Dec 14, 2024 Story by: Publisher
From the post-World War II era to the 1970s, the nation experienced robust economic growth and widespread prosperity. Incomes rose quickly and evenly across different income groups, roughly doubling in real terms during this time. The income gap, while present, remained relatively stable.
However, the 1970s marked a turning point. Economic growth decelerated, and income disparity widened. Households in the middle and lower income brackets saw limited growth in earnings, whereas those at the top continued to amass wealth at a much faster pace. By the 21st century, income concentration at the top reached levels reminiscent of the “Roaring Twenties.” While recent years have shown stronger wage growth for lower-income workers, it hasn’t significantly altered the overall trend since the 1970s.
Wealth, which encompasses a household’s assets minus its debts, remains even more concentrated than income. Federal Reserve data highlights that the bottom 50% of U.S. households hold less than 4% of the nation’s wealth, whereas the top 10% control over two-thirds. This wealth disparity has grown over the past 35 years.
Racial and ethnic inequities in both income and wealth persist at levels similar to those from 50 years ago, with wealth gaps being even more pronounced. Despite these disparities, government assistance has led to some progress in reducing poverty over the last five decades.
Data from various sources paint a comprehensive picture of this trajectory: robust growth and shared prosperity in the postwar period, followed by slower growth and rising inequality since the 1970s. These data sources provide slightly different insights, but together, they offer valuable context for understanding these economic shifts.
Census and IRS Data: Insights into Income Trends
The Census Bureau’s Current Population Survey (CPS) and the IRS’s Statistics of Income (SOI) are the primary sources of household income data. The Census Bureau releases annual reports based on CPS data, while the IRS provides insights through its SOI reports derived from tax returns. The Federal Reserve also gathers income data through its triennial Survey of Consumer Finances (SCF), a critical resource for wealth analysis.
Each agency publishes detailed statistics and provides public-use data for further research. The Congressional Budget Office (CBO) combines CPS and SOI data to analyze income distribution before and after taxes, offering a more comprehensive view since 1979. Renowned economists like Thomas Piketty and Emmanuel Saez have utilized SOI data to study income and wealth concentration trends as far back as 1913.
Key Concepts in Income Measurement
Census Money Income
The Census Bureau’s Annual Social and Economic Supplement (ASEC) collects detailed data on household income, including earnings, Social Security, and non-cash benefits like SNAP and Medicare. The reported “money income” does not account for taxes and is presented at the household level. However, this measure doesn’t adjust for household size, which many analysts argue is essential for accurate comparisons.
Income Tax Data
The IRS’s SOI data includes income reported on tax returns, covering items like capital gains, which are often missing in survey data. While tax data provide a more accurate picture of high-income households, they exclude non-filers and non-cash benefits, limiting their representation of low-income groups.
Comprehensive Analyses by CBO
The CBO integrates CPS and SOI data to produce detailed reports on income distribution. It employs various measures of income, including:
- Market Income: Earnings from wages, investments, and private pensions.
- Income Before Transfers and Taxes: Market income plus social insurance benefits like Social Security.
- Income After Transfers and Taxes: Adds government assistance benefits and tax credits while subtracting taxes.
By adjusting for household size and ranking households by income before transfers and taxes, the CBO offers nuanced insights into income inequality trends.
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Broad Trends in Income Inequality
Over the past 11 decades, no single data source has offered a complete picture of income inequality, as each has unique strengths and limitations. Ideally, a thorough analysis would examine a broad measure of income over time, compare income before and after taxes and transfers, and account for shifts in household size and structure.
The Congressional Budget Office (CBO) provides data meeting many of these criteria, but its records only date back to 1979 and can be influenced by methodological changes. Historical data on family income from the Census and Piketty-Saez’s top-income concentration studies span a longer period but rely on less inclusive income metrics and overlook household size adjustments. Comprehensive income data, as compiled by Piketty, Saez, and Zucman, address some gaps but introduce complexities due to the numerous assumptions made.
The Decline of Shared Prosperity
From the late 1940s to the early 1970s, family incomes grew at similar rates across all income levels, according to Census data. Real family income nearly doubled for those at the 95th percentile, the median, and the 20th percentile during this period. However, the 1970s marked the beginning of widening income disparities, with those at the top earning significantly more than middle- and lower-income households.
Household income data, available since 1967, mirrors this trend of increasing inequality and stagnant growth for median and lower-income groups after economic peaks in 1999 and 2007. Despite recent signs of narrowing wage gaps from 2019 to 2023, these changes have yet to reverse the long-term concentration of household income.
Persistent Racial and Ethnic Income Disparities
Census data reveal that racial and ethnic income gaps remain deeply entrenched. Although median household income rose by 4% in 2023 (adjusted for inflation) and hit an all-time high for Black households, income disparities persist. Black households earned a median income that was 63% of white households’ in 2023, a modest improvement from 58% in 1972. Similarly, Latino households’ median income was 74% of white households’, unchanged since 1972.
