60

70

30

50

20

10

40

0

Shares of Income After Transfers and Federal Taxes, 1979 and 2007

1979

2007

Lowest

Quintile

Middle

Quintile

Second

Quintile

Fourth

Quintile

Highest 

Quintile

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Trends in the 

Distribution of 

Household Income 

Between 

1979 and 2007

OCTOBER 2011
Pub. No. 4031
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Trends in the Distribution of 

Household Income Between 

1979 and 2007

October 2011
CBO

Notes and Definitions

Numbers in the text, tables, and figures may not add up to totals because of rounding.

Unless otherwise indicated, all years referred to in this study are calendar years.

Some of the figures have shaded vertical bars that indicate the duration of recessions. (A recession extends from the peak of a business cycle to its trough.)

Income is adjusted for inflation using the Bureau of Labor Statistics’ research series of the 

consumer price index for all urban consumers (CPI-U-RS). 

Income is adjusted for differences in household size—specifically, by dividing income by the 

square root of a household’s size. (A household consists of the people who share a housing 

unit, regardless of their relationships.)

Income categories are defined by ranking all households by their size-adjusted income. Percentiles (hundredths) and quintiles (fifths) contain equal numbers of people. Households with 

negative income are excluded from the lowest income category but are included in totals.

A household with children has at least one member under age 18. An elderly childless 

household is headed by a person age 65 or older with no member under age 18. A nonelderly 

childless household is one headed by a person under age 65 and with no member under 

age 18.

Market income includes the following components:

• Labor income, which includes cash wages and salaries (including those allocated by 

employees to 401(k) plans), employer-paid health insurance premiums, and the 

employer’s share of Social Security, Medicare, and federal unemployment insurance 

payroll taxes.

• Business income, which includes net income from businesses and farms operated solely 

by their owners, partnership income, and income from S corporations.

• Capital gains, which are profits realized from the sale of assets. Increases in the value of 

assets that have not been realized through sales are not included in market income.

• Capital income (excluding capital gains) comprises taxable and tax-exempt interest, 

dividends paid by corporations (but not dividends from S corporations, which are 

considered part of business income), positive rental income, and corporate income 

taxes. Capital gains are considered separately and not included in this measure of capital 

income. The Congressional Budget Office assumes in this analysis that corporate 

income taxes are borne by owners of capital in proportion to their income from capital; 

therefore, the amount of the corporate tax is included in household income measured 

before taxes.

• Other income, which includes income received in retirement for past services and any 

other sources of income.
CBO

NOTES AND DEFINITIONS III

Transfer income includes cash payments from Social Security, unemployment insurance, Supplemental Security Income, Aid to Families with Dependent Children, Temporary Assistance 

for Needy Families, veterans’ benefits, workers’ compensation, and state and local government 

assistance programs, as well as the value of in-kind benefits, including food stamps, school 

lunches and breakfasts, housing assistance, energy assistance, Medicare, Medicaid, and the 

Children’s Health Insurance Program (health benefits are measured as the fungible value, a 

Census Bureau estimate of the value to recipients).

After-tax income is equal to market income plus transfer income minus federal taxes paid. In 

assessing the impact of various taxes, individual income taxes are allocated directly to households paying those taxes. Social insurance, or payroll, taxes are allocated to households paying 

those taxes directly or paying them indirectly through their employers. Corporate income 

taxes are allocated to households according to their share of capital income. Federal excise 

taxes are allocated to households according to their consumption of the taxed good or service. 

Average tax rates are calculated by dividing federal taxes paid by the sum of market income 

and transfer income. Negative tax rates result when refundable tax credits, such as the earned 

income and child tax credits, exceed the other taxes owed by people in an income group. 

(Refundable tax credits are not limited to the amount of income tax owed before they are 

applied.)

The Gini index is a summary measure of income inequality based on the relationship between 

shares of income and shares of the population. It ranges in value from zero to one, with zero 

indicating complete equality (for example, if each fifth of the population, ranked by income, 

received one-fifth of total income) and one indicating complete inequality (for example, if one 

household received all the income). A Gini index that increases over time indicates rising 

income dispersion. 

A concentration index is a measure similar to a Gini coefficient and is used in this study to 

express the inequality of market income from different sources. The index differs from a Gini 

index for an income source because in calculating the concentration index, households are 

ranked by total market income rather than by income from that source, as they would be in 

calculating the Gini index for that income source.
Preface

CBO

This Congressional Budget Office (CBO) study—prepared at the request of the Chairman and former Ranking Member of the Senate Committee on Finance—documents changes 

in the distribution of household income between 1979 and 2007. CBO’s analysis examines 

the distribution of household income before and after government transfers and federal taxes, 

and it reports the contribution of various income components (such as wages and salaries, 

capital income, and business income) to the distribution of market income. The study presents information on trends in the distribution of income for all households combined and for 

households separated on the basis of age and the presence of children. In keeping with CBO’s 

mandate to provide objective, impartial analysis, this study makes no recommendations.

Edward Harris and Frank Sammartino of CBO’s Tax Analysis Division wrote the study. Greg 

Acs, Nabeel Alsalam, Mark Hadley, Jon Schwabish, and David Weiner, all of CBO, provided 

helpful comments, as did Sheldon Danziger of the University of Michigan and Tom DeLeire 

and Tim Smeeding of the University of Wisconsin-Madison. The assistance of external 

reviewers implies no responsibility for the final product, which rests solely with CBO.

Christine Bogusz edited the study, and Sherry Snyder proofread it. Jeanine Rees prepared the 

study for publication, and Maureen Costantino designed the cover. Monte Ruffin printed the 

initial copies, and Linda Schimmel coordinated the print distribution. The study is available 

on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

October 2011
Contents

CBO

Summary ix

Introduction 1

CBO’s Analysis 1

Increased Dispersion of Households’ After-Tax Income 2

Uneven Growth in After-Tax Income 2

The Resulting Shift in Income Shares 3

Increased Dispersion of Households’ Market Income 4

Measuring Income Dispersion 4

Comparison with Other Estimates 6

Why Did Market Income Become Less Equally Distributed? 7

Why Has the Distribution of Labor Income Grown More Unequal? 13

How Did the Distribution of Market Income Change for Different Types of 

Households? 15

Changes in Market Income for the Top 1 Percent of the Population 16

Composition of Income for the Top 1 Percent of the Population 16

What Explains the Rise in Income for the Top 1 Percent? 18

The Effect of Government Transfer Payments and Federal Taxes 19

Government Transfer Payments 20

Federal Taxes 24

Appendix A: Measuring Household Income 33

Appendix B: Inequality Indexes 39

Appendix C: The Effect of Health Insurance on the Distribution of Income 43
VI TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Tables

