CBO: Projected Changes in the Distribution of Household Income, 2016 to 2021

The Congressional Budget Office has released its periodic study of the distribution of income in the US and its relation to taxes. The executive summary is as follows:

The Congressional Budget Office regularly analyzes the distribution of income in the United States and how that distribution has changed over time. Building on those past analyses, this report presents CBO’s projections of the distributions of household income, means-tested transfers, and federal taxes in 2021 (under current law and measured in 2016 dollars) and compares them with the actual distributions in 2016 (the most recent year for which data were available when this analysis was conducted).

  • Income. Adjusted for inflation, average household income before means- tested transfers and federal taxes increases for all income groups between 2016 and 2021 in CBO’s projections; the highest and lowest quintiles
    (or fifths) of the income distribution experience the largest percentage increases. Average household income after transfers and taxes also increases over the period, but that growth is more skewed toward higher-income households than growth in income before transfers and taxes.
  • Means-Tested Transfers. The ratio of means-tested transfers to income before taxes and transfers decreases between 2016 and 2021 in CBO’s projections. Lower-income households, which receive most means-tested transfers, experience the greatest percentage-point decreases in transfer rates. Those changes are largely attributable to income growth at the bottom of the distribution, which pushes some people’s income above the eligibility thresholds for transfers.
  • Federal Taxes. In CBO’s projections, all income groups’ average federal
    tax rates are lower in 2021 than they were in 2016; the largest percentage- point decreases are in the highest-income households’ rates. Income growth pushes more household income into higher tax brackets, thereby increasing average tax rates, but that effect is more than offset by reductions in taxes stemming from the 2017 tax act.
  • Income Inequality. Income before transfers and taxes is projected to be
    less evenly distributed in 2021 than it was in 2016. Together, means-tested transfers and federal taxes work to reduce income inequality. The reduction in inequality stemming from transfers and taxes is projected to be smaller in 2021 than it was in 2016.This analysis relies on comprehensive data on household income, taxes, and transfers in 2016. CBO projected that data forward to 2021 to be consistent with the baseline projections reported in An Update to the Budget and Economic Outlook: 2019 to 2029 (August 2019).

To see full report, click CBO: Projected Changes in the Distribution of Household Income, 2016 to 2021.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

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