In 2014, household income was unevenly distributed: Households at the top of the income distribution received significantly more income than households at the bottom of the distribution. According to CBO’s estimates:
- Average income among households in the lowest quintile (or fifth) of the income distribution was about $19,000 (see interactive graphic below).
- Average income among households in the highest quintile was about $281,000.
Furthermore, within the highest quintile, income was highly skewed toward the very top of the distribution: Average income among households in the bottom half of the highest quintile (the 81st to 90th percentiles) was about $151,000; average income among the 1.2 million households in the top 1 percent of the distribution was about $1.8 million.
Those amounts include social insurance benefits (such as benefits from Social Security and Medicare) but exclude the effects of governmental policies that directly affect the distribution of household income either through means-tested transfer programs or through the federal tax system. Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are designed to provide assistance to individuals and families with low income and few assets. They include benefits from government assistance programs such as Medicaid and the Children’s Health Insurance Program (CHIP), the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp program), and Supplemental Security Income (SSI). Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.
Means-tested transfers and federal taxes cause household incomes to be more evenly distributed. In 2014, those transfers and taxes:
- Increased income among households in the lowest quintile by $12,000 (or more than 60 percent), on average, to $31,000.
- Decreased income among households in the highest quintile by $74,000 (or more than 25 percent), on average, to $207,000.
CBO has analyzed the distribution of household income and federal taxes on a recurring basis for more than 30 years. For this report, the agency focused on the distribution of household income in 2014 because that is the most recent year for which relevant data were available when the analysis began. In addition, CBO assessed trends in household income, means-tested transfers, federal taxes, and income inequality over a 36-year period, beginning in 1979 and ending in 2014. An important distinction between this report and earlier ones is that it reflects significant changes to CBO’s methodology; those changes are described below.
How Did Means-Tested Transfers and Federal Taxes Affect the Distribution of Income in 2014?
Means-tested transfers and federal taxes are both progressive—that is, low-income households receive a larger share of their income as means-tested transfers than high-income households do, and high-income households pay a larger share of their income in federal taxes than low-income households do. Because of the progressive structure of those systems, the distribution of income after transfers and taxes was more even than the distribution of income before transfers and taxes. In 2014, those transfers and taxes boosted the lowest quintile’s share of total income by more than 3 percentage points. In contrast, among households in the highest quintile, the share of income after transfers and taxes was almost 7 percentage points lower than the share of income before transfers and taxes, CBO estimates.
In 2014, the average means-tested transfer rate among all households was about 5 percent, CBO estimates—that is, in total, means-tested transfers received by households were equal to 5 percent of all income before accounting for such transfers and federal taxes. The average rate, however, varied significantly by income group. Among households in the lowest quintile of the income distribution (ranked by income before transfers and taxes), the average means-tested transfer rate was about 64 percent; among households in the middle quintile the average rate was about 5 percent; and among households in the highest quintile the average rate was less than one-half of one percent. Although some households in the top 1 percent of the income distribution received some means-tested transfers in 2014, the average means-tested transfer rate among that income group was virtually zero.
Not all households receive means-tested transfers. As the rates imply, though, means-tested transfers went overwhelmingly to low-income households—almost half of such transfers went to households in the lowest income quintile and almost three-quarters to households in the lowest two quintiles.
In 2014, the average federal tax rate also varied significantly by income group. Among all households it was about 21 percent, CBO estimates—but among households in the lowest quintile, the average rate was about 2 percent; among households in the middle quintile it was 14 percent; and among households in the highest quintile it was about 27 percent. The average federal tax rate among households in the top 1 percent of the income distribution in 2014 was about 34 percent.
Although all households have some form of federal tax burden, high-income households pay a majority of federal taxes. Households in the highest income quintile, which received about 55 percent of all income, paid more than two-thirds of federal taxes in 2014. In contrast, households in the lowest quintile, which received about 4 percent of all income, paid less than one-half of one percent of federal taxes that year, CBO estimates.
Changes in the rules governing transfers and taxes had direct effects on the distribution of household income in 2014. The most significant effects resulted from implementation of several provisions of the Affordable Care Act (ACA). Together, CBO estimates, the provisions of the ACA that were in effect in 2014 boosted household income, on average, for those in the lowest quintiles, and reduced income for households in the top quintile—especially for households in the top 1 percent of the income distribution.
What Are the Trends in Household Income and Income Inequality?
According to the agency’s estimates, average household income before transfers and taxes was almost 60 percent higher in 2014 than it was in 1979 in real (inflation-adjusted) terms—an average growth rate of 1.3 percent per year. That growth, however, was not the same across the income spectrum. Income growth among households in the bottom 80 percent of the income distribution was less than half that overall growth rate—26 percent for households in the lowest quintile and 28 percent for households in the middle three quintiles. Meanwhile, among households in the highest quintile, average income in 2014 was 95 percent higher than it was in 1979. Because of those differences in cumulative growth rates, income inequality was greater in 2014 than it was in 1979 (see interactive graphic below).
From 1979 through 2014, for households in the lowest income quintile, cumulative growth in income after transfers and taxes was significantly greater than cumulative growth in income before transfers and taxes—69 percent versus 26 percent. That faster growth was attributable both to the expansion of means-tested transfers (especially Medicaid) and to a reduction in federal taxes—the latter largely the result of the expansion of refundable tax credits provided through the individual income tax.
The expansion of means-tested transfers further up the income scale and generally declining average federal tax rates in the middle three income quintiles (the 21st to 80th percentiles) had a similar effect: Cumulative growth in income after transfers and taxes was significantly larger for that group than cumulative growth in income before transfers and taxes—42 percent versus 28 percent.
In contrast, in the highest quintile, cumulative growth in income before and after transfers and taxes was similar—95 percent versus 97 percent. The top 1 percent of the income distribution experienced the largest cumulative growth in income after transfers and taxes. In 2014, real income after transfers and taxes for that income group was 228 percent greater than it was in 1979, CBO estimates.
Because of the redistributive nature of means-tested transfers and federal taxes, the degree of income inequality after transfers and taxes was lower than the degree of income inequality before transfers and taxes. Over the period examined, the extent to which redistributive fiscal policies reduced measures of income inequality was relatively stable.
How Do Current Estimates Differ From Those in Previous CBO Reports?
The estimates in this report reflect two significant changes to CBO’s methodology:
- Income groups are defined using a new measure of income, and
- Estimates of income from means-tested transfers have been improved.
In previous CBO reports on the distribution of household income, the primary income measure used to define income groups and calculate average federal tax rates was before-tax income. That income measure was equal to market income—labor income, business income, capital income (including realized capital gains), and other nongovernmental sources of income—plus government transfers. In those earlier reports, government transfers consisted of both social insurance benefits—Social Security and Medicare benefits, for example—and means-tested transfers—Medicaid and SNAP transfers, for example.
The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included, thus providing a basis for separately assessing the effects of those transfers on the distribution of household income.
CBO relies on household survey data for information on both the receipt and dollar value of means-tested transfers. However, household surveys generally do not capture the full extent to which means-tested transfers affect household income. Furthermore, over time, those survey data have become less representative of all the households that receive means-tested transfers. Therefore, for its estimates of income that households receive from the three largest sources of means-tested transfers—Medicaid and CHIP (considered together), SNAP, and SSI—CBO adjusted the survey data to address that shortcoming.
As a result of those changes, estimates of the distribution of and trends in household income and average federal tax rates presented in this report are different from what they would have been using the previous methodology. Consequently, the results in this report are not directly comparable with results presented in prior reports.