For American Indian and Alaska Native (AIAN) households, median income stood at 69% of white households in 2023, consistent with levels reported in 2002. Meanwhile, Asian households reported a median income exceeding white households’ by 25%.
Rising Inequality Since the 1970s
Census family income data illustrate a sharp departure from the shared prosperity of earlier decades, as income inequality surged in the 1970s. Using CBO data, we can analyze trends in comprehensive income measures since 1979, both pre-and post-taxation and transfers.
Between 1979 and 2007, average post-tax income quadrupled for the top 1% of households, while growth for middle- and low-income groups was significantly smaller. Despite gains in the bottom quintile, methodological revisions in CBO data—including adjustments to government-provided health insurance valuations—may exaggerate the improvement in living standards for this group.
The Role of Taxes and Transfers
Transfers and taxes play a progressive role in reducing inequality. According to CBO data, in 2021, the top 20% of households held a smaller share of total income post-taxation and transfers, while the bottom 80% saw their share increase. Nevertheless, income remains highly concentrated, with the top 1% receiving 21% of pre-transfer income and 17% post-transfer income, far exceeding their population share.
CBO’s analysis indicates that the temporary COVID-19 relief measures in 2020 and 2021, such as expanded unemployment benefits and the American Rescue Plan’s Child Tax Credit, significantly reduced inequality. However, without these policies, the reduction in inequality would have resembled levels from prior decades.
Income Concentration Returns to 1920s Levels
Historical data from Piketty and Saez highlight a dramatic rise in income concentration since the 1970s, reaching levels last observed in the 1920s. This trend, which primarily benefits the top 0.5%, reversed earlier declines in top-income shares seen from the 1930s through the early 1970s.
Economic disruptions like the dot-com bubble and the 2008 financial crisis temporarily interrupted this upward trajectory. However, top incomes resumed growth after 2009, and by 2022, income shares for the wealthiest remained higher than in any pre-pandemic year since 1928.
Wealth Distribution: Greater Concentration
While income represents a yearly flow, wealth—net assets minus liabilities—is even more concentrated. Data from the Federal Reserve’s Survey of Consumer Finances (SCF), dating back to 1983, show a sharp rise in wealth concentration since the 1980s. SCF, which includes an oversample of wealthy households, offers unparalleled insights into wealth distribution but lacks the comprehensive income distribution data provided by other sources.
Wealth Is More Concentrated Than Income
There is a significant overlap between the wealthiest 1% of income earners and those with the highest wealth, but they are not identical groups.
Wealth Is Even More Concentrated Than Income
Wealth is distributed even less evenly than income. According to the SCF data, in 2022, households in the top 1% of the income distribution accounted for roughly 20% of all income, whereas the top 1% of households by wealth held over one-third of all wealth. Similarly, the top 10% of income earners received just over half of all income, while the top 10% of wealth holders controlled nearly 75% of all wealth.
Wealth Is Highly Concentrated by Race
Racial disparities in wealth are even greater than in income, reflecting the cumulative effects of historical and current discrimination in employment, education, and other areas. SCF data from 2022 reveal the following:
– The median net worth of Black households was only 16% of white households’ median net worth, while Hispanic households’ median net worth was 22% of white households’. By contrast, Black and Hispanic households’ median incomes were 57% and 58% of white households’, respectively.
– In dollar terms, the median net worth was $44,900 for Black households, $61,600 for Hispanic households, and $285,000 for white households.
Among the wealthiest households, the disparities are even more pronounced. The 90th percentile of Black households held a net worth of $517,000, while Hispanic households at this level held $518,000. White households in the 90th percentile, however, had a net worth exceeding $2.5 million—nearly five times more than Black and Hispanic households.
Furthermore, many households have minimal or negative net worth. At the 10th percentile, Black households had a median net worth of negative $11,400, indicating debt. Hispanic households at the same level had a median net worth of $210, while white households held $5,500.
This unequal distribution means that the wealthiest 10% of white households (those with a net worth of $2.5 million or more) collectively own 61% of U.S. wealth. The remaining 90% of white households own 24%, while all households of color—comprising 33% of all households—own just 14%.
Least Wealthy Half of Households Hold a Tiny Share of Wealth
The Federal Reserve’s distributional financial accounts show the stark disparities in wealth distribution. These accounts integrate SCF data with quarterly economic data, providing a detailed breakdown of wealth shares. As of 2022, households in the bottom 50% held no more than 4% of total wealth, while the top 10% controlled over two-thirds. Wealth concentration at the top has increased significantly since 1989.
Wealth Has Become More Concentrated at the Very Top Since the 1970s
While Federal Reserve data provide valuable insights, they cover a shorter time frame. Emmanuel Saez and Gabriel Zucman’s research, using tax return data to infer wealth distribution, extends back to 1913. Their findings reveal a decline in wealth concentration from the late 1920s to the 1970s, followed by a marked increase driven by the growing share of wealth held by the top 0.5%.
