The upward redistribution of income in the United States 1979 to 2007

from David Ruccio

If it wasn’t clear before it should be now: the distribution of income in the United States has become increasingly unequal over the course of the past three decades.

It is increasingly unequal based on “market incomes,” and it is only slightly less increasingly unequal after taking consideration transfers and taxes. The result in both cases is that the distribution of income in the United States has become grotesquely unequal. 

That’s the conclusion of the new study by the nonpartisan Congressional Budget Office [summary here and pdf here]. The study includes a set of basic facts and figures that should figure in every discussion of the origins of the current crisis as well as the current political debates concerning taxes, deficits, and much else.

It’s also a challenge to economists to either stop ignoring the conditions and consequences of the unequal distribution of income or to go beyond the facile invoking of “technology and globalization” as its causes—and to come up with a real analysis of how this increasingly unequal distribution of income created the conditions for the  crisis of 2007-08 as well as of the changing patterns of U.S. capitalism starting in the mid-1970s that led to concentration of income at the top.

Here, in short, is what we know.

First, for the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007 while, for others, income grew much less: 40 percent for the 60 percent of the population in the middle of the income scale, only 20 percent of the population with the lowest income. The result was that, between 2005 and 2007, the after-tax income received by the 20 percent of the population with the highest income exceeded the after-tax income of the remaining 80 percent.

Second, a large part of the explanation of why incomes became so unequally distributed between 1979 and 2007 was because of the increase in the concentration of “market income” (income measured before government transfers and taxes) in favor of higher-income households. In other words, such households’ share of market income was greater in 2007 than in 1979. Specifically, over that period, the highest income quintile’s share of market income increased from 50 percent to 60 percent. The share of market income for every other quintile declined.

Finally, while income transfers and taxes make the distribution of income slightly less unequal, the fact is, the equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979. That’s in part because the distribution of transfers shifted, moving away from households in the lower part of the income scale, and because the overall average federal tax rate fell by a small amount and the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes. As a result of those changes, the share of household income after transfers and federal taxes going to the highest income quintile grew from 43 percent in 1979 to 53 percent in 2007. The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007.

Those are the basic facts and figures about the increasingly unequal distribution of income—before and after taxes—in the United States between 1979 and 2007.

The next step is to analyze why the distribution of income became increasingly unequal and what its consequences are. I’ll be investigating and writing about those issues in the days and weeks ahead. I hope others will, too. . .