1. Sources of Change in the Gini Index for Market Income 13

A-1. Income Category Minimums, 1979 to 2007 35

B-1. Effect of Hypothetical Transfers on the Gini Index 40

C-1. Shares of Selected Income Measures, by Income Group, 1979 and 2007 45

C-2. Health Insurance as a Share of Market Income, by Income Group, 

1979 and 2007 46

Figures

S-1. Growth in Real After-Tax Income from 1979 to 2007 x

S-2. Shares of Market Income, 1979 and 2007 xi

S-3. Shares of Income After Transfers and Federal Taxes, 1979 and 2007 xiii

1. Cumulative Growth in Mean and Median Household After-Tax Income 2

2. Cumulative Growth in Average After-Tax Income, by Income Group 3

3. Share of Total After-Tax Income, by Income Group 6

4. Cumulative Growth in Mean and Median Household Market Income 6

5. Summary Measures of Market Income Inequality, With and Without 

Capital Gains 7

6. Concentration of Major Sources of Market Income, 1979 and 2007 11

7. Income Concentration, by Major Income Source 12

8. Summary Measures of Market Income Inequality for Different Types of 

Households 15

9. Summary Measures of Market Income Inequality, With and Without the 

Top 1 Percent of Households 16

10. Shares of Market Income, by Source, for the Top 1 Percent of Households 17

11. Summary Measures of Income Inequality, With and Without 

Transfers and Federal Taxes 20

12. Reduction in Income Inequality from Transfers and Federal Taxes 20

13. Transfers as a Percentage of Household Market Income 21

14. Share of Total Transfers, by Market Income Group 24

15. Share of Total Transfers, by Type of Household 24

16. Reduction in Income Inequality from Transfers for Different Types of 

Households 25
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 VII

CBO

17. Federal Taxes as a Percentage of Household Income Including Transfers 25

18. Federal Taxes as a Percentage of Household Income, by Income Group 26

19. Indexes of the Progressivity of Federal Taxes 28

20. Indexes of Federal Tax Progressivity Based on Equalization of Income 

Distribution for Different Types of Households 30

C-1. Effect of Health Insurance on Income Inequality Measures 47

Boxes

1. Measures of Economic Well-Being 4

2. Calculating and Interpreting the Gini Index 8

3. The Misreporting of Transfer Income 22

Figures (Continued)

CBO

Summary

From 1979 to 2007, real (inflation-adjusted) average 

household income, measured after government transfers 

and federal taxes, grew by 62 percent. During that period, 

the evolution of the nation’s economy and the tax and 

spending policies of the federal government and state and 

local governments had varying effects on households at 

different points in the income distribution: Income after 

transfers and federal taxes (denoted as after-tax income in 

this study) for households at the higher end of the 

income scale rose much more rapidly than income for 

households in the middle and at the lower end of the 

income scale.1

 In particular: 

 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 (see Summary 

Figure 1). 

 For others in the 20 percent of the population with 

the highest income (those in the 81st through 99th 

percentiles), average real after-tax household income 

grew by 65 percent over that period, much faster than 

it did for the remaining 80 percent of the population, 

but not nearly as fast as for the top 1 percent.

 For the 60 percent of the population in the middle of 

the income scale (the 21st through 80th percentiles), 

the growth in average real after-tax household income 

was just under 40 percent.

 For the 20 percent of the population with the lowest 

income, average real after-tax household income was 

about 18 percent higher in 2007 than it had been in 

1979. 

As a result of that uneven income growth, the distribution of after-tax household income in the United States 

was substantially more unequal in 2007 than in 1979: 

The share of income accruing to higher-income households increased, whereas the share accruing to other 

households declined. In fact, between 2005 and 2007, 

the after-tax income received by the 20 percent of the 

population with the highest income exceeded the aftertax income of the remaining 80 percent.

To assess trends in the distribution of household income, 

the Congressional Budget Office (CBO) examined the 

span from 1979 to 2007 because those endpoints allow 

comparisons between periods of similar overall economic 

activity (they were both years before recessions). The 

growth in average income for different groups over the 

1979–2007 period reflects a comparison of average 

income for those groups at different points in time; it 

does not reflect the experience of particular households. 

Individual households may have moved up or down the 

income scale if their income rose or fell more than the 

average for their initial group. Thus, the population with 

income in the lowest 20 percent in 2007 was not necessarily the same as the population in that category in 

1979.

Increased Concentration of Market 

Income

The major reason for the growing unevenness in the 

distribution of after-tax income was an increase in the 

concentration of market income (income measured 

1. For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality 

indexes, see “Notes and Definitions” at the beginning of this 

study. All measures of household income are adjusted to account 

for differences in household size. Appendix A provides a more 

detailed discussion of the methodology. 
X TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Summary Figure 1.

Growth in Real After-Tax Income from 1979 to 2007

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

before government transfers and taxes) in favor of higherincome households; that is, 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 (see Summary Figure 2). The share of market 

income for every other quintile declined. (Each quintile 

contains one-fifth of the population, ranked by adjusted 

household income.) In fact, the distribution of market 

income became more unequal almost continuously 

between 1979 and 2007 except during the recessions in 

1990–1991 and 2001. 

Two factors accounted for the changing distribution of 

market income. One was an increase in the concentration 

of each source of market income, which consists of labor 

income (such as cash wages and salaries and employerpaid health insurance premiums), business income, 

capital gains, capital income, and other income. All of 

those sources of market income were less evenly distributed in 2007 than they were in 1979. 

The other factor leading to an increased concentration of 

market income was a shift in the composition of that 

income. Labor income has been more evenly distributed 

than capital and business income, and both capital 

income and business income have been more evenly distributed than capital gains. Between 1979 and 2007, the 

share of income coming from capital gains and business 

income increased, while the share coming from labor 

income and capital income decreased. 

Those two factors were responsible in varying degrees for 

the increase in income concentration over different portions of the 1979–2007 period. In the early years of the 

period, market income concentration increased almost 

exclusively as a result of an increasing concentration of 

separate income sources. The increased concentration of 

labor income alone accounted for more than 90 percent 

of the increase in the concentration of market income 

in those years. In the middle years of the period, an 

increase in the concentration within each income source 

accounted for about one-half of the overall increase in 

market income concentration; a shift to moreconcentrated sources explains the other half. In the later 

years, an increase in the share of total income from more 

highly concentrated sources, in this case capital gains, 

accounted for about four-fifths of the total increase in 

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile 81st–99th Percentiles Top 1 Percent

0

50

100

150

200

250

300

Income Group
SUMMARY TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 XI

CBO

Summary Figure 2.

Shares of Market Income, 1979 and 2007

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

concentration. Over the 1979–2007 period as a whole, 

an increasing concentration of each source of market 

income was the more significant factor, accounting 

for four-fifths of the increase in market income 

concentration.

Income at the Very Top of the 

Distribution 

The rapid growth in average real household market 

income for the 1 percent of the population with the 

highest income was a major factor contributing to the 

growing inequality in the distribution of household 

income between 1979 and 2007. Average real household 

market income for the highest income group nearly tripled over that period, whereas market income increased 

by about 19 percent for a household at the midpoint of 

the income distribution. As a result of that uneven 

growth, the share of total market income received by the 

top 1 percent of the population more than doubled 

between 1979 and 2007, growing from about 10 percent 

to more than 20 percent. Without that growth at the top 

of the distribution, income inequality still would have 

increased, but not by nearly as much. The precise reasons 

for the rapid growth in income at the top are not well 

understood, though researchers have offered several 

potential rationales, including technical innovations that 

have changed the labor market for superstars (such as 

actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases 

in firms’ size and complexity, and the increasing scale of 

financial-sector activities. 

