughout this paper were adjusted by CBO for inflation andare presented in 2005 dollars.)
- By contrast, the average after-taxincome of the middle fifth of the population rose a relatively modest21 percent, or $8,700, reaching $50,200 in 2005.
- The average after-tax income of thepoorest fifth of the population rose just 6 percent, or $900, over thepast 26 years, reaching $15,300 in 2005.[3]
As a result, the CBO figures show, thegap between the wealthiest Americans and everybody else grew to itswidest point since at least 1979.
- The top 1 percent of householdsreceived 70 times as much in average after-tax income as the bottomone-fifth of households in 2005 the widest such income gap on record,with data available back to 1979. The previous record was 63 times asmuch, set in 2000. In 1979, by comparison, the richest households made22 times as much as the poorest households.
- The average income of the top 1 percentof households was 20 times that of the middle one-fifth of households. This, too, was the widest such ratio on record.
Income Gaps Widened in 2005
The CBO data show that gaps in incomeinequality widened significantly between 2004 and 2005. The share oftotal after-tax income going to the top 1 percent rose from 14.0percent in 2004 to 15.6 percent in 2005, an increase of 1.6 percentagepoints. This amounts to nearly $180,000 per household in the top 1percent, which is equivalent to approximately $123 billion inadditional income for the top 1 percent as a whole.
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Thetop 1 percent saw its total income rise by $180,000 in 2005 more thanthe average middle-income household makes in three years. |
In contrast, income gains between 2004and 2005 were quite modest for middle- and lower-income households. Average income rose 0.8 percent (or $400) for middle-income householdsand 1.3 percent (or $200) for the poorest fifth of households. Thiscompares to a stunning 20.2 percent increase in income ($180,000 perhousehold) for the top 1 percent. In percentage terms, this was thelargest one-year income gain for the top 1 percent in 17 years.[4] In dollar terms, it was the largest one-year gain since 1979, the first year for which the CBO data are available.
The growing concentration ofincome at the top of the income scale continues a long-term trend. Income concentration grew steadily during the latter half of the 1990s,rising through 2000, a year that the stock market hit a record high. From 2000 to 2002, income became less concentrated at the very top,partially due to the drop in the stock market; after-tax incomes fellfrom 2000 to 2002 for most income groups, but declined the most for thetop 1 percent. From 2003 through 2005, however, the long-term trendtoward growing income inequality returned. The CBO figures show thatin 2005, the share of income going to the top 1 percent reached 15.6percent, compared with the previous high of 15.5 percent in 2000.[5]
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Change in Real Average After-Tax Income, 2004 to 2005 |
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|
Income Category |
Dollar Change |
Percent Change |
| Lowest fifth | $200 | 1.3% |
| Second fifth | 200 | 0.6% |
| Middle fifth | 400 | 0.8% |
| Fourth fifth | 400 | 0.6% |
| Top fifth | 11,800 | 7.4% |
| Top1 Percent | 179,900 | 20.2% |
| Source: Congressional Budget Office, Effective Federal Tax Rates: 1979-2005, December 2007. | ||
Recent Federal Tax Policies Are Exacerbating Income Gaps
Legislation enacted since 2001 hasprovided taxpayers with about $1 trillion in tax cuts over the past sixyears. These large tax reductions have made the distribution ofafter-tax income more unequal. Because high-income households receivedby far the largest tax cuts, the tax cuts have increased theconcentration of after-tax income at the top of the spectrum.
The CBO data do not provide a directmeasure of the impact of these tax policy changes because they reflectthe impact not only of legislative changes but also of changes inhousehold incomes and other factors that influence tax payments. Direct estimates by the Urban Institute-Brookings Institution TaxPolicy Center that consider only the impact of the recent taxpolicy changes provide definitive evidence that the recent tax cutshave widened income inequality. The Tax Policy Center has found thatas a result of the tax cuts enacted since 2001:[6]
- Households in the bottom fifth of theincome spectrum received tax cuts in 2006 that averaged $20 and raisedtheir after-tax incomes by an average of 0.3 percent.
- Households in the middle fifth of theincome spectrum received tax cuts averaging $740 that raised theirafter-tax incomes an average of 2.5 percent.
- But the top 1 percent of householdsreceived tax cuts averaging $44,200 in 2006, which increased theirafter-tax income an average of 5.4 percent.
