The Center's work on 'Income Inequality' Issues


5 Takeaways From Last Week’s Figures on Poverty, Inequality, and Health Coverage

September 25, 2014 at 12:32 pm

Here are five key findings from our analyses (here and here) and blog posts on the new figures from the Census Bureau and Centers for Disease Control and Prevention (CDC).

  1. While poverty and median income improved last year for families with children,poverty rates reached record highs for childless families and individuals.  The poverty rate for individuals not living in families (people living alone or only with non-relatives) rose to 23.3 percent in 2013, the highest in over 30 years.  The poverty rate for childless families (childless couples, older couples or other families whose children have moved away or turned 18, and other relatives who live together), while much lower at 6.2 percent, was also the highest in over three decades.
  1. Income inequality remained historically high.  The share of the nation’s income going to the bottom fifth of households remained at 3.2 percent, tied for the lowest level on record with data back to 1967.  The ratio of the median income of the top fifth of households to that of the bottom fifth topped 12 to 1 for the first time on record, with data back to 1967.
  1. Austerity policies limited progress on jobs, income, and poverty.  Instead of responding to continued weak job growth by creating jobs (such as by expanding infrastructure investments), policymakers adopted various austerity policies that constrained consumer spending and employment growth.  Sequestration budget cuts, for example, lowered appropriations for most discretionary programs by 5 to 8 percent in 2013.  Policymakers also allowed a payroll tax holiday to expire after December 2012 and allowed tax cuts for very high-income individuals to expire (though the latter mattered less for consumer demand since high-income people’s spending is less sensitive to tax changes).  The Congressional Budget Office projected in early 2013 that these measures would reduce economic growth over the year by about 1½ percentage points and lower employment by more than 1 million jobs.
  1. The uninsured rate fell slightly last year and is falling further in 2014, as health reform’s major coverage expansions take effect.  The share of Americans without health coverage fell from 14.8 percent to 14.5 percent in 2013, according to Census’ American Community Survey.  And preliminary data from CDC — the first government survey data that reflect the early impact of the coverage expansions (the Medicaid expansion and subsidized marketplace coverage) — show that the number of uninsured fell by 3.8 million in the first quarter of 2014.
  1. The coverage gap between states that have expanded Medicaid and states that haven’t is widening.  In 2013,before the expansion took effect, some 14.1 percent of the people in the 27 expansion states (including Washington, D.C.) were uninsured, compared to 17.3 percent in the 24 non-expansion states.  Figures for the first part of 2014 show the gap is widening.  For example, CDC data show that 15.7 percent of non-elderly adults in expansion states were uninsured in the first quarter of 2014, compared to 21.5 percent for non-expansion states (see graph).

Why More Inequality Means Less State Revenue — And How States Can Respond

September 19, 2014 at 11:06 am

Growing income inequality in recent decades has slowed state tax collections, a new report from Standard & Poor’s finds, making it harder to fund public services ― like education ― that lay the groundwork for a strong future and help push back against rising inequality. States need to adapt their tax codes to take growing inequality into account.

Virtually all states collect more taxes (as a share of family income) from low- and moderate-income families than from high-income families.  So it makes sense that collections would slow when, as we’ve documented, the lion’s share of income growth goes to the richest families.

  • Many states have a flat-rate or nearly flat-rate income tax.  A flat income tax raises less revenue from economic growth — especially when most of the gains go to people at the top of the income scale — than a graduated income tax, which taxes higher incomes at higher rates.
  • Growth in sales tax collections weakens when low- and middle-income families’ incomes stagnate or grow more slowly, since they spend (rather than save) a larger share of their income than wealthy families do.
  • States’ antiquated sales tax rules favor high-income consumers.  Those at the top tend to spend more on services, like lawn care or health club memberships, which remain exempt from sales tax in many states.  They also spend a larger share of their income online — purchases that often are effectively tax-free.

States can respond to slowing tax collections by making their income tax more progressive through a more graduated rate structure.  This would make tax collections more responsive to economic growth, bringing faster revenue growth when the economy expands.  Tax collections would also fall more when the economy slows, but states can address this with stronger reserve funds, better mechanisms to manage surpluses, and other policy tools, as we have explained.

States also can broaden their sales tax base to include more services, including those used by high-income families, and extend the sales tax to Internet sales.

Over time, these changes would give states more resources to push back against rising inequality by investing in education and training, providing supports like child care assistance for low-wage workers, and adopting or expanding state earned income tax credits.

