Only the top one percent of American households has gained a larger share of after-tax income

Recall from a previous post that that lower-income households spend a larger fraction of their income on state and local taxes than do higher-income households.

The figure [source] is based on 2009 data. The following is the online summary of an October 2011 report from the Congressional Budget Office, “Trends in the Distribution of Household Income Between 1979 and 2007.” The report does not take into account non-federal taxes, which have risen, and thus the growing disparity in after-tax income is more pronounced than indicated.

After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers — which are payments to people through such programs as Social Security and Unemployment Insurance — have been added.)

CBO finds that, between 1979 and 2007, income grew by:

• 275 percent for the top 1 percent of households,
• 65 percent for the next 19 percent,
• Just under 40 percent for the next 60 percent, and
• 18 percent for the bottom 20 percent.

The share of income going to higher-income households rose, while the share going to lower-income households fell.

• The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
• Most of that growth went to the top 1 percent of the population.
• All other groups saw their shares decline by 2 to 3 percentage points.

Market Income Shifted Toward Higher-Income Households

Shifts in the distribution of market income underlie most of the changes in the distribution of after-tax income. (Market income—or income before taxes and transfers—includes labor income, business income, capital income, capital gains, and income from other sources such as pensions.)

• Each source of market income was less evenly distributed in 2007 than in 1979.
• More concentrated sources of income (such as business income and capital gains) grew faster than less concentrated sources (such as labor income).

Government Transfers and Federal Taxes Became Less Redistributive

Government transfers and federal taxes both help to even out the income distribution. Transfers boost income the most for lower-income households, while taxes claim a larger share of income as people's income rises.

In 2007, federal taxes and transfers reduced the dispersion of income by 20 percent, but that equalizing effect was larger in 1979.

• The share of transfer payments to the lowest-income households declined.
• The overall average federal tax rate fell.

Taking non-federal taxes into account, the apparent slight gain in share of after-tax income for households in the 81st to 99th percentiles is erased. Only the top one percent has gained a larger share of after-tax income since 1979.