The composition of income for the 1 percent of the population with the highest income changed significantly 

from 1979 to 2007, as the shares from labor and business 

income increased and the share of income represented by 

capital income decreased. That pattern is consistent with 

a longer-term trend: Over the entire 20th century, labor 

income has become a larger share of income for highincome taxpayers, while capital income has declined as a 

share of their income. 

1979 2007 1979 2007 1979 2007 1979 2007 1979 2007

0

10

20

30

40

50

60

70

Income Group

Lowest

Quintile

Second

Quintile

Middle

Quintile

Fourth

Quintile

Highest

Quintile

81st–99th

Percentiles

Top 1 Percent
XII TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

The Role of Government Transfers and 

Federal Taxes

Although an increasing concentration of market income 

was the primary force behind growing inequality in the 

distribution of after-tax household income, shifts in 

government transfers (cash payments to individuals and 

estimates of the value of in-kind benefits) and federal 

taxes also contributed to that increase in inequality.2

CBO estimates that the dispersion of market income 

grew by about one-quarter between 1979 and 2007, 

while the dispersion of after-tax income grew by about 

one-third.3

This study assesses the effects of transfers and taxes on the 

distribution of household income by examining the differences in the dispersion of income for three types of 

income:

 Market income (before-transfer, before-tax income), 

 Market income plus government transfers (aftertransfer, before-tax income), and

 Market income plus government transfers minus 

federal taxes (after-transfer, after-federal-tax 

income)—called after-tax income in this study. 

A proportional transfer and tax system would leave the 

dispersion of after-tax income equal to the dispersion of 

market income. Transfers that are a decreasing percentage 

of market income as income rises (progressive transfers) 

cause after-tax income to be less concentrated than market income, as do taxes that are an increasing percentage 

of before-tax household income as income rises (progressive taxes).

Transfers and taxes can also affect households’ market 

income by creating incentives for people to change their 

behavior. If an additional dollar earned or saved leads to 

reductions in transfer payments or increases in taxes, then 

the after-tax return to working and saving is reduced, 

which may cause people to work or save less. However, 

those changes in transfers and taxes also reduce aftertransfer, after-tax income, which may cause people to 

work or save more. In this analysis, CBO did not adjust 

market income to account for those effects of transfers 

and taxes. 

Because government transfers and federal taxes are 

both progressive, the distribution of after-transfer, afterfederal-tax household income is more equal than is the 

distribution of market income. Specifically, the dispersion 

of after-tax income in 2007 was about four-fifths as large 

as the dispersion of market income. Of the difference in 

dispersion between market income and after-tax income, 

roughly 60 percent was attributable to transfers and 

roughly 40 percent was attributable to federal taxes. 

The equalizing effect of transfers and taxes on household 

income was smaller in 2007 than it had been in 1979. 

The equalizing effect of transfers depends on their size 

relative to market income and their distribution across 

the income scale. The size of transfer payments—as measured in this study—rose by a small amount between 

1979 and 2007. The distribution of transfers shifted, 

however, moving away from households in the lower part 

of the income scale. In 1979, households in the bottom 

quintile received more than 50 percent of transfer payments. In 2007, similar households received about 

35 percent of transfers. That shift reflects the growth in 

spending for programs focused on the elderly population 

(such as Social Security and Medicare), in which benefits 

are not limited to low-income households. As a result, 

government transfers reduced the dispersion of household income by less in 2007 than in 1979.

Likewise, the equalizing effect of federal taxes depends 

on both the amount of federal taxes relative to income 

(the average tax rate) and the distribution of taxes among 

households at different income levels. Over the 1979–

2007 period, the overall average federal tax rate fell by 

a small amount, the composition of federal revenues 

shifted away from progressive income taxes to lessprogressive payroll taxes, and income taxes became 

slightly more concentrated at the higher end of the 

income scale. The effect of the first two factors outweighed the effect of the third, reducing the extent to 

which taxes lessened the dispersion of household income.

2. This study does not include state and local taxes, an issue discussed in more detail in Appendix A.

3. In this study, CBO measured dispersion using the Gini index, 

which takes on the value of zero if income is equally distributed 

and increases as incomes become more unequal.
SUMMARY TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 XIII

CBO

Summary Figure 3.

Shares of Income After Transfers and Federal Taxes, 1979 and 2007

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

Increased Concentration of After-Tax 

Income

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 (see Summary Figure 3). 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.

The population in the lowest income quintile received 

about 7 percent of after-tax income in 1979; by 2007, 

their share of after-tax income had fallen to about 5 percent. The middle three income quintiles all saw their 

shares of after-tax income decline by 2 to 3 percentage 

points between 1979 and 2007.

1979 2007 1979 2007 1979 2007 1979 2007 1979 2007

0

10

20

30

40

50

60

70

Lowest

Quintile

Second

Quintile

Middle

Quintile

Fourth

Quintile

Highest

Quintile

Top 1 Percent

81st–99th

Percentiles

Income Group

CBO

Trends in the Distribution of Household Income 

Between 1979 and 2007

Introduction

This Congressional Budget Office (CBO) analysis finds 

that, over the past three decades, the distribution of 

income in the United States has become increasingly dispersed—in particular, the share of income accruing to 

higher-income households has increased, whereas the 

share accruing to other households has declined. Despite 

definitional and methodological differences, other analyses using data from tax returns or surveys have reached 

similar conclusions.1

The dispersion of household income rose almost continually throughout the nearly 30-year period spanning 1979 

through 2007 except during the 1990–1991 and 2001 

recessions. The recent turmoil in financial markets, the 

prolonged recession that began in December 2007, and 

the ongoing slow recovery may have caused a pause in 

that upward trend, but the present analysis does not 

extend beyond 2007.2

Other developed economies have experienced a similar 

long-term trend toward greater dispersion in household 

income. A recent report covering the 30 developed countries of the Organization for Economic Cooperation and 

Development (OECD) concluded, “Overall, over the 

entire period from the mid-1980s to the mid-2000s, the 

dominant pattern is one of a fairly widespread increase in 

inequality (in two-thirds of all countries) . . . The rises are 

stronger in Finland, Norway and Sweden (from a low 

base) as well as Germany, Italy, New Zealand and the 

United States (from a higher base).”3

The growing dispersion of household income over the 

past three decades follows a lengthy period in which 

income concentration was little changed. Economists 

Thomas Piketty and Emmanuel Saez used data from tax 

returns to examine income concentration in the United 

States over the past 90 years. They found that income 

concentration dropped dramatically following World 

War I and World War II, remained roughly unchanged 

for the next few decades, and then rose starting in 1975, 

reaching pre–World War I levels by 2000.4

CBO’s Analysis

In this analysis, CBO examines the trends in the distribution of household income from 1979 through 2007. 