Conversely, if states fail to adapt their tax systems to this growing problem, they will have an even harder time stemming the harmful rise in inequality.

Income Inequality Remains at Historic High, Census Data Show

September 18, 2014 at 2:43 pm

Income inequality remained near a record high in 2013 by several measures the Census Bureau released earlier this week, with data going back to 1967.

The principal Census summary measure of household income inequality, known as the “Gini coefficient,” was not statistically different from the record high in 2012.  And the share of national income that goes to the top fifth of households was 51.0 percent, not statistically different from its record high of 51.1 percent in 2011.  The share of the nation’s income going to the top 20 percent has been growing for decades, but it only recently surpassed 50 percent.  That means the top 20 percent of households receive more of the nation’s income than the bottom 80 percent combined (see chart).

The Census figures provide an incomplete look at pre-tax income inequality — for example, they don’t include capital gains (a major income source for the affluent) and don’t ask about earnings above $1.1 million, while also leaving out key income sources for the poor such as government food assistance, rent subsidies, and tax credits.

Still, the trend of high and rising inequality that the new data show is consistent with other recent studies.  For example, a recent Federal Reserve study finds evidence of growing income concentration between 2010 and 2013.  “Only families at the very top of the income distribution saw widespread income gains between 2010 and 2013,” the study found, as incomes grew for the nation as a whole but fell for middle- and lower-income households.  (Unlike the Census data, the Fed’s survey includes capital gains and SNAP — formerly food stamp — benefits.)

Preliminary tax-return data through 2012, as analyzed by economist Emmanuel Saez, provide further evidence about widening inequality in recent years.  Saez found that from 2009 to 2012, average pre-tax income of the top 1 percent of households rose 31 percent — or by about $300,000 per household — but rose by just 0.4 percent (an average of about $170) for the other 99 percent of households.  (These figures do not include government benefits and, thus, provide a picture of economic inequality before tax and transfer policies.)  The top 1 percent received 95 percent of the nation’s total rise in pre-tax income during this period, Saez found.

Tomorrow’s Poverty Data Will Give Only Partial Picture

September 15, 2014 at 4:19 pm

As our preview of tomorrow’s Census release of 2013 poverty data explains, the official poverty statistics are based on pre-tax cash income, so they omit support like SNAP (formerly food stamps) and rental subsidies, as well as tax-based assistance like the Earned Income Tax Credit (EITC).  Later this year Census will release 2013 figures using an alternative poverty measure —the Supplemental Poverty Measure (SPM) — that includes these benefits.  Columbia University researchers recently estimated a version of the SPM called the “anchored” SPM for 1967 through 2012, and this measure tells a somewhat less dreary story about poverty trends over the last decade than the official measure.

The official poverty rate rose from 11.3 percent to 12.5 percent between 2000 and 2007, in part due to widening income gaps and poorly shared economic growth, then leapt to 15 percent by 2012 due to the Great Recession and the slow recovery.  Under the SPM, in contrast, poverty remained essentially flat from 2000 to 2007 and rose only about halfas much as under the official measure — 1.3 percentage points, versus 2.5 percentage points — through 2012 (see graph).

The better performance under the SPM largely reflects the powerful role of SNAP and refundable tax credits like the EITC — as strengthened by policymakers both early in the decade and through largely temporary measures in the Great Recession — which helped keep more Americans from falling into poverty as the recession deepened.

In 2013, the SPM will continue to capture policy changes left out of the official measure.

In short, tomorrow’s figures on the official poverty rate will give a real but incomplete picture of poverty and anti-poverty policies.

Our chart book on the War on Poverty has more on these issues, including

5 Facts to Help You Understand Next Week’s Poverty Figures

September 12, 2014 at 9:51 am

Our new report provides context for the official poverty and income figures for 2013, which the Census Bureau will release on Tuesday.  Here are the highlights:

