Trends in the
Distribution of After-Tax Income:
An Analysis of Congressional Budget Office Data
by Isaac Shapiro and Robert Greenstein
The Congressional Budget Office recently released tables on after-tax income in the United States in 1994. A comparison of these data to data CBO previously had released for 1977 finds that the gains in after-tax income since the late 1970s have gone overwhelmingly to households in the upper parts of the income scale.
This analysis finds that average after-tax income climbed 9.5 percent during the 1977-1994 period, after adjustment for inflation. But most income groups did not share in these income gains. The bottom two-fifths of families experienced a decline in their average after-tax income over this period, after adjusting for inflation, while the after-tax income of the middle fifth of families remained essentially unchanged. By contrast, the after-tax incomes of high-income families rose sharply. The average after-tax income of the top 20 percent of families rose 25 percent during this period, after adjusting for inflation. The average after-tax income of the top one percent of households rose 72 percent.
As a result, the proportion of after-tax income that different groups of families received changed markedly over this period. In 1977, the top one percent of families received 7.3 percent of the national after-tax income. By 1994, they received 11.4 percent of after-tax income, as much as the bottom 35 percent of the population combined. The top one percent of families received $146 billion more in after-tax income in 1994 than they would have received if their share of national after-tax income had remained the same as in 1977.
Recent Income Trends
The Congressional Budget Office compiles information on after-tax family income based primarily on Census data and IRS data. The CBO data are currently available for selected years from 1977 through 1994. CBO only recently released data for 1994 to Congressional staff. This analysis examines the 1994 data and compares them to data for earlier years.
This analysis finds that average after-tax family income was 9.5 percent higher in 1994 than in 1977, after adjusting for inflation.(1) The increase in income was much greater than this for high-income families, while as a group, low- and middle-income families lost ground or simply stayed even.
The top one percent of families experienced an average gain of 72 percent in their after-tax income from 1977 to 1994. (See Figure 1.) This was nearly eight times the 9.5 percent overall average gain.
Changes in Income Shares
The divergence in the extent to which different groups have benefited from recent economic trends has led to substantial growth in income disparities. Based on the CBO data, this analysis finds:
Figure 2 shows the share of after-tax income that the different income groups received in 1977 and 1994. Some of the changes shown in after-tax income shares may seem relatively small. For example, the middle fifth of the population received 16.3 percent of the national after-tax income in 1977; by 1994, this share had slipped to 15.2 percent. Yet seemingly small shifts in income shares reflect differences of tens of billions of dollars in the amounts of income going to various groups.
Figure 2 will be
The outcome is very
different for those at the high end of the income scale.
If the richest one percent of the population received the
same share of after-tax income in 1994 as in 1977, these
families would have received $146 billion less in
income. The average after-tax income of the top one
percent of the population was $374,000 in 1994. Had the
top one percent received the same share of the national
income in 1994 as it did in 1977, its average after-tax
income would have been $241,000 in 1994.
Average After-Tax Income in 1994
|Actual||If group's share of the national
income had been the same as in 1977
|Top One Percent||374,131||241,176||-132,955|
Joint Committee on Taxation and Census Data Show Similar Trends
Tables issued by the Joint Committee on Taxation provide an additional source of data on the distribution of after-tax income. The data derived from the Joint Tax Committee tables are similar to those derived from the CBO tables.
Census data on before-tax income, which are available for a longer time period, also depict the marked trend toward greater income disparities. The Census data show that from 1993 through 1995, the proportion of national before-tax income that the top 20 percent of households received as well as the proportion that the top five percent of households received were the highest proportions recorded since these data began being collected in 1967.(3) Meanwhile, the share of national before-tax income that the bottom 40 percent of households received was at the lowest level ever recorded. (Inclusion of in-kind benefits in these calculations would have only a small effect on these findings. This matter is discussed in the appendix.)
The disparities in income levels among families in different parts of the income spectrum are large.
The findings of this analysis of CBO data underscore the extent to which income has become concentrated in the United States. Federal Reserve Board and other studies show that the top fifth of families possesses an even larger of the national wealth than of the national income. In addition, these CBO data on after-tax income (as well as the Joint Tax Committee data on after-tax income cited above) reflect income after federal taxes are subtracted; they do not subtract state and local taxes. Since state and local taxes are generally regressive that is, low- and middle-income households pay a larger share of their income in these taxes than upper-income households do the distribution of after-tax income would be shown to be even more uneven if state and local taxes were taken into account.
These income trends since 1977 primarily reflect the effects of changes in the private economy. Earnings trends have diverged widely for different groups, with those on the higher rungs of the wage scale gaining substantially, and other workers receiving wages that have essentially been stagnant or have declined. Changes in technology and international trade, as well as the weakening of unions, are among the factors that appear to be driving these diverging paths.
