The nonpartisan Congressional Budget Office (CBO) recently released a report analyzing household income in the US over the last four decades. After accounting for government transfers and taxes, the report documents the cumulative growth in household income across all income groups during the period of 1979 through 2014. Of course, the most affluent households did a lot better than the rest (228% cumulative income growth for the top 1%). But even the lowest income group made significant gains (69% cumulative income growth), mostly because their taxes went down and government transfers became increasingly generous during this period.
I’ve chosen three CBO charts that tell the story well. The first documents the increasing value of government transfers over the period of 1979-2014. Explanations of terminology are at the end of this post.
Next documents the decline in average tax rates for lower income groups. This decline is mostly thanks to the rise of tax credits. In 1979, the tax credit rate among households in the lowest income quintile was approximately 1 percent. By 2014, that rate had climbed to an estimated 12 percent.
Putting it together, trends in household income after transfers and taxes:
So, no: the poor aren’t getting poorer and the middle-class hasn’t stagnated. However, the rich are getting richer.
Explanation of Terminology:
Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.
Income before transfers and taxes is market income plus social insurance benefits. Market income consists of labor income, business income, capital income (including capital gains), income received in retirement for past services, and other nongovernmental income sources. Social insurance benefits consist of benefits provided through Social Security, Medicare, unemployment insurance; and workers’ compensation.
Means-tested transfers are cash payments and in-kind transfers from federal, state, and local governments. The largest means-tested transfers consist of transfers provided through Medicaid, the Children’s Health Insurance Program, Supplemental Nutrition Assistance Program (“food stamps”), and Supplemental Security Income. The transfer rate is the value of transfers by before-tax income.
Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.
Quintiles (fifths) contain an equal number of households (each being 20% of US households). The five household income quintiles are often labeled Lowest, Second, Third, Fourth and Highest. Sometimes the highest quintile is further divided into the top 1% and the rest (81-99%ile).
Tax credit rates:: total tax credits divided by income before transfers and taxes. Examples of tax credit programs include the Earned Income Tax Credit (EITC) and the Child Tax Credit.
The Distribution of Household Income, 2014 Congressional Budget Office. March 2018