A deeper dive into the weeds of the CBO household income data

November 25th, 2014 at 6:57 am

Yesterday, I published a report by myself and Ben Spielberg analyzing the Congressional Budget Office’s comprehensive data series on household income. Here we dive a bit deeper into some of the weeds, expanding on some of our findings.

One motivation for our report was to correct the record of those who claim that the trend of increasing income inequality is significantly reduced when accounting for government taxes and transfers. In fact, as we show, between 1979 and 2011, inequality measured by the Gini coefficient rose 24% based solely on market outcomes and by 22% based on CBO’s comprehensive, post-tax and transfer income data.

Here we show that changes in pre- and post-tax income shares* – the percentage of total U.S. income held by different income groups – reveals a similar trend:

Change in CBO Income Shares

The “low” category in this figure represents the lowest before-tax income quintile, the “middle” category represents households between the 40th and 60th income percentiles, and the “high” category represents the top quintile. As with the Gini, the change in pre- and post-tax income shares are similar. The share of total income held by the poorest households fell by 1 percentage point on a pre-tax basis, and by 1.2 points on a post-tax basis. The share of income held by middle-class households fell by almost two percentage points on a pretax basis and by 1.4 percentage points post-tax.

Only within the top fifth of households do we see relative gains, and in fact, most of the increase in top quintile income shares has accrued to the richest subset of this group: the top 1%.

A second motivation of our report was to document the stagnation of middle-class earnings to households with children and the increased importance of transfer income to these families. We note, for example, that the increase in earnings to middle-income households with children was actually less than the increase in the dollar value of transfers.

To illustrate these points further, the graph below plots earnings (left axis) and transfer income (right axis) as a share of total after-tax income for middle quintile households with children.

Earnings and Transfer Share

Back in 1979, transfer income constituted only 5% of overall after-tax income for these families, and that share hardly grew in the deep recession of the early 1980s. By 2011, after climbing steeply in the recent downturn and continuing into the recovery (with Medicaid contributing the most in dollar terms), transfers constituted 13% of their overall income.

Earnings, on the other hand, used to account for almost all of the income for this group, but by 2011 accounted for barely three-fourths of their after-tax income. Our report shows that, depending on the method used to adjust earnings for the impact of inflation, they grew either 13% or 3% over this 32 year period. Either way, that’s stagnant growth in real earnings for middle-income families with kids.

To be clear, there’s nothing wrong and a lot right with transfers replacing lost earnings, especially in downturns. Tax cuts also helped offset middle quintile income losses. But this is not a reliable strategy by which to raise middle-class living standards for working families. For that, we must reconnect overall economic growth to paychecks, an effort that requires better policies, like those that comprise our full employment agenda. The CBO data highlight the nature of this problem and the urgency with which we must pursue the right solutions.

*CBO does not include households with negative income in their income quintile data, but CBO does include these households in their totals when calculating income shares. As a result, their official income share figures do not sum to 100%. CBO’s official figures tell the same story about post-tax inequality as our calculations, which force income shares to sum to 1 by excluding households with negative income from the total.

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5 comments in reply to "A deeper dive into the weeds of the CBO household income data"

  1. Tyler says:

    Low-income households would benefit greatly from a full payroll tax holiday.

    • smith says:

      Cutting taxes is a bad and inefficient way to try to stimulate the economy. Because there is still tremendous debt overhang (underwater mortgages, consumer debt, student debt) a significant portion of the cuts are not spent. The money that is spent doesn’t address current needs like infrastructure spending. It’s ok to add to the deficit, but the money should be used for critical needs like bridge repair and road construction while interest rates are still at historic lows. Cutting payroll tax is especially dubious given that there is an expected, albeit small and uncertain, shortfall expected 20 or 30 years hence. Cutting taxes in general, given the already historic low rates and expected need for greater revenue (for education, infrastructure, health care and basic research) in the future seems unwise, both from a economic and political viewpoint.

  2. smith says:

    I believe the change in income share from CBO data conflicts, and vastly underestimates the figures produced by Piketty, by around 100%. When Piketty figures what share of the pie you’re getting, he doesn’t include social security, because employees are not bargaining with employers each year over how much money is available to pay them in the form of social security payments. He does include dividends, because that is actually money taken from profits and not available for distribution to labor. He does include capital gains because one can easily see the buying and selling of something is the essence of economic activity whether fruit, shoes, widgets, securities, or real estate. No such qualitative similarity exists in the payment of pension and health benefits, government distribution of benefits or payment in kind to the poor, Not sure how employer payroll tax and imputed rent is treated.

    The point is that in discussing income distribution, a leading figure in the field comes to vastly different conclusions than the CBO, characterizing the income share gains of the 1% as significantly higher, double or more in fact.

    See page 4, figures are through 2011

  3. Brett says:

    Have you thought about asking Scott Winship to do an official back-and-forth written debate on this issue? It might be quite interesting.