During the late 1980s and early 1990s, there was a widespread view that government policies should not exacerbate the increasing income disparities that developments in the economy are causing. This view was reflected in both the 1990 and 1993 budget laws. In both acts, high-income families were asked to bear a larger proportion of the deficit-reduction burden than middle- and low-income families. Partly as a result, the share of national after-tax income that the top 20 percent of families received fell from 49.8 percent in 1992 to 49.3 percent in 1994. The share of after-tax income received by the wealthiest one percent of families fell from 12.1 percent in 1992 to 11.4 percent in 1994. (Their share of income before taxes rose from 1992 to 1994.) Even so, the shares of after-tax income that the top 20 percent and top one percent of the population received in 1994 were far above their shares in the late 1970s.
The new budget agreement signed into law on August 5, 1997 charts a distinctly different path from the 1990 and 1993 budget laws. Under the tax provisions of the just-enacted legislation, low- and moderate-income families would receive relatively little tax relief, after the increases in excise taxes are accounted for, while the wealthiest families would receive the largest boost.
An analysis by Citizens for Tax Justice estimates that the richest one percent of the population will receive 32.3 percent of the benefits from the tax cuts when the tax reductions are fully in effect. This is a larger share of the tax cuts than will go to the bottom 80 percent of the population.
The top 20 percent of households will ultimately receive 78 percent of the tax cut benefits under the budget agreement, the CTJ analysis estimates.
Logic Used by Some Defenders of High-Income Tax Cuts Suggests That The Wealthier High-Income Households Become, The More They Need Tax Relief
In defending their tax cut proposals, some Congressional leaders have argued that the reason the tax legislation provides the lion's share of its tax relief to high-income taxpayers is that these taxpayers pay the majority of federal taxes. However, as this analysis indicates, the principal reason that high-income taxpayers pay the majority of federal taxes is that they receive the majority of the national before-tax income.
Moreover, the growth in the share of the national income going to high-income families points to a problem with the logic used by these defenders of the tax legislation's distribution of the tax cuts. Their logic suggests that as the share of national income received by high-income families grows and thus, the share of federal tax payments borne by high-income families increases the need of these high-income families for tax relief grows commensurately. The richer those with the highest incomes become relative to the rest of the country, this logic suggests, the more they rather than other families need tax relief.
The tax provisions of the budget agreement consequently will accentuate the already-large disparities in the distribution of income. High-income families the one group whose average after-tax income has risen sharply since the 1970s will ultimately be the principal beneficiaries.
Income Distribution and In-Kind Benefits
The standard Census data on income and the CBO data analyzed here do not include the value of in-kind benefits. Since low- and moderate-income households receive more assistance from government in-kind benefits than high-income households do, these benefits moderate income disparities somewhat. The effect, however, is relatively modest.
This can be seen by examining various experimental measures of income the Census Bureau uses. These measures, which provide information back to 1979, incorporate several types of income not included in the official Census income data capital gains income, in-kind benefits, and the effects of federal income and payroll taxes, including the Earned Income Tax Credit.
Under all of these experimental measures, income disparities were wider in 1994 than in any other year since 1979, with the exception of 1986. Some measures of income disparities were wider in 1994 than in 1986, while others were narrower. The 1986 data are skewed at the top, however, because of a one-time jump in capital gains income, which reflected the "cashing in" of capital gains before higher capital gains tax rates took effect in 1987 as a result of the 1986 Tax Reform Act.
Also of note, the share of national resources that the bottom fifth of households receives does not increase dramatically when in-kind benefits are considered. Even when an expansive measurement of in-kind benefits that includes some valuation of Medicare and Medicaid benefits is used, the share of national income received by the bottom fifth of households rises by only 0.7 percentage points. Excluding Medicare and Medicaid, the share rises by 0.5 percentage points.
1. The CBO figures are based primarily on Census data on family incomes but reflect a fuller measure of income than Census data do. CBO also assigns families to different income quintiles in a somewhat different manner than the Census Bureau traditionally does. The Census Bureau groups families strictly by the amount of income they have, so that the 20 percent of families with the lowest incomes become the bottom fifth or quintile. CBO, on the other hand, accounts for the fact that larger families have greater income needs than smaller families. Accordingly, it adjusts each family's income according to the family's size before assigning the family to a quintile. This method accounts for the fact that a $20,000 income is far more ample for a single-person family than for, say, a family of five.
2. This gain in the share of after-tax income that the top fifth of the population received actually was concentrated among the top 10 percent. The share of after-tax income received by the next-to-the-top 10 percent of the population decreased from 1977 to 1994.
3. While the various Census indicators of income inequality were at record levels during this period, the shares of income that the top 20 percent and top five percent of households received were slightly lower in 1995 than in 1994. For example, the top fifth of households received 48.7 percent of before-tax income in 1995, compared to 49.1 percent in 1994. (These Census data are available through 1995.)
4. The second poorest fifth had average after-tax income of $16,540, while the average income of the next-to-the-top fifth was $37,226. Switching to before-tax income, the average figures are: bottom fifth, $7,650; second poorest fifth, $19,337; middle fifth, $31,905; next-to-the-top fifth, $47,989; top fifth, $112,984; and top one percent, $576,929.
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