The Congressional Budget Office released a report yesterday that provides more detail into their hugely valuable reporting on household income growth at different points in the income distribution. There’s plenty to dig into here, but, we’ll start with just noting that the report confirms what we posted today: that the primary complaint of the Occupy Wall Street movement – that economic inequality is rising, and economic policy, driven by the interests of the already well-off, is driving that rise – is spot-on.
The CBO report focuses on 1979-2007 – the last year before the Great Recession. While inequality actually tends to fall in the immediate aftermath of recessions (as incomes derived from the stock market fall more quickly than others, and these incomes are disproportionately claimed by the richest households), we know that over this period that inequality has always risen very sharply after the immediate recession-years.
One immediate comparison that comes to mind when examining data on inequality is a simple comparison of the growth of mean versus median income between 1979 and 2007. Mean income is just the simple average – it’s essentially how much the economy was able to generate on a per household basis. Median income growth is a measure of how a household smack in the middle of the distribution – poorer than half of households but richer than half – has done over the same period. If income growth is much faster for already-rich households (and it definitely was over this period) then mean income growth is going to outpace median growth. And, we can ask how much households at the median could be earning today if their income growth matched the overall average. This doesn’t seem too much to ask in terms of economic outcomes – the richest 1 percent in 1979 made considerably more than the typical household – so even if all incomes had simply grown at the overall average rate, there would be a considerable income gap today. Instead, of course, median growth fell far below average growth. If it hadn’t, the CBO data indicates that the median household would have had $75,160 in after-tax income in 2007, rather than the $61,800 it actually had.
In short, the inequality driven by households at the top claiming so much of the overall growth acted as a $13,360 tax on the median household. I should note that those used to citing Census Bureau numbers on median incomes will find these income numbers to be high. That’s because these are a measure of “comprehensive income” that includes many things – like in-kind transfers and imputed taxes besides the money incomes reported by Census.
Speaking of taxes and transfers, we can also look at how policy most visibly affects income trends – looking at how taxes and transfers affect the evolution of inequality. Because the federal income tax is progressive and because transfers (Social Security, unemployment insurance, Medicare, Medicaid) make up a larger share of low- and moderate-income households’ incomes, the effect of taxes and transfers overall is to, at any given point in time, reduce the inequality that results from market-based incomes (though, to be clear, policy has fingerprints all over market-based incomes as well).
But, the CBO notes that “shifts in the distribution of government transfer payments and federal taxes also contributed to the increase in after-tax income inequality.” See the chart below from the CBO report and focus on the top-line. This top line shows the contribution that taxes and transfers make to reducing inequality – and it shows this contribution has fallen significantly between 1979 and 2007. That is, this most visible hand of policy – the effect of taxes and transfers – has actually changed in the direction of increasing inequality (or reducing it less) relative to its 1979 levels. In short, tax and transfer policy is leaning with the wind of rising inequality rather than against it.