New CBO Data Show Income Inequality Continues to Widen

The CBPP reports on inequality using new data from the CBO:

New CBO Data Show Income Inequality Continues to Widen: After-Tax-Income for Top 1 Percent Rose by $146,000 in 2004, By Arloc Sherman and Aviva Aron-Dine: The Congressional Budget Office recently released extensive data on household incomes for 2004.[1] CBO issues the most comprehensive and authoritative data available on the levels of and changes in incomes and taxes for different income groups, capturing trends at the very top of the income scale that are not shown in Census data.

The new CBO data document that income inequality continued to widen in 2004.  The average after-tax income of the richest one percent of households rose from $722,000 in 2003 to $868,000 in 2004, after adjusting for inflation, a one-year increase of nearly $146,000, or 20 percent.  This  increase was the largest increase in 15 years, measured both in percentage terms and in real dollars.[2]

In contrast, the income of the middle fifth of the population rose $1,700, or 3.6 percent, to $48,400 in 2004.  The income of the bottom fifth rose a scant $200 (or 1.4 percent) to $14,700.

The new data also highlight the degree to which income gains over the past quarter-century have become increasingly concentrated at the top of the income scale.  Since 1979 — the first year for which the CBO date are available — income gains among high-income households have dwarfed those of middle- and low-income households.  Over this 25-year period:

• The average after-tax income of the top one percent of the population nearly tripled, rising from $314,000 to nearly $868,000 — for a total increase of $554,000, or 176 percent.  (Figures throughout this paper were adjusted by CBO for inflation and are presented in 2004 dollars.)

• By contrast, the average after-tax income of the middle fifth of the population rose a relatively modest 21 percent, or $8,500, reaching $48,400 in 2004.

• The average after-tax income of the poorest fifth of the population rose just 6 percent, or $800, over the past 25 years, reaching $14,700 in 2004.[3]

Because incomes grew much faster among the most affluent, this group’s share of the total national income also increased.

• The top one percent of the population received 14.0 percent of the national after-tax income in 2004, nearly double its 7.5 percent share in 1979.  (Each percentage point of after-tax income is equivalent to $71 billion in 2004 dollars.)

• In contrast, the middle fifth of the population, which has 20 times more people in it, received 15.0 percent of the national after-tax income in 2004, down from 16.5 percent in 1979.  The bottom fifth received 4.9 percent of the income in 2004, down from 6.8 percent in 1979.

Income is now more concentrated at the top of the income spectrum than in all but two years since the mid-1930s. This conclusion is reached by examining the CBO data in conjunction with data from a ground-breaking historical analysis of pre-tax income distribution trends published in a leading economics journal.[4] When viewed together, the studies indicate that the top one percent of households now receive a larger share of the national pre-tax income than at any time since 1937, except for the years 1999 and 2000.

Average After-Tax Income by Income Group (in 2004 dollars)
Income Category	1979	2004	Percent Change 1979-2004	Dollar Change 1979-2004
Lowest fifth	$13,900	$14,700	6%	$800
Second fifth	28,000	32,700	17%	4,700
Middle fifth	39,900	48,400	21%	8,500
Fourth fifth	52,300	67,600	29%	15,300
Top fifth	92,100	155,200	69%	63,100
Top 1 Percent	314,000	867,800	176%	553,800
Source: Congressional Budget Office, Effective Federal Tax Rates:  1979-2004, December 2006.

Income Gaps Widened in 2004

The CBO data show that gaps in income inequality widened significantly between 2003 and 2004.  The share of after-tax income going to the top one percent rose from 12.2 percent in 2003 to 14.0 percent in 2004, an increase of 1.8 percentage points.  As noted above, this amounts to $146,000  per household in the top one percent, equivalent to an additional $128 billion in income for the top one percent as a whole.  This is the largest one-year increase in the share of income going to the top one percent in 15 years.  The CBO data go back to 1979.[5], [6]

Change in Real Average After-Tax Income, 2003 to 2004 (in 2004 dollars)
Income Category	Dollar Change	Percent Change
Lowest fifth	$200	+1.4%
Second fifth	900	+2.8%
Middle fifth	1,700	+3.6%
Fourth fifth	2,000	+3.0%
Top fifth	11,600	+8.1%
Top 1 Percent	145,500	+20.1%
Source: Congressional Budget Office, Effective Federal Tax Rates:  1979-2004, December 2006.

The growing concentration of income at the top continues a long-term trend.  Income concentration grew steadily during the latter half of the 1990s, and peaked in 2000, a year that the stock market hit a record high.  From 2000 to 2002, income became less concentrated at the very top, partially due to the drop in the stock market; after-tax incomes fell from 2000 to 2002 for most income groups, but declined the most for the top one percent.  In 2003 and 2004, however, the long-term trend toward growing income inequality returned. ...