  1. As in other recent recoveries, poverty has been slow to decline.  Over time, poverty rates tend to move roughly in tandem with economic indicators, which generally improved slightly in 2013.  Thus, the poverty rate — which jumped from 12.5 percent in 2007 to 15.1 percent in 2010 and remained essentially unchanged at 15.0 percent in 2011 and 2012 — may start to improve in 2013 as well, although the improvement might not be statistically significant.A return to pre-recession poverty levels is unlikely soon.  To replace the millions of jobs lost in the Great Recession anytime soon and keep up with population growth, the economy must create jobs faster than it has to date.  Although the economic recovery (which officially began in June 2009) is not uniquely disappointing in this regard, it is still problematic — and because the economic downturn was so deep, there is much more ground to make up.  Recoveries in the 1960s, 1970s, and 1980s featured quicker reductions in poverty (see graph).
  1. Austerity policies likely hampered progress against poverty in 2013.  The economy almost certainly would have improved more in 2013 had austerity policies not reduced the government’s contribution to the economy.  These included the “sequestration” spending cuts of the 2011 Budget Control Act and first implemented in 2013 and the expiration of the payroll tax holiday, which reduced most workers’ take-home pay by 2 percent of earnings.
  2. Unequal wage growth also slowed progress.  Between 2009 and 2013, inflation-adjusted hourly wages rose by 1 percent for workers at the 95th percentile (workers whose wage levels exceed those of 95 percent of all workers but are less than the remaining 5 percent), but fell by about 4 to 6 percent for workers in the bottom 60 percent of the wage scale, according to the Economic Policy Institute.
  3. Income inequality tied a record-high level in 2012.  The income gap between rich and poor as measured by the Gini index — the Census Bureau’s main summary indicator of inequality in pre-tax cash income — tied a record in 2012, with the data going back to 1967.  Other inequality measures also stood at or near record levels in 2012.
  4. Most poverty figures released on Tuesday won’t reflect non-cash benefits.  The Census figures will focus on the official poverty statistics, which are based on pre-tax cash income and omit support such as food assistance and rental subsidies as well as tax-based assistance such as the Earned Income Tax Credit (EITC).  An alternative Census Bureau poverty measure, the Supplemental Poverty Measure (SPM), includes these types of assistance, and experts generally consider it a more reliable tool for measuring changes in poverty over time as well as the safety net’s impact on poverty.  Unfortunately, Census will not release SPM figures for 2013 until later this year.  However, Census will release a table on Tuesday providing data on the poverty-reducing effects of certain programs, including SNAP (formerly food stamps) and the EITC.

Click here for the full report.

John Oliver Debunks Some Estate Tax Myths

July 14, 2014 at 4:55 pm

John Oliver’s HBO show this weekend featured a segment on income and wealth inequality (warning: colorful language!), and Oliver cited our paper showing that 99.86 percent of all estates in 2013 owed no estate tax (see chart).

As Oliver mentioned and our paper explains, contrary to the myth that many people face the estate tax, the first $5.25 million of every estate (effectively $10.5 million per married couple) is exempt from tax (with that level indexed for inflation).  That means that very few estates owe any tax.  For those few that did in 2013, the “effective” tax rate — that is, the percentage of the estate’s value that is paid in taxes — was 16.6 percent, on average.  That’s far below the top estate tax rate of 40 percent.

Rather than cutting investments in areas like education, medical research, and environmental protection in order to reduce the deficit, policymakers should be looking to strengthen the estate tax.  Learn more about the myths and realities of the federal estate tax here.

IMF Joins Calls for Strengthening EITC and Minimum Wage

June 18, 2014 at 2:47 pm

We noted yesterday a new report by the Organisation for Economic Co-operation and Development (OECD) describes the Earned Income Tax Credit (EITC) as “effective in fighting poverty and encouraging work” and calls for expanding the EITC and lifting the federal minimum wage.  My colleague Jared Bernstein points out today that the International Monetary Fund (IMF) has just made a nearly identical recommendation.

In its latest look at the U.S. economy, the IMF says that strengthening the EITC and the federal minimum wage would aid the recovery and improve the nation’s long-term economic outlook:

An expansion of the Earned Income Tax Credit — to apply to households without children, to older workers, and to low income youth — would be another effective tool to raise living standards for the very poor.  Similarly, the government should make permanent the various extensions of the EITC and the improvements in the Child Tax Credit that are due to expire in 2017.  Finally, given its current low level (compared both to U.S. history and international standards), the minimum wage should be increased.  This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households.

OECD Calls for Strengthening EITC and Minimum Wage

June 17, 2014 at 1:47 pm

The Earned Income Tax Credit (EITC) “has been effective in fighting poverty and encouraging work,” the Organisation for Economic Co-operation and Development’s (OECD) new Economic Survey of the United States finds.  The report recommends expanding the EITC to reach those largely left out — and lifting the federal minimum wage to make such an expansion more effective.  These are timely messages, given that proposals before Congress would accomplish both goals.