- And households with incomes exceeding$1 million received an average tax cut of $118,000 in 2006, whichrepresented an increase of 6.0 percent in their after-tax income. Thatis more than double the percentage increase received by the middlefifth of households. [7]
Furthermore, some of the tax cutsenacted in 2001 are still being phased in, and the tax cuts stillphasing in are heavily tilted to people at the top of the incomescale. These include the elimination of the tax on the nation۪slargest estates and two income-tax cuts that started to take effect onJanuary 1, 2006 and go almost exclusively to high-income households.[8] As a result, the tax cuts will ultimately be even more skewed towardhigh-income households, and will increase income inequality to a stilllarger degree, than was the case in 2006.
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Average After-Tax Income by Income Group, 1979-2005 |
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| Income Category | 1979 | 2005 | Percent Change 1979-2005 |
Dollar Change 1979-2005 |
| Lowest fifth | $14,400 | $15,300 | 6% | $900 |
| Second fifth | 29,100 | 33,700 | 16% | 4,600 |
| Middle fifth | 41,500 | 50,200 | 21% | 8,700 |
| Fourth fifth | 54,300 | 70,300 | 29% | 16,000 |
| Top fifth | 95,700 | 172,200 | 80% | 76,500 |
| Top1 Percent | 326,400 | 1,071,500 | 228% | 745,100 |
| Source: Congressional Budget Office, Effective Federal Tax Rates: 1979-2005, December 2007. | ||||
End Notes:
[1] Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
[2]Thomas Piketty and Emmanuel Saez, “Income Inequality in the UnitedStates, 1913-1998,” Quarterly Journal of Economics, 118, 2003. Pikettyand Saez۪ tables have been updated through 2005 at http://emlab.berkeley.edu/users/saez/ The Piketty and Saez data are discussed further in Aviva Aron-Dine,”New Data Show Income Concentration Jumped Again in 2005,” Center onBudget and Policy Priorities, revised October 24, 2007. http://www.cbpp.org/3-29-07inc.pdf
[3]In the CBO data, the income categories do not represent a fixed groupof people from year to year but rather represent the people who fallinto the various income categories in the year in question. As aresult, the people in a given income category shift somewhat overtime. This does not alter the conclusions of this paper but means thatthe trends shown in the data do not necessarily match the incometrajectories of individual households.
[4]Since 1979 (the first year for which CBO data are available), theafter-tax income for the top 1 percent has increased by more than 20percent only in 1986 and 1988. Analysts generally consider income datafor the 1986-1988 period anomalous because a substantial amount ofincome “shifting” occurred during those years in response to enactmentof the 1986 Tax Reform Act. Many high-income individuals chose torealize capital gains in 1986 in order to avoid paying the highercapital gains tax rates that took effect in 1987; this artificiallyincreased the incomes of high-income households in 1986 andartificially reduced those incomes in 1987. For further discussion,see Joel Slemrod, “Income Creation or Income Shifting? BehavioralResponses to the Tax Reform Act of 1986,” The American Economic Review,May 1995, pp. 175-180.
[5]As the Economic Policy Institute has noted, the two-year increasein the share of income (both pre- and post-tax) going to the wealthiestAmericans was greater from 2003 to 2005 than in any other two-yearperiod covered by the CBO data. See Jared Bernstein, “Updated CBO DataReveal Unprecedented Increase in Inequality,” Economic PolicyInstitute, December 13, 2007, http://www.epi.org.
[6] See Tax Policy Center tables T06-0273 and T06-0279 at http://www.taxpolicycenter.org.
[7]CBO۪s data show that the share of total federal taxes paid by the top 1percent of households rose from 25.4 percent in 2004 to 27.6 percent in2005, the highest share on record in the CBO data. The rising share oftaxes paid by the wealthy is often cited erroneously as evidence thatthe tax burden on the highest-income households is rising. In fact, asCBO Director Peter Orszag has pointed out in his Director۪s Blog, theincrease in the share of taxes paid by the top 1 percent of householdsfrom 2004 to 2005 “occurred despite a slight decline in the effectivetax rate applied to income among the top 1 percent (from 31.4 percentto 31.2 percent) because the share of pretax income accruing to thatpart of the income distribution rose from 16.3 percent in 2004 to 18.1percent in 2005.” Indeed, the effective tax rate of the top 1 percentof households was lower in 2005 than in any year since 1992.
[8]See Aviva Aron-Dine and Robert Greenstein, “Two High Income Tax CutsNot Yet Fully in Effect Will Cost Billions Over the Next Five Years,”Center on Budget and Policy Priorities, Feb. 1, 2007, http://www.cbpp.org/2-1-07tax.htm.