Using data from the Internal Revenue Service (IRS) and 

survey data collected by the Census Bureau, CBO estimated income after government transfer payments and 

1. Arthur F. Jones Jr. and Daniel H. Weinberg, The Changing Shape 

of the Nation’s Income Distribution, 1974–1998, Current Population Reports, Series P60-204 (Bureau of the Census, June 2000); 

and Michael Strudler and others, Analysis of the Distribution of 

Income, Taxes, and Payroll Taxes via Cross Section and Panel Data, 

1979–2004 (Internal Revenue Service, Statistics of Income 

Division, 2006).

2. Tabulations of tax returns from the Internal Revenue Service 

show that high-income taxpayers had especially large declines in 

adjusted gross income between 2007 and 2009. However, evidence based solely on survey data from the Census Bureau shows 

some increase in income dispersion between 2007 and 2009. 

(See Internal Revenue Service, Statistics of Income—Individual 

Income Tax Returns, for 2007, 2008 and 2009; and U.S. Census 

Bureau, Current Population Survey, 1968 to 2010 Annual Social 

and Economic Supplements, “Selected Measures of Household 

Income Dispersion: 1967 to 2009,” www.census.gov/hhes/www/

income/data/historical/inequality/taba2.pdf.)

3. Organization for Economic Cooperation and Development, 

Growing Unequal? Income Distribution and Poverty in OECD 

Countries (2008).

4. Thomas Piketty and Emmanuel Saez, “Income Inequality in 

the United States, 1913–1998,” Quarterly Journal of Economics, 

vol. 118, no. 1 (February 2003), pp. 1–39.
2 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 1.

Cumulative Growth in Mean and 

Median Household After-Tax Income

(Percentage change in income since 1979, adjusted for 

inflation)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

federal taxes for a representative sample of households in 

each year during that period. (Appendix A contains a 

more detailed discussion of the data and methodology.) 

CBO analyzed the trend in the dispersion of households’ 

after-transfer, after-federal-tax income (in this study, 

labeled “after-tax income”) and the extent to which 

transfers and federal taxes mitigated the dispersion of 

before-transfer, before-tax income (in this report, labeled 

“market income”). The analysis examines the contribution of various components of income—such as wages 

and salaries, capital income, and business income—to the 

distribution of market income and considers the effects of 

increases in women’s participation in the labor force and 

women’s earnings. It presents information on the trends 

in the distribution of income for all households combined and for households separated on the basis of age 

and the presence of children. 

The beginning and end points of the analysis, 1979 and 

2007, were similar years in terms of overall economic 

activity; both were economic peak years just prior to a 

recession.5

 Moreover, as a practical matter, 1979 is the 

earliest year for which the Census Bureau provides consistent estimates for some measures of income. 

CBO focuses on annual income measures in this analysis, 

comparing average income at different points in time for 

different households grouped by income or household 

type. However, many households represented in those 

averages experienced growth or declines in income that 

differed from the average experience for their initial 

group, and the households in any particular segment of 

the income distribution in 2007 were not necessarily the 

same households that were in that segment in 1979. The 

analysis does not assess trends in the distribution of other 

measures of economic well-being, such as household 

income measured over a longer period, household consumption, or household wealth (see Box 1 on page 4). 

Increased Dispersion of Households’ 

After-Tax Income

Real (inflation-adjusted) mean household income, measured after government transfers and federal taxes, grew 

by 62 percent between 1979 and 2007. Over the same 

period, real median after-tax household income (half of 

all households have income below the median, and half 

have income above it) grew by 35 percent (see Figure 1). 

Because the mean (or average) can be heavily influenced 

by very high or very low incomes, the large gap between 

mean and median income growth signals a pattern of 

growth that was heavily weighted toward households with 

income well above the median. 

Uneven Growth in After-Tax Income 

The distribution of after-tax income (including government transfer payments) became substantially more 

unequal from 1979 to 2007 as a result of a rapid rise in 

income for the highest-income households, sluggish 

income growth for the middle 60 percent of the population, and an even smaller increase in after-tax income for 

the 20 percent of the population with the lowest income.6

1980 1985 1990 1995 2000 2005

80

60

40

20

0

-20

Mean Household

Income

Median Household

Income

80

60

40

20

0

-20

5. The recession in 1980 officially began in January 1980, and the 

most recent recession began in December 2007.

6. Households are ranked by income that is adjusted for household 

size by dividing income by the square root of a household’s size. 

Each fifth of the population (quintile) contains an equal number 

of people, but because households vary in size, quintiles generally 

contain unequal numbers of households. (See Appendix A for the 

income ranges for each quintile.) 
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 3

CBO

Figure 2.

Cumulative Growth in Average 

After-Tax Income, by Income Group

(Percentage change in income since 1979, adjusted for 

inflation)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

Average real after-tax household income for the 1 percent 

of the population with the highest income grew by 275 

percent between 1979 and 2007 (see Figure 2). Average 

real after-tax income for that group has been quite 

volatile: It spiked in 1986 and fell in 1987, reflecting an 

acceleration of capital gains realizations into 1986 in 

anticipation of the scheduled increase in tax rates the 

following year. Income growth for the top 1 percent of 

the population rebounded in 1988 but fell again with the 

onset of the 1990–1991 recession. By 1994, after-tax 

household income was 50 percent higher than it had 

been in 1979. Income growth surged in 1995, averaging 

more than 11 percent per year through 2000. After 

falling sharply in 2001 because of the recession and stock 

market drop, average real after-tax income for the top 

1 percent of the population rose by more than 85 percent 

between 2002 and 2007. (The turmoil in financial 

markets in 2008 probably reversed some of that growth, 

but it is not clear by how much or for how long.) 

For other households in the highest-income quintile (the 

81st through 99th percentiles), average after-tax income 

grew by 65 percent between 1979 and 2007. That 

growth was not nearly as great as for the top 1 percent of 

the population, although it was much greater than for 

most other households. 

For the 60 percent of the population in the middle of the 

income scale (the 21st through 80th percentiles), average 

after-tax household income grew 37 percent between 

1979 and 2007. Income for those households grew in 

most years starting after 1983, with the exception of 

1990–1991 and 2002.

Average after-tax household income in the lowest income 

quintile (the 1st through 20th percentiles) was 18 percent 

higher in 2007 than in 1979. After-tax income for that 

quintile dropped sharply during the 1980 and 1981–

1982 recessions; by 1983, that income was 15 percent 

lower than it had been in 1979, and it did not rebound 

to its 1979 level until 1995, some 16 years later. Average 

after-tax income for the lowest income quintile peaked in 

1999, fell through 2003, and then began to rise again 

in 2004, climbing steadily through 2007.