Poverty
The Official Poverty Measure
The official U.S. poverty measure, developed in the 1960s, defines poverty based on family income thresholds adjusted annually for inflation. For example, in 2023, the threshold for a family of four (two adults and two children) was $30,900. Individuals with family incomes below these thresholds are classified as living in poverty.
While poverty rates dropped significantly between 1959 and 1969, they have remained relatively stagnant since then, apart from economic fluctuations. However, the official measure has limitations, as it excludes non-cash benefits (like SNAP or housing vouchers) and tax credits (like the EITC and Child Tax Credit).
Alternatives to the Official Poverty Measure
Over time, researchers have identified issues with the official poverty measure. Following a 1995 National Academy of Sciences (NAS) report, alternative measures were explored, leading to the development of the Supplemental Poverty Measure (SPM) in 2011. The SPM accounts for non-cash benefits, tax credits, and necessary expenses like childcare and medical costs. It also adjusts thresholds based on local housing costs and societal changes in basic needs.
Efforts to refine poverty measures continue. In 2023, the National Academies of Sciences, Engineering, and Medicine recommended incorporating healthcare and childcare as essential needs into the SPM.
Long-Term Poverty Trends
Excluding non-cash benefits and tax credits from the official poverty measure obscures progress in reducing poverty. Using an “anchored” version of the SPM, which adjusts thresholds for inflation, Columbia University researchers found that government assistance programs reduced the poverty rate from 29.7% in 1967 to 12.9% in 2023.
Both anchored and relative SPM measures show that poverty reached a historic low in 2021, driven by pandemic-related relief measures, before rising in 2022. These measures illustrate greater progress in reducing poverty since the 1960s compared to the official poverty rate.
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Trends in Poverty and Deep Poverty Show Divergent Patterns
Analyzing income trends among individuals living below the poverty line offers insights that traditional poverty data may overlook, providing a more nuanced view of economic conditions for those with the least income. For instance, while the poverty rate may decrease, deep poverty — defined as the proportion of individuals with incomes below half the poverty line — can still rise.
A CBPP analysis revealed that in the decade following significant policy changes to public cash assistance in the mid-1990s, the percentage of children in single-mother households below the poverty line declined, but the share living in deep poverty increased. These policy changes reduced the accessibility of programs like SNAP and cash assistance under Temporary Assistance for Needy Families (TANF) for the poorest families. At the same time, tax credits were expanded for low- and moderate-income families with modest earnings. Renowned academic experts noted that government assistance shifted focus during this period, prioritizing children in families with slightly higher incomes over those with the least.
Evolving CBO Methodologies
The Congressional Budget Office (CBO) made several significant adjustments to its methods for analyzing household income and tax distribution between 2001 and 2012. Initially, it ranked households and calculated average federal tax rates using “before-tax income,” which included both market income and a wide array of government transfers, such as Social Security, Medicare, unemployment benefits, SNAP, Medicaid, and TANF. After-tax income was derived by subtracting federal taxes from this measure.
However, in its 2012 analysis (spanning 1979–2009), the CBO introduced three major methodological changes. First, it adjusted how corporate income tax burdens are allocated, assigning 25% to workers and 75% to capital owners, instead of the previous assumption that capital owners bore the entire burden. Second, it revised the valuation of government-provided health insurance, switching from a capped method to one based on the government’s average cost of providing coverage. This adjustment significantly increased the measured income of many low-income households without altering the cash available for other needs. Lastly, it replaced the Consumer Price Index (CPI) with the Personal Consumption Expenditures (PCE) price index for calculating inflation-adjusted income, which generally reflects lower inflation rates and faster real income growth.
In 2018, another methodological overhaul occurred. The CBO began ranking households using “income before transfers and taxes,” which includes market income, social insurance benefits, cash income, certain tax-exempt earnings, and estimated in-kind benefits such as employer-paid health insurance. This shift moved some seniors with substantial Medicaid benefits into the lowest income quintile, as means-tested entitlements like Medicaid are not included under this sorting method.
Additionally, the CBO introduced a new metric, “income after transfers and taxes,” which builds upon after-tax income by adding means-tested transfers like Medicaid and SNAP. The previous ranking method, based on after-tax income, was effective for evaluating federal tax impacts. However, with the growing significance of means-tested transfers, this updated approach allows for a more comprehensive analysis of both taxes and transfers.
The combined effects of these changes, particularly the 2012 revision concerning government-provided health insurance, have markedly influenced income trends for the lowest-income households. For example, between 1979 and 2019 (pre-pandemic), excluding Medicaid and CHIP from income calculations would reduce estimated income growth for the bottom fifth of households from 97% to 53%, as measured by CBO’s preferred metric of income after transfers and taxes. Source: CBPP