The EITC “encourages low-income parents to take up work by lowering their tax rate and by providing a financial bonus for their work,” the OECD explains, noting that the research shows any negative effect on employment from the credit’s gradual phaseout at higher income levels is limited.  As we’ve pointed out, studies show the EITC is particularly successful at raising employment among single mothers.

To make the EITC even more effective, the OECD suggests strengthening the credit for childless workers (including non-custodial parents) by expanding their credit and lowering the age eligibility threshold from 25 to 21.  Since childless workers now receive little or no EITC, it’s “less effective at increasing employment and reducing poverty” among this group, according to the OECD.

In part because the EITC for childless workers is so meager, childless workers are the sole group that the federal tax system taxes into poverty.

The President’s 2015 budget and a number of congressional proposals would address this glaring hole in the EITC by strengthening the credit for childless workers.  The President’s proposal, for example, would lift about half a million people out of poverty and reduce the depth of poverty for another 10.1 million, the Treasury Department estimates.

The OECD report also recommends that expanding the EITC “would be more effective supported by a higher minimum wage.”  We strongly agree.

As we’ve explained, the EITC and federal minimum wage are complementary ways to support low-wage workers, not alternatives.  One reason is that the EITC, by increasing the number of people seeking jobs in the low-wage sector, can put downward pressure on the wages that employers offer potential workers.  A higher minimum wage helps offset that effect.

The OECD points out that the effects of minimum-wage increases on employment are “uncertain” and recommends carefully monitoring the impact of any such increase.  But it also notes, “[t]he value of the minimum wage has declined significantly in real terms over time” and “[r]elative to the median wage, the current federal minimum wage is well below the average statutory minimum wage in OECD countries.”

“Plentiful empirical evidence suggests a modest increase in the minimum wage from such a low level will have no or only a small negative effect on employment of low-skilled workers,” the OECD concludes.  A proposal before Congress would raise the minimum wage from $7.25 to $10.10 in three annual increments and then index it to inflation.

Nine Things You Might Not Know About Minimum-Wage Workers

June 9, 2014 at 12:47 pm

In debates over raising the minimum wage, it’s important to know who we’re talking about, CBPP Senior Fellow Jared Bernstein explains today in the New York Times’ Upshot blog.  His post lists nine facts about who earns the minimum wage and who would benefit from raising it from $7.25 to $10.10.  Here’s an excerpted version:

  • Minimum-wage workers are older than they used to be.  Their average age is 35, and 88 percent are at least 20 years old.  Half are older than 30, and about a third are at least 40. . . .
  • They’re split fairly evenly between full-timers and part-timers.  Most — 54 percent — work full-time schedules (at least 35 hours per week), and another 32 percent work at least half time (20-34 hours per week).
  • Many have kids.  About one-quarter (27 percent) of these low-wage workers are parents, compared with 34 percent of all workers.  In all, 19 percent of children in the United States have a parent who would benefit from the increase.
  • One in eight lives in a high-income household.  About 12 percent of those who would gain from an increase to $10.10 live in households with incomes above $100,000.  This group highlights the fact that the minimum wage is not nearly as well targeted toward poverty reduction as the earned-income tax credit, a wage subsidy whose receipt, unlike the minimum wage, is predicated on family income.

    Still, a minimum-wage increase does much more to help low- and moderate-income households than any other groups.  Households that make less than $20,000 receive 5 percent of the nation’s total earnings, for instance — but would receive 26 percent of the benefit from the proposed minimum-wage increase.

  • Most are women.  Women make up 48 percent of the work force yet 55 percent of the would-be beneficiaries of the increase in the minimum wage.
  • Most are white, but minorities are overrepresented.  Hispanic workers account for 16 percent of the work force but 24 percent of those who would be affected by the wage increase.  For African-Americans, the comparable shares are 11 percent of the work force and 15 percent of those who would gain from the increase.
  • They’ve got some schooling, though less than other workers.  Of those who would be affected by the increase, 78 percent have at least finished high school, about one-third have some college under their belts, and about 10 percent have graduated from college. . . .
  • Their earnings are a big part of their family budgets.  The average worker in this group brings home half of his or her household’s earnings; 19 percent of those who would get the raise are sole earners.  Parents who would benefit from the increase bring home an even larger share of their families’ earnings: 60 percent.
  • They’re in every state, but are overrepresented in the South.  Because most of the states that have raised their minimums above the federal level are outside the South, a national increase would have more bite there.  Workers in Southern states make up 17 percent of the nation’s work force but 21 percent of minimum-wage beneficiaries. . . .