The Resulting Shift in Income Shares

As a result of that uneven income growth, the share of 

total after-tax income received by the 1 percent of the 

population in households with the highest income more 

than doubled between 1979 and 2007, whereas the share 

received by low- and middle-income households declined 

(see Figure 3 on page 6). The share of income received by 

the top 1 percent grew from about 8 percent in 1979 to 

over 17 percent in 2007. The share received by other 

households in the highest income quintile was fairly flat 

over the same period, edging up from 35 percent to 

36 percent. In contrast, the share of after-tax income 

received by the 60 percent of the population in the three 

middle-income quintiles fell by 7 percentage points 

between 1979 and 2007, from 50 percent to 43 percent 

of total after-tax household income, and the share of 

after-tax income accruing to the lowest-income quintile 

decreased from 7 percent to 5 percent. By 2005, the share 

of total after-tax household income received by the 

20 percent of the population with the highest income 

had exceeded the share received by the remaining 80 percent. In 2007, those shares were 53 percent and 47 percent, respectively. In 1979, the top 1 percent received 

about the same share of income as the lowest income 

quintile; by 2007, the top percentile received more than 

the lowest two income quintiles combined.

1980 1985 1990 1995 2000 2005

300

250

200

150

100

50

0

-50

Top 1 Percent

81st to 99th

Percentiles

21st to 80th

Percentiles Lowest Quintile

300

250

200

150

100

50

0

-50
4 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Continued

Increased Dispersion of Households’ 

Market Income 

An increase in the dispersion of household market 

income was the major reason for the widening dispersion 

of household after-tax income. Market income is measured before adding transfer payments and subtracting 

federal taxes and consists of labor income (such as cash 

wages and salaries and employer-paid health insurance 

premiums), business income, capital gains, capital 

income, and other income. Real average market income 

grew by 58 percent between 1979 and 2007 (similar to 

the 62 percent change in average after-tax income), but 

median market income grew by only 19 percent (less 

than the 35 percent growth in median after-tax income; 

see Figure 4 on page 6). 

Measuring Income Dispersion

Various summary measures of income dispersion condense data for the entire distribution of household 

income into a single number. One such measure, the 

Gini index, is based on the relationship between shares of 

income and shares of the population (see Box 2 on page 

8). That index ranges in value from zero to one, with 

zero indicating complete equality (for example, if each 

percentile of the population, ranked by income, received 

1 percent of total income) and one indicating complete 

inequality (for example, if one household received all the 

income). A Gini index for household income that 

increases over time indicates rising inequality of household income.

Box 1.

Measures of Economic Well-Being

Because annual income is only one measure of economic well-being, trends in the distribution of 

annual income may provide an incomplete picture of 

trends in the distribution of well-being. For example, 

a household’s income in any given year may not accurately represent its economic circumstances over a 

longer period. Average income over multiple years, 

even over a lifetime, might be a better indicator of a 

household’s economic well-being. 

Likewise, a household’s consumption might be a better measure of its economic well-being than its 

income is. For households whose spending tracks 

their annual income, the distinction does not matter. 

But a young family may spend more than its current 

income, relying on borrowing to finance current consumption, while an older family may also spend more 

than its current income, drawing down assets in 

retirement. In contrast, a household in its middle 

years may spend less than its current income while 

saving for future needs. 

The ability of households to smooth their consumption over time by borrowing and saving suggests that 

household wealth might provide another useful perspective on economic well-being. Households may 

finance consumption directly from accumulated 

wealth by drawing down assets or by borrowing with 

those assets as collateral. In addition, some forms of 

wealth, such as owner-occupied housing, provide a 

service to owners that is often not measured as part of 

annual income. 

Those alternative measures of economic well-being—

household income measured over a longer time, 

household consumption, and household wealth—are 

distributed across households in different ways than 

annual income is. Moreover, the distributions of 

those measures may have evolved in different ways 

than has the distribution of households’ annual 

income over the past three decades.

Household income measured over a multiyear period 

is more equally distributed than income measured 

over one year, although only modestly so. Given 

the fairly substantial movement of households 

across income groups over time, it might seem that 

income measured over a number of years should be 

significantly more equally distributed than income 

measured over one year. However, much of the 

movement of households involves changes in income 
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 5

CBO

The Gini index for household market income rose from 

0.479 in 1979 to 0.590 by 2007, an increase of 23 percent (see Figure 5 on page 7).7

 The index increased 

almost continuously during that span except for declines 

during the recessions in 1990–1991 and 2001. The rate 

of increase was not constant, however. The Gini index 

increased at a rate of about 11⁄4 percent per year from 

1979 through 1988, at about 1 percent per year from 

1991 through 2000, and at a 2 percent annual rate from 

2002 through 2005; it changed little from 2005 through 

2007. 

The Gini index also can be described another way, as half 

of the average difference in income between every pair of 

households in the population, expressed as a percentage 

of average income. From that perspective, a Gini index of 

0.479 in 1979 implies that the average income difference 

between pairs of households in that year was equal to 

96 percent (twice 0.479) of average household market 

income, or about $34,500 (measured in constant 2007 

dollars and adjusted for differences in household size). 

Similarly, a Gini index of 0.590 in 2007 implies that 

the average difference between pairs of households was 

118 percent (twice 0.590) of average household market 

income in that year, or about $66,600 (with a similar 

adjustment for household size). 

Some of the transitory changes in the Gini index reflect 

the volatile nature of income from capital gains. Capital 

gains ranged from about 3 percent to 5 percent of market 

income in most years, but they spiked to over 10 percent 

Box 1. Continued

Measures of Economic Well-Being

that are large enough to push households into different income groups but not large enough to greatly 

affect the overall distribution of income. Multiyear 

income measures also show the same pattern of 

increasing inequality over time as is observed in 

annual measures.1

Household consumption is more equally distributed 

than household income. Trends in the concentration 

of household consumption are mixed. Inequality in 

consumption appears to have increased during the 

1980s but not in the 1990s.2

 However, data on the 

consumption of U.S. households do not adequately 

capture consumption by high-income households, a 

group whose rising income accounts for much of the 

observed increase in annual income inequality. 

Household wealth is much more unequally 

distributed than household income or household 

consumption. The distribution of household wealth 

appears to have become more unequal from 1983 to 

1989 but to have remained relatively unchanged 

from 1989 through 2007.3

1. Congressional Budget Office, Effective Tax Rates: Comparing 

Annual and Multiyear Measures (January 2005); and 

Wojciech Kopczuk, Emmanuel Saez, and Jae Song, “Earnings 

Inequality and Mobility in the United States: Evidence from 

Social Security Data Since 1937,” Quarterly Journal of Economics, vol. 125, no. 1 (February 2010), pp. 91–128.

2. For further discussion, see David M. Cutler and Lawrence F. 

Katz, “Rising Inequality? Changes in the Distribution of 

Income and Consumption in the 1980s,” American Economic 

Review, vol. 82, no. 2 (1992), pp. 546–551; David S. Johnson, Timothy M. Smeeding, and Barbara Boyle Torrey, “Economic Inequality Through the Prisms of Income and 

Consumption,” Monthly Labor Review, vol. 128, no. 4 

(2005), pp. 11–24; and Dirk Krueger and Fabrizio Perri, 

“Does Income Inequality Lead to Consumption Inequality? 

