Worsening Inequality of Wealth and Incomes

SUMMARY

In October 2011, the Congressional Budget Office (CBO) released an analysis at the request of the Senate Committee on Finance. The analysis documents changes in household income distribution from 1979 to 2007. That analysis titled “Trends in the Distribution of Household Income notes that the share of average after-tax income for the top 20% gained, while the lower 80% declined seen in Summary Figure 2.

Further, within the top 20%, the share of after-tax income of the top 1% grew from less than 18% to over 30% of the top 20% income bracket. While actual incomes for all quintiles increased, only the share of total after-tax income of the top 1% increased. The 81-99% remained essentially flat while the lower 80% of all households declined over 28 years.  shares of market incomeSource: Trends in the Distribution of Household Income

However, this analysis uses another CBO table that further parses the top 1% household income earners into subgroups: 99.0-99.5%, 99.51-99.9%, 99.91-99.99% and .01%. While everyone in the top 1% did well, the higher the income, even greater the gain. The top 1% of 1% (1 in 10,000) showed after-tax income gains of nearly 800% since 1979. Compare that to the lowest 20% whose income grew by less than 16% over that same 28 years. Moreover, transfer payments boosted lower after-tax incomes. Without transfers, the lowest 20% showed declines in inflation adjusted dollars.

METHODOLOGY

As with any analysis, data requires definition. CBO begins with data from the IRS and the Census Bureau. CBO groups data, one of which is household income to consist of both cash and “other” income.

Cash income includes: wages, salaries, self-employment income, rents, taxable and non-taxable interest, dividends, realized capital gains, cash transfer payments like AFDC and Social Security receipts, retirement benefits plus taxes paid by businesses, corporate income taxes and employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes, and employees’ contributions to 401(K) retirement plans.

Other income includes: in-kind benefits from Medicare, Medicaid and employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance.

To derive after-tax income from pretax items above, CBO defines taxes to households to include:

  • Individual income taxes to those paying income taxes.
  • Payroll taxes to households paying those taxes directly or indirectly through their employers.
  • Corporate income taxes to household’s share of capital income.
  • Federal excise taxes to household’s consumption of the taxed good or service .

Initially, income adjustments favored lower-income groups but now Social Security benefits to an aging population are benefiting multiple levels. The net of all adjustments is to increase incomes of the lower groups. Without the various government programs, the inequality would be even worse] .

Below is the table from the CBO showing what income by household size move the household into the next higher income bracket. CBO applies factors based on household size. For a family of 3, income needs to be almost $140,000 to reach the top 20% bracket. Factors apply to the 5 quintiles, while the top 3 brackets: 10%, 5% and 1% are shown in italics using the same factors, though the formula may not hold at the highest levels. Potentially, a family of 3 would have to make almost $250,000 to reach the top 5% bracket.

income bracket threshold 

DISCUSSION

For the 28 years and the 7 tax brackets in the table above, the CBO has a lot of numbers to digest. This analysis offers an alternate approach by dynamically charting the data in moving trend lines from 1979 to 2007. Chart 2 tracks the growth in after-tax income for four groups.  The lowest 80% of all households are combined and shown in the lowest blue line. The other lines in rising order are the top 10%, 5% and 1% household income growth over the last 28 years. The sizes of the circles each year are proportional to the average after-tax of income for that income group.

As the chart clearly shows, whatever happens to the top 1% also affects the top 5% and top 10% as both of these income brackets include the 1% bracket. A different chart is needed to separate out the effect of higher incomes from each group.

Chart 2 – Top 10%   Click on chart for larger view

Top 10 percent

Chart 3 CBO further segregate the top 1% into four distinct groups: 99.0-99.5%, 99.5%-99.9%, 99.9-99.99, and the top.01% or just one in 10,000 households. The lowest blue line again represents the lower 80%. However, Chart 3’s vertical scale is two times Chart 2’s scale. While the top 1% had the highest average income by definition, the top 1% also had the greatest rate of increase –  275% since 1979.  

Chart 3 – Top 1%   Click on chart for larger view

top 1 percent 

What Chart 3 shows is that the inequality within the top 1% is similar to the inequality between the top 1% and the other 99%. Further, household after-tax incomes for the richest of the rich grew nearly 800% above 1979 averaging almost 35 million dollars by 2007. A remarkable performance indeed.

In the interest of transparency, breakdown of the 1% for the years 2006 and 2007 are extensions of trends from 4 earlier years, as the latest CBO subdivided data for the top 1% ended with 2005. However, the sum of the extended parts equals the 1% as a whole in which there was data for 2006 and 2007.

 For further analysis using these data, click on this link “Worsening Inequality of Wealth and Incomes” that also resides on this website.

LIVE ACTION OF AFTER-TAX INCOME GROWTH CHARTS

Real-time Dynamic Trends in After-tax Income – Top 10% & 1%

One can also click on the above link to follow changes through time in the above growth and income charts.

Click on chart for larger view of Dynamic Trends Chart

google trend start 

When the window first opens, it looks like the above chart (top 10%) as highlighted in the tab at bottom left. To see the 1% chart, click on the next tab at right. 

At the left margin near the bottom is the “GO” triangle icon to start the trend chart. All the circles begin at the lower left corner of the grid in 1979 with 1979=100.  The plotting then moves to the right through time. Percent increase over 1979 is reflected by the height of the circle. The size of the circle reflects the average after-tax income for that series.

In the middle right of the window are a set of check boxes. When cleared, only the current year “circles” show. When boxes are checked: each circle is retained, and connected by a line as in the first charts in this analysis.

The real issue is not just about an inequitable shift of income to the wealthy, but a shift to the extremely wealthy. Another issue is what the sources of income for the wealthy are. These are addressed in Trends in Income Sources.

One Response

  1. Like your thinking, and fully agree with your thoughts. Continue to write and to share with us your wonderful work.

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