Charting the Latest CBO Data on Incomes, Taxes, and Inequality

By Scott Lincicome and Ilana Blumsack of Cato.

"The Congressional Budget Office (CBO) has just released its annual report on trends in U.S. household incomes, government transfers, and federal taxes between 1979 and 2018 (the last year for which data are available). As discussed last year when the CBO data came out, the office’s report is one of the more comprehensive assessments of Americans’ actual financial position – as opposed to, say, just the topline of their paychecks – because it accounts for most of the taxes and subsidies that add to or subtract from our “market incomes.” And, just like last year, these data tend to puncture several persistent myths regarding taxes, middle class incomes, wealth redistribution and transfers, and income inequality in the United States. This post will provide some of the highlights.

The Rich Are Paying Their “Fair Share”

For starters, the CBO data again show that the rich in the United States are paying a lot of taxes – even in 2018 after the Tax Cuts and Jobs Act took effect. In particular, the total amounts of annual federal taxes paid by the top quintile and the top 1 percent have basically doubled and tripled, respectively, since 1979 (adjusting for inflation). By contrast, the tax burdens of middle-income Americans (the second through fourth quintiles) have largely remained steady, and the federal taxes on the poorest Americans (the lowest quintile) have basically disappeared:

(Click on an income group to highlight or exclude it.)

Government Transfers Remain Historically Elevated

Next, the CBO data again show that, while the average amount of means-tested transfers has increased for every income group since 1979, it has exploded for low-income Americans and driven their gains in total transfer receipts:

On the other hand, low-income Americans’ share of total means-tested transfers actually declined between 1979 and 2018 because of a significant increase in such subsidies – especially Medicaid benefits – going to the middle class.

Incomes Are Increasing, But Probably Not How You Think

Third, the 2021 CBO report finds that 2018 continued the streak of increasing median household incomes and average household incomes by quintile – before and after taxes and transfers:

Figure 6 shows that taxes and transfers have substantially increased both incomes and income growth for the poorest Americans and the middle class.

Also noteworthy is the fact that, as economist Donald Schneider first pointed out on Twitter, pre-tax/transfer incomes haven’t increased for many of the richest U.S. households in recent years. In particular, Figure 7 shows that market incomes of households with children have increased for each income group in the bottom 99% percentile but actually declined a bit for the top 1 percent, while Figure 8 shows that this latter group’s significant income gains since the late 1970s came during the 1980s and 1990s.

These data again buck oft-repeated claims of the “rich getting richer” in recent years at other Americans’ expense.

And speaking of inequality…

About that “Inequality Crisis”

The CBO report also shows, as noted in a recent column, how dire claims of skyrocketing inequality are overblown and how the current U.S. tax and transfer system affects these trends. When accounting for taxes and transfers, for example, the gap between rich and poor narrows significantly and was actually smaller in 2018 than it was several other times in the 1980s, 1990s, and 2000s:

And the share of post-tax/transfer income held by the top 1% in recent years (a little more than 13 percent) is only slightly higher than it was in 1986 (12.9%) and much lower than it was right before the Great Recession:

Furthermore, even the one percent's share of market incomes has been essentially flat since 1999 (at around 18 percent, with plenty of ups and downs in between). These data thus refute current demands for new and expansive government programs to fix a supposedly recent and troubling rise in inequality (regardless of whether one thinks rising income inequality is even a problem to be fixed).

* * *

As discussed last year and elsewhere, one could (and probably should) question a system in which government payments represent a large and increasing share of Americans’ income, as well as how these payments affect Americans’ life and work decisions. And certainly, there are many tax, trade, and regulatory policies that the federal and state/local governments should adopt to improve American living standards. Still, the new CBO data are - just like last year - an important counter to prevalent calls for an even more progressive distribution of taxes and transfers to combat an “unfair” tax code, “stagnant” incomes, and “skyrocketing” inequality.

It's just not reality."