Evidence and Theory,” Review of Economic Studies, vol. 73, 

no. 1 (2006), pp. 163–193.

3. For further discussion, see Wojciech Kopczuk and Emmanuel Saez, “Top Wealth Shares in the United States, 1916–

2000: Evidence from Estate Tax Returns,” National Tax Journal, vol. 57, no. 2, part 2 (2004), pp. 445–488.

7. As a point of comparison, by one calculation the Gini index for 

the United States in the mid-2000s was about 23 percent above 

the average for all OECD countries and about 23 percent below 

the index for Mexico, the OECD country with the highest index. 

See Organization for Economic Cooperation and Development, 

Growing Unequal? Income Distribution and Poverty in OECD 

Countries.
6 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

in 1986 and nearly 9 percent in 2000. The spike in 1986 

reflected the rush to realize profits from increases in asset 

prices in anticipation of the tax-rate increase scheduled to 

take effect in 1987. The peak in 2000 was the culmination of five years of growing realizations reflecting the 

run-up in stock market prices from 1995 through 2000. 

Realized gains peaked again in 2007, at 9 percent of 

market income.

Removing capital gains from before-transfer, before-tax 

income smoothes out some of the jumps in the Gini 

measure but does not change the trend (see Figure 5). 

The Gini index for market income excluding capital gains 

increased from 0.464 to 0.562 between 1979 and 2007. 

That increase of more than 21 percent was nearly as large 

as the 23 percent increase in the Gini index for household 

income including capital gains.

Comparison with Other Estimates 

Other researchers have reached similar conclusions about 

the trends in income inequality. In an influential paper, 

economists Thomas Piketty and Emmanuel Saez found

Figure 3.

Share of Total After-Tax Income, by 

Income Group

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

Figure 4.

Cumulative Growth in Mean and 

Median Household Market Income

(Percentage change in income since 1979, adjusted for 

inflation)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

that income concentration began to rise in the late 1970s 

and continued to grow thereafter. They found especially 

dramatic increases within the top percentile of the 

income distribution.8

 Their analysis is based on published 

tax return statistics, and it uses a market-income definition. The key advantage of those data, as well as the data 

used in this analysis, is that they are comprehensive at the 

top of the income distribution, where much of the 

change in the income distribution has occurred. One 

drawback of tax return data alone, however, is that they 

only cover the portion of the population filing tax 

returns, so they cannot yield distributional statistics for 

the full population. In addition, they cannot capture 

income that is not reported on tax returns.

Census Bureau statistics also show an increase in inequality, although those statistics—which do not measure 

income for the highest-income households nearly as well 

as tax return data—imply both a smaller degree of 

1980 1985 1990 1995 2000 2005 

60 

50 

40 

30 

20 

10 

0 

Lowest Quintile 

21st to 80th Percentiles 

81st to 99th Percentiles 

Top 1 Percent 

60 

50 

40 

30 

20 

10 

0 

8. See Piketty and Saez, “Income Inequality in the United States,” 

and updated tables at www.econ.berkeley.edu/~saez/. 

1980 1985 1990 1995 2000 2005

80

60

40

20

0

-20

Mean Household

Income

Median Household

Income

80

60

40

20

0

-20
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 7

CBO

Figure 5.

Summary Measures of Market Income 

Inequality, With and Without 

Capital Gains

(Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

inequality and a smaller increase in inequality than were 

found in CBO’s analysis. As computed by the Census 

Bureau, the Gini index for household money income—

a before-tax income measure that includes some government transfers—rose from 0.403 in 1979 to 0.463 in 

2007, an increase of 15 percent.9

 The Gini indexes for 

alternative measures of income (as computed by the 

Census Bureau) show comparable increases.

Economist Richard Burkhauser and his coauthors, using 

internal Census Bureau data, found that the rate of 

increase in inequality has slowed substantially since the 

mid-1990s.10 They computed Gini indexes using a 

before-tax, after-transfer measure of household cash 

income, excluding capital gains, which was adjusted for 

differences in household size using the square root of 

household size. They found that the Gini index grew at 

an annual rate of 0.14 percent after 1993, in contrast to a 

growth rate of 0.74 percent in the 1975–1992 period. 

Burkhauser and his coauthors also compared the trends 

in top income shares with those reported by Piketty and 

Saez and found that the measures from the two data 

sources align well, except for measures for the top percentile of the income distribution. Even though Burkhauser 

and his coauthors found little increase in income inequality after 1993, their analysis did not reject the possibility 

that inequality could have increased among the highestincome households, so they concluded that their results 

were not inconsistent with those of Piketty and Saez. 

An increase among the highest-income households may 

explain the slower growth in measured income inequality 

in more recent years in the Census Bureau’s data. 

Why Did Market Income Become Less Equally 

Distributed?

The market income of households can become more 

unequally distributed over time if individual components 

of income become more highly concentrated or if the 

composition of income shifts so that a greater share of 

total income comes from components that are more 

highly concentrated. 

Over the 1979–2007 period, the first of those factors 

was the primary reason overall market income became 

less evenly distributed: All major sources of market 

income became more highly concentrated in favor of 

higher-income households. Labor income was the biggest 

contributor because it is by far the largest source of 

income, even though the increase in the concentration 

of labor income was smaller than the increase in concentration for other sources. 

A shift in the composition of income also contributed to 

the growing concentration. A decrease in the share of 

total market income from wages and other labor compensation and an increase in the share from capital gains 

contributed to the increase in market income inequality 

because capital gains are much more concentrated among 

higher-income households than is labor income.

9. Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. 

Smith, Income, Poverty, and Health Insurance Coverage in the 

United States: 2009, Current Population Reports, Series P60-238 

(Bureau of the Census, September 2010).

10. Richard Burkhauser and others, Estimating Trends in US Income 

Inequality Using the Current Population Survey: The Importance of 

Controlling for Censoring, Working Paper 14247 (Cambridge, 

Mass.: National Bureau of Economic Research, August 2008).

1980 1985 1990 1995 2000 2005

0.7

0.6

0.5

0.4

0

Market Income

Market Income

Excluding Capital Gains

0.7

0.6

0.5

0.4

0
8 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Continued

Box 2.

Calculating and Interpreting the Gini Index

Income and Population Shares, 2007

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality 

indexes, see “Notes and Definitions” at the beginning of this study.

The Gini index is a widely used measure of income 

inequality. It ranges from zero to one, with higher 

values implying greater inequality. The index provides a useful summary metric of the entire income 

distribution by characterizing it with a single number, but interpreting the value of the index may not 

be intuitive. 

The Gini index can be estimated directly from data 

on the shares of income accruing to various groups.1

The first step in computing the index is to array the 

groups in order from lowest to highest income and 

to calculate the share of income earned by each 

group. Consider the distribution of market income 

(defined here as income before transfers and taxes) in 

2007. The lowest quintile (or one-fifth of the population) earned 2 percent of market income; the second, 

middle, and fourth quintiles earned 7 percent, 

12 percent, and 19 percent, respectively; and the 

remaining 60 percent of market income was divided 

among the subgroups of the top quintile (see the 

table). 

