Occupy CBO: A Misleading Report on Income Inequality

October 26, 2011

The Congressional Budget Office (CBO) has published an uncharacteristically misleading report on the 30-year trend of income inequality in the United States, based on the period 1979 to 2007. They conclude that over this period the distribution of income has grown more unequal, and that part of the reason is that federal taxes have become less redistributive. While we agree that the distribution of income has grown more unequal since 1979, recent data suggests there is no clear trend since the 1990s. We also demonstrate that federal taxes have become more, not less, redistributive over the last three decades.

First, the authors of the CBO report overstate their case by not including the most recent data, and conceal what is perhaps a dramatic reversal of the trend. The trend they speak of, i.e. towards income inequality, peaked in 2007 and has reversed ever since, based on the most recent IRS data. The first graph below shows that the share of total income attributable to the top 1 percent peaked in 2007 at 22.8 percent, and declined precipitously to 16.9 percent by 2009. This is because the recession hurt high income earners the most, since their income is derived largely from investments and business income. The trend towards greater concentrations of wealth occurred mainly in the 1980s and 1990s, and since then the incomes of the top 1 percent have fluctuated up and down with the economy. In fact, the data indicates that income is now more evenly distributed than it was under most of Clinton’s second term.

Second, it is completely wrong to claim that federal taxes have become less redistributive over this period. The CBO’s evidence is that the average effective tax rate has gone down, but that has nothing to do with the distribution of taxes paid, which is shown below in the second graph. From there you can see a very strong trend that continues throughout the last three decades, which is that the top 1 percent of earners pay an increasing share of the income tax burden. The recession has also upset this trend but to a lesser degree than the trend towards income inequality. In 2009, the share of total income taxes paid by the top 1 percent was 36.7 percent — higher than in any year prior to 2000, and double what it was in 1980. The main reason is that a record number, 42 percent, of tax-filers have a zero or negative tax liability, in large part because of the relentless growth of refundable tax credits such as the earned income tax credit and the child credit.

Follow David S. Logan @Loganomix

Follow William McBride @EconoWill



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