No, the OECD Didn’t Say We Already Do a Lot to Reduce Inequality

May 12, 2014 at 12:29 pm

Critics of proposals to reduce income inequality sometimes cite a 2008 Organisation for Economic Co-Operation and Development (OECD) report that found, among other things, that the United States has the most progressive tax system among developed countries.  But, as a whole, the report doesn’t support the implication that the United States does a lot to address income inequality; nor do more recent OECD data.

In fact, various taxes and “cash transfer” programs (such as Social Security, unemployment compensation, and means-tested benefits like SNAP) do less to reduce inequality in the United States than in any other OECD country examined except South Korea, Chile, and Switzerland, according to the OECD’s latest data (see graph).

As a result, while the United States had the tenth-highest level of inequality among the roughly 30 OECD countries studied before taxes and transfers, it had the fourth-highest level after taxes and transfers.

There are two main reasons why the U.S. tax and transfer system does relatively little to reduce inequality:

  • While the taxes that the OECD analysis examined are more progressive in the United States than in other OECD countries, they also collect less revenue (as a share of household income) than the OECD average.
  • U.S. cash transfers are only about half as large as the OECD average, measured as a share of household disposable income; they’re also less progressive than in other OECD countries.

The OECD analysis omits some taxes and transfers due to data limitations.  It’s unclear how including all of the missing pieces would affect the findings.  But citing only the OECD’s finding about the progressivity of the U.S. tax system while ignoring its other findings, as some have done, provides a misleading picture of the OECD report.

Gradual Phase-In Helps Employers Adapt to Minimum Wage Hike

April 30, 2014 at 10:00 am

The Senate will vote today on a proposal to raise the minimum wage to $10.10 by 2016, providing important, tangible benefits to low-wage workers. Seemingly unaware that the increase phases in over time — in three annual steps of $0.95 (see graph) — some argue that it would constitute a significant shock to low-wage employers.  While there’s no question that a higher minimum wage raises their labor costs, the gradual phase-in is designed to help them adapt to the higher wage level.

As always when a minimum wage increase is proposed, opponents also claim that it would lead to large numbers of layoffs.  But, extensive research doesn’t support that conclusion, as our report explains.  Moderate increases like the one under consideration have been shown to help many more low-wage workers than they hurt.

Since the minimum wage isn’t adjusted for inflation, the longer Congress fails to act, the more its buying power erodes.

New Report Highlights Need for States to Help Address Income Inequality

March 6, 2014 at 2:05 pm

An important new report documents rising inequality in states across the country.  As we outlined in our 2012 analysis of state-by-state income inequality, states can — and should — take certain steps to help alleviate these trends.

A study of IRS data by the Economic Analysis and Research Network found that:

  • The top 1 percent of taxpayers received the lion’s share of income growth across the country between 1979 and 2007, and its share of income grew in every state.
  • In 15 states, between half and 84 percent of all income growth over this period went to the top 1 percent.  In four states — Alaska, Michigan, Nevada, and Wyoming — incomes grew for only the top 1 percent while the incomes of the bottom 99 percent fell.
  • This lopsided income growth has continued after the recession.  The top 1 percent received at least half of the income growth in 33 states between 2009 and 2011 (the most recent year for which state data are available).

Governments at all levels can take steps to help alleviate these trends.  Specifically, states can:

Stop exacerbating inequality through the tax code.  In most states, low- and middle-income people pay a higher portion of their income in taxes than the wealthy.   States certainly should avoid worsening this trend with tax cuts that benefit the richest households and do little for poor and middle-income families.  For example, cutting progressive taxes like the income tax will benefit high-income families more than low-income families and will widen income gaps further.

Strengthen supports for low-income families.  States play a major role in delivering social safety net assistance.  State assistance with child care, job training, transportation, and health insurance helps poor families get and retain jobs and move up the income scale.  In addition, states can shield the nation’s most vulnerable citizens from poverty’s long-term effects by maintaining their pieces of the safety net.

Raise, and index, the minimum wage.  The purchasing power of the federal minimum wage is 22 percent lower than its late 1960s peak.  Its value falls well short of the amount needed to meet a family’s needs, especially in states with a high cost of living.  Federal action to raise the minimum wage is critical, but states don’t have to wait.  Any state can help raise wages for workers at the bottom by enacting a state minimum wage that is higher than the federal wage and indexing it to ensure continued growth.