The distribution of income after transfers and federal 

taxes (labeled after-tax income) was more equal than 

was the distribution of market income. Each of the 

bottom four quintiles (ranked by after-tax income) 

received a share of after-tax income that was 1 or 

2 percentage points higher than its share of market 

income, while the highest quintile’s share of after-tax 

income was 6 percentage points lower than its share 

of market income.

The next step in calculating the index is to compute 

the cumulative share of income earned by each group 

and all of the groups with lower income. The first 

and second quintiles—cumulatively, the bottom 

40 percent of the population—received a combined 

Income Group

Lowest Quintile 20 20 2 2 4 4

Second Quintile 20 40 7 9 9 13

Middle Quintile 20 60 12 21 14 27

Fourth Quintile 20 80 19 40 20 47

81st–90th Percentiles 10 90 14 55 14 61

91st–95th Percentiles 5 95 10 65 10 71

96th–99th Percentiles 4 99 14 79 12 83

Top 1 Percent 1 100 21 100 17 100

After-Tax Income 

Cumulative Share

(Income After 

Share Cumulative Share Share Cumulative Share Share

Population Market Income Transfers and Federal Taxes)

1. To calculate the Gini indexes in the primary analysis, the 

Congressional Budget Office applied this approach to 

disaggregated data, yielding a more precise estimate of the 

Gini index than do calculations based on grouped data.
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 9

CBO

Box 2. Continued

Calculating and Interpreting the Gini Index

Income Concentration, 2007

(Percent)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction of inequality indexes, see “Notes and Definitions” 

at the beginning of this study.

The line of equality shows what the distribution would 

be if each income group had equal income.

9 percent of market income and 13 percent of aftertax income. Adding the middle quintile shows that 

the bottom 60 percent of the population received 

21 percent of market income and 27 percent of aftertax income.

The cumulative percentage of income can be plotted 

against the cumulative percentage of the population, 

producing a so-called Lorenz curve (see the figure). 

The more even the income distribution is, the closer 

to a 45-degree line the Lorenz curve is. At one 

extreme, if each income group had the same income, 

then the cumulative income share would equal the 

cumulative population share, and the Lorenz curve 

would follow the 45-degree line, known as the line of 

equality. At the other extreme, if the highest income 

group earned all the income, the Lorenz curve would 

be flat across the vast majority of the income range, 

following the bottom edge of the figure, and then 

jump to the top of the figure at the very right-hand 

edge. 

Lorenz curves for actual income distributions fall 

between those two hypothetical extremes. Typically, 

they intersect the diagonal line only at the very first 

and last points. Between those points, the curves are 

bow-shaped below the 45-degree line. The Lorenz 

curve of market income falls to the right and below 

the curve for after-tax income, reflecting its greater 

inequality. Both curves fall to the right and below the 

line of equality, reflecting the inequality in both market income and after-tax income.

The Gini index is equal to twice the area between the 

45-degree line and the Lorenz curve. Once again, the 

extreme cases of complete equality and complete 

inequality bound the measure. At one extreme, if 

income was evenly distributed and the Lorenz curve 

followed the 45-degree line, there would be no area 

between the curve and the line, so the Gini index 

would be zero. At the other extreme, if all income was 

in the highest income group, the area between the 

line and the curve would be equal to the entire area 

under the line, and the Gini index would equal one. 

The Gini index for after-tax income in 2007 was 

0.489—about halfway between those two extremes.

0

20

40

60

80

100

0 10 20 30 40 50 60 70 80 90 100

Market

Income

After-Tax

Income

Cumulative Share of Population

Cumulative

Share of Income

Line of

Equality
10 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Sources of Income. For this analysis, CBO divided market income into the following components: 

 Labor income: Cash wages and salaries (including 

those allocated by employees to 401(k) plans), 

employer-paid health insurance premiums, and the 

employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes. CBO 

assumes in this analysis that the employer’s share of 

payroll taxes is passed on to employees in the form of 

lower wages and, therefore, that those taxes are effectively being paid by the employees and should be 

included in before-transfer, before-tax household 

income.

 Business income: Net income from businesses and 

farms operated solely by their owners, partnership 

income, and income from S corporations. (Corporations can elect S corporation status if they have 100 or 

fewer shareholders and meet certain other requirements. S corporations do not pay the corporate 

income tax but instead must pass through all income 

and losses to shareholders.) 

 Capital gains: Profits realized from the sale of assets. 

Increases in the value of assets that have not been realized through sales are not included in market income.

 Capital income (excluding capital gains): Taxable and 

tax-exempt interest, dividends paid by corporations 

(but not dividends from S corporations, which are 

considered part of business income), rental income, 

and corporate income taxes. CBO assumes in this 

analysis that corporate income taxes are borne by 

owners of capital in proportion to their income from 

capital; therefore, the imputed amount of the corporate tax is included in household income measured 

before taxes.

 Other income: Income received in retirement for past 

services and any other sources of income.

Labor income accounted for more than 70 percent of 

market income in most years between 1979 and 2007, 

although its share of total income had dropped from 

three-fourths in 1979 to two-thirds by 2007. Capital 

income (excluding capital gains) is the next largest source, 

but even at its peak in 1981 it was only about 14 percent 

of market income. After that, the share of total income 

from capital declined to about 10 percent of total income 

in 2007. Income from capital gains rose from about 

4 percent of market income in 1979 to about 8 percent in 

2007. Business income and income from other sources 

(primarily private pensions) each accounted for about 

7 percent of total income in 2007, up from about 4 percent apiece in 1979. 

The Distribution of Various Income Sources. Labor 

income is more evenly distributed across the income 

spectrum than business income and capital income, 

both of which are more evenly distributed than capital 

gains. In 1979, the bottom 80 percent of the population 

in the income spectrum received nearly 60 percent of 

total labor income, about 33 percent of income from 

capital and business, and about 8 percent from capital 

gains (see Figure 6). By 2007, the share of labor income 

going to the bottom 80 percent had dropped to less than 

50 percent, their percentage of business income and 

income from capital had decreased to 20 percent, and 

their share of capital gains was about 5 percent. All 

sources of income were less evenly distributed in 2007 

than in 1979. 

A concentration index can express the concentration of 

each income source as a single number. It is analogous to 

a Gini index, and rising values signify rising concentration of income.11

Concentration indexes for the major sources of income 

all increased—albeit irregularly—from 1979 to 2007, 

indicating rising dispersion in the distribution of each 

source of income (see Figure 7). Labor income became 

steadily more concentrated from 1979 through 1988, and 

then again in 1992 following the 1990–1991 recession. 

After remaining mostly unchanged during the rest of the 

1990s, the concentration of labor income increased again 

from 1999 through 2002. Since 2002, the concentration 

has declined slightly, though not back to the levels of the 

late 1990s. 

