Inequality Growing, and Government Doing Less About It

October 27, 2011 at 10:45 am

The Congressional Budget Office has released a fascinating and disturbing analysis on the growth in income inequality among American households over the past few decades.

The key findings are:

  • Inequality increased significantly over this period (see graph).  Between 1979 and 2007, incomes grew by 275 percent for the wealthiest 1 percent of households, 37 percent for the middle 60 percent of households, and 18 percent for the poorest 20 percent of households.  These figures adjust for inflation and account for the impact of taxes and government transfer payments such as Social Security and unemployment benefits.
  • The share of the nation’s total income accruing to the middle 60 percent of households fell from around half in 1979 to a bit above 40 percent in 2007.  Virtually all of this decline (and the decline in the share of income held by the bottom 20 percent of households) is reflected in the increase for the top 1 percent, whose share of the nation’s total income more than doubled.

Income Gains at the Top Dwarfed Those of Low- and Middle-Income Households

The increase in inequality mostly reflects the growing share of market income — that is, income before accounting for taxes and transfer payments — going to higher-income Americans.  Because our tax and transfer system is progressive (e.g., higher-income households pay higher federal income taxes and transfers tend to benefit those with lower incomes), taxes and transfers reduce inequality at any given point in time.

But, given that market incomes have grown more unequal, a good question is whether changes to the tax and transfer system in recent decades have made it more effective in pushing back against this rising tide of inequality.  They haven’t.  In fact, the opposite has happened.  The CBO study finds:  “Between 1979 and 2007, the Gini index [a measure of income inequality] for market income increased by 23 percent … and the index for income measured after transfers and federal taxes increased by 33 percent.”

The reason is that both federal taxes and transfers, while still progressive, have become less so over time.  In a sense, the tides of inequality have been rising, while the levees to hold them back have been shrinking.

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More About Jared Bernstein

Jared Bernstein

Jared Bernstein joined the Center in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Bernstein’s areas of expertise include federal and state economic and fiscal policies, income inequality and mobility, trends in employment and earnings, international comparisons, and the analysis of financial and housing markets. He is the author and coauthor of numerous books for both popular and academic audiences, including “Crunch: Why Do I Feel So Squeezed?” and nine editions of "The State of Working America." Bernstein has published extensively in various venues, including The New York Times, Washington Post, Financial Times, and Research in Economics and Statistics. He is an on-air commentator for the cable stations CNBC and MSNBC and hosts

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1 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. anthony cristiano sr #

    These are the people who claim we want to share there money,
    so does say FOX no news say….
    they are all crooks, money made on the backs of the middle class and poor
    so why do the people in the south vote for the GOP, they are part of the problem
    it’s called stealing from the middle class, we the middle class fight the wars
    so they make more money aboard, and open factories in China, than
    want us to buy that cheap junk


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