The Center's work on 'Income Inequality' Issues

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. . . .