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CBO report on the distribution of household income

December 19, 2019

Topics: Quote of the Day

Congressional Budget Office, December 2019

Share of Total Income Received by Each Income Group

To assess the direct distributional effects of federal fiscal policies, CBO projected each quintile’s share of total income both before and after means-tested transfers and taxes. Income shares are one measure of income inequality: When the share of income received by the top income group grows, income inequality tends to rise. CBO’s projections reflect such a pattern:

  • The highest quintile’s share of income before transfers and taxes is projected to increase by 0.7 percentage points between 2016 and 2021, from 54.4 percent to 55.1 percent (see Figure 3 – at link).
  • Within that quintile, the growth of shares of total income before transfers and taxes varies in CBO’s projections. For example, for households in the 81st to 90th percentiles, the share decreases by 0.1 percentage points, from 14.9 percent to 14.8 percent. But for households in the top 1 percent, the share rises by 0.6 percentage points, from 15.8 percent to 16.4 percent.
  • By contrast, the share of income before taxes and transfers received by the other four quintiles does not grow. The middle three quintiles’ shares decline over the five-year period in CBO’s projections. The lowest quintile’s share remains roughly unchanged at 3.8 percent.

Because higher-income households receive a smaller share of their income in the form of transfers and pay a larger share of their income in taxes, shares of income after transfers and taxes are more evenly distributed than shares of income before transfers and taxes. Nevertheless, in CBO’s projections, the highest quintile’s share of income after transfers and taxes increases even more over the 2016–2021 period than its share of income before transfers and taxes:

  • The highest quintile’s share of income after transfers and taxes rises by 1.2 percentage points, from 47.6 percent in 2016 to 48.8 percent in 2021.
  • Most of that increase is attributable to households in the top 1 percent, whose share rises by 0.9 percentage points, from 12.5 percent to 13.4 percent.

By contrast, the share of income after transfers and taxes of each of the other quintiles declines over the period.

Projected Changes in Income Inequality

If the distributions of income, means-tested transfers, and federal taxes follow CBO’s projections, income inequality will be greater in 2021 than it was in 2016.

A standard composite measure of income inequality is the Gini coefficient, which summarizes an entire distribution in a single number that ranges from zero to one. A value of zero indicates complete equality (for example, if each household received the same amount of income), and a value of one indicates complete inequality (for example, if a single household received all the income). Thus, a Gini coefficient that increases over time indicates rising income inequality.

Income inequality as measured by the Gini coefficient increased from 1979 to 2016, and CBO projects that it will be higher in 2021. That increase reflects the accelerated growth of household income that is projected to occur at the top of the distribution. The Gini coefficient for income before taxes and transfers is projected to grow from 0.513 in 2016 to 0.521 in 2021—close to its previous peak, which was recorded in 2012 (see Figure 8 – at link).

The Gini coefficient can also be interpreted as a measure of one-half of the average difference in income between every pair of households in the population, divided by the average income of the total population. For example, the Gini coefficient of 0.513 for 2016 indicates that the average difference in income between pairs of households in that year was equal to 102.6 percent (twice 0.513) of average household income in 2016, or about $70,700 (adjusted to account for differences in household size). Similarly, the Gini coefficient of 0.521 projected for 2021 indicates that the average difference in income between pairs of households would equal 104.2 percent (twice 0.521) of average household income in 2021, or about $77,800 (in 2016 dollars).

In CBO’s projections, inequality increases from 2016 to 2021 even as income grows for all income groups, including those at the bottom of the distribution. That pattern is similar to the one observed during the economic expansion of the mid-1990s, when income grew for households at the bottom of the distribution after a long period of stagnation, while inequality increased because income at the top of the distribution grew more strongly. A similar pattern occurred during the expansion of the mid-2000s.

The Gini coefficient for income after transfers and taxes is lower than the coefficient for income before transfers and taxes because means-tested transfers and federal taxes in the United States are progressive. The degree to which means-tested transfers and federal taxes reduce income equality varies from year to year according to the size and progressivity of the tax and transfer systems. In CBO’s projections, the Gini coefficient for income after transfers and taxes is 0.437 in 2021—0.084 less than the Gini coefficient for income before transfers and taxes (see Figure 9 – at link). That reduction in inequality is smaller than the reduction in 2016, when means-tested transfers and federal taxes reduced the Gini coefficient by 0.090, from 0.513 to 0.423.

https://www.cbo.gov…


Comment:

By Don McCanne, M.D.

Because of our very high national health expenditures, low- and middle-income individuals and families are unable to afford their proportionate share of health care spending. Fortunately, because we are a wealthy nation, we should be able to pay for health care for everyone by using progressive financing.

The simplest and most equitable method would be to finance the system through progressive taxes, as would be the case with single payer Medicare for All. Since we don’t have such a system now we have had to rely on transfers through various government programs to help finance care for those cannot afford to pay their proportionate share on their own.

This report from the Congressional Budget Office shows how income is distributed amongst households, and it shows how taxes and transfers redistribute income. Then they project the changes they expect in income inequality.

Some important observations:

  • The highest quintile’s share of income after transfers and taxes increases even more over the 2016–2021 period than its share of income before transfers and taxes, with most of that going to households in the top 1 percent.
  • By contrast, the share of income after transfers and taxes of each of the other quintiles declines over the period.
  • Inequality increases from 2016 to 2021 even as income grows for all income groups, including those at the bottom of the distribution.
  • The reduction in the projected inequality in 2021 is smaller than the reduction in 2016.

We keep hearing that you can tax all of the income of the wealthy and still we wouldn’t have enough to pay for health care for everyone. Well, first of all, nobody proposes confiscatory taxes on the wealthy. But more importantly, we are already spending $3.8 trillion on health care, and that has been made possible partly because of taxes and transfers already in existence. The amount of additional funds that we will need under single payer Medicare for All is not that great because we will recover hundreds of billions of dollars currently wasted on our profound administrative excesses and on excessive profit margins, especially for pharmaceuticals. If additional funds are required, today’s report shows that we have plenty of leeway at the upper end of the income scale to tap more funds through progressive tax policies. These would be comparatively small adjustments in our tax system that would not in any way impact the lifestyles of the multi-millionaires and billionaires.

Even if we didn’t enact and implement a single payer Medicare for All program, the CBO report still shows that we need more tax policies to correct the excessive maldistribution of income that persists today. There are plenty of potential public programs that could benefit from those revenues, but single payer, improved Medicare for All should be very high on the list.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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