Increased Income Inequality Occupies Recent CBO Report

In a well-timed recent report, the Congressional Budget Office (CBO) provides a series of statistics that largely reinforce the concerns being raised in the Occupy Wall Street protests. In its October 2011 report, titled “Trends in the Distribution of Household Income Between 1979 and 2007,” written by Edward Harris and Frank Sammartino of CBO’s Tax Analysis Division, the CBO studied the distribution of household income both before and after government transfers and federal taxes. The study confirmed a real and growing income gap, finding that inequality in America has indeed increased significantly since 1979.

The report reveals that in those 30 years, real (inflation-adjusted) average household income in the United States increased by 62%. This growth, however, was overwhelmingly concentrated in the incomes of the richest Americans, with average real after-tax household income growth of 275% for the top 1% of U.S. income-earners. By comparison, average real-after tax household income grew by a staggeringly low 18% for the lowest 20% of earners, and by less than 40% for the middle class. The CBO further noted that the Gini Index — a well-regarded measure of income inequality — grew from 0.479 to 0.590 between 1979 to 2007. Put simply, the report illustrates that the rich are getting richer relative to both the lower- and middle-class.

The study also finds that changes in the structure of the U.S. economy have strongly favored the top quintile in America. Hourly wage rates have increased more for higher-wage workers due to technological changes, which increased demand for high-skilled workers. Outside of labor income, increases in business income, capital gains, and capital income have likewise occurred at greater rates. These components make up a larger share of the incomes of the top quintile than of any other U.S. group.

Finally, shifts in government transfers and federal taxes have also contributed to the increase in income inequality. While government transfer payments relative to household income were relatively constant during the duration of the study, rapid growth in Medicare and Social Security shifted transfers more to middle- and upper-income households as proportionally less spending was direct to means-tested programs. In fact, in 1979, 54% of federal transfer payments were received by the bottom quintile; in 2007 that number was just 36%. At the same time, the composition of federal tax revenue shifted from progressive income taxes, which fell during the period, to less progressive forms of taxation.

The report largely confirms that, as the Occupy movement has been claiming, the richest Americans have gotten a larger share of the economic pie in recent decades, to the detriment of middle- and lower-income households across the United States.