Capital income became increasingly concentrated beginning in the early 1990s. After declines in 2001 and 2002, 

11. A concentration index differs from a Gini index for each source 

because in calculating the concentration index, the population is 

ranked by total market income rather than by income from that 

source, as they would be in calculating the Gini index for that 

source. A concentration index can thus range from -1.0 (if all 

income from a source accrued to the household with the lowest 

market income), to 0 (if the income from a source was evenly 

distributed across households), to 1.0 (if all income from a source 

accrued to the household with the highest market income).
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 11

CBO

Figure 6.

Concentration of Major Sources of Market Income, 1979 and 2007

(Cumulative share of income, in percent)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

The line of equality shows what the distribution would be if each income group had equal income.

The concentration curves exclude business and investment losses.

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

1979

2007

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

1979

2007

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

1979

2007

Concentration of Labor Income,

 1979 and 2007

Concentration of Business

Income, 1979 and 2007

Concentration of Capital Income

(Excluding Capital Gains),

1979 and 2007

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

1979

2007

Concentration of Capital Gains,

1979 and 2007

Cumulative Share of

Population

Cumulative Share of

Population

Cumulative Share of

Population

Cumulative Share of

Population

Line of Equality Line of Equality

Line of Equality Line of Equality
12 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 7.

Income Concentration, by 

Major Income Source

(Concentration index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

its concentration then increased significantly from 2003 

through 2007. Capital gains also became increasingly 

concentrated beginning in the early 1990s; unlike other 

income from capital, however, the degree of concentration of capital gains continued to rise through 2003 but 

fell thereafter. The concentration of business income was 

quite variable in the early part of the 1980s. Some of that 

variability might reflect changes in tax law in that period. 

After 1986, the concentration of business income rose 

steadily through 1991 and then declined through much 

of the 1990s before rising rapidly in the 2000–2002 

period. Since then, the concentration has declined, 

though not back to the levels that prevailed in the 1990s.

Decomposing Changes in Market Income Inequality by 

Income Source. A useful property of the Gini index is 

that it is possible to determine the contribution of different factors to the increase in overall income inequality 

through a simple decomposition (see Appendix B). The 

contribution of each income source to the Gini index for 

total market income is the product of the concentration 

index for that income source and the share of total market income attributable to that source. Thus, changes in 

the concentration of income from a source such as labor 

income will have a much greater effect on overall income 

concentration than an equivalent change in the concentration of another income source (such as capital income) 

because labor income is a much larger share of total 

income. 

Such a decomposition suggests that changes in the 

income concentration for particular sources and shifts in 

the shares of market income represented by those sources 

were responsible in varying proportions for the increase 

in the concentration of household market income at different times (see Table 1). From 1979 to 1988, more than 

90 percent of the increase of 5.7 percentage points in the 

Gini index for total market income resulted from an 

increasing concentration of separate income sources, primarily labor income. Small shifts in the share of market 

income from less to more highly concentrated sources—

in particular, from labor income to business and other 

income—explain only a small portion of the increase in 

the concentration of total market income over that 

period. 

In contrast, from 1991 to 2000—a period that saw an 

increase of 4.8 percentage points in the Gini index—a 

shift to more concentrated sources explains about 45 percent of the overall increase in market income inequality, 

and an increase in the concentration within each source 

accounts for the other 55 percent. In that case, a decrease 

in the percentage of total income from labor and capital 

and an increase in the share from capital gains were major 

factors, as were increases in the concentration of both 

labor and capital income. 

The importance of those various factors to the increase of 

3.6 percentage points in the Gini index for total market 

income between 2002 and 2007 differs yet again. More 

than four-fifths of the total increase in the Gini index 

over those years stemmed from an increase in the share of 

total income coming from more highly concentrated capital gains. An increase in the concentration of capital 

income accounts for most of the remaining increase. 

Labor income became somewhat less concentrated over 

that period, but the effect on overall income dispersion 

was small.

Over the 1979–2007 period as a whole, the increased 

concentration of the individual sources of market income 

accounted for close to 80 percent of the total increase in 

the Gini index. 

1980 1985 1990 1995 2000 2005

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0

Capital Gains

Business Income

Capital Income 

Excluding Capital Gains

Labor Income

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 13

CBO

Table 1.

Sources of Change in the Gini Index for Market Income

Source: Congressional Budget Office.

Note: For information on income distributions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

Why Has the Distribution of Labor Income Grown 

More Unequal?

Many studies have documented the increasing inequality 

of labor income, and the result is robust across data 

sources and statistical measures. In all likelihood, the 

interaction of multiple factors has led to the growth in 

labor income inequality, and disentangling the contribution of those factors will remain a focus of research for 

some time. Most studies have concentrated on the 

distribution of cash labor income (CBO uses a broader 

measure of labor income that also includes some forms 

of nonwage compensation). Cash labor income is determined by multiple factors—hourly wages (the amount 

earned by workers per hour worked), the number of 

hours worked per person in the labor force, and the labor 

market participation of different members of a household. Of those factors, increases in the inequality of 

hourly wage rates appear to be the largest contributor to 

the increased inequality of cash labor income. That trend 

in the distribution of hourly wages stems primarily from 

a growing demand for skilled workers relative to the supply of such workers. 

Hourly Wage Rates. Hourly wages grew more unequal 

over the 1979–2009 period, but the pattern of growth 

varied considerably over time, according to a recent CBO 

study.12 For men and women alike, the gap between the 

wage rates received by high-wage workers (those at the 

90th percentile of the wage distribution) and middlewage workers (those at the 50th percentile) grew 

throughout the 30-year period. The gap between the 

wage rates received by low-wage workers (those at the 

10th percentile of the wage distribution) and middlewage workers widened somewhat during the 1980s, but 

not since then. 

Numerous researchers have concluded that, on balance, 

the technological changes of the past several decades—

and perhaps the entire past century—increased employers’ demand for workers with higher skills and more 

education. That increase, along with a smaller increase in 

the supply of workers with higher skills and more education, generated substantial gains in the relative wages of 

more-educated workers. 

Specifically, researchers have argued that the demand for 

skilled workers, particularly for highly educated workers, 

was spurred by innovations in information and computing technology in the 1990s and 2000s. Moreover, 

innovations in the production process—such as new 

technology and organizational changes—also may have 

increased the productivity of higher-skilled workers more 

than that of lower-skilled workers. For example, some 

researchers have hypothesized that information technology might complement highly educated workers engaged 

in abstract tasks while substituting for moderately educated workers performing routine clerical, mechanical, 

Change in Gini Index (Percentage points) 5.7 -1.2 4.8 -1.8 3.6 11.1

Source of Change (Percentage points)

Shift to more or less concentrated income sources 0.4 -0.8 2.2 -2.3 3.1 2.3

Change in concentration within each income source 5.3 -0.3 2.6 0.4 0.5 8.8

Share of Change from Each Source (Percent) 

Shift to more or less concentrated income sources 8 70 45 124 85 21

Change in concentration within each income source 92 30 55 -24 15 79

Total, 

1979 to

1988 1991 2000 2002 2007 2007

1979 to 1988 to 1991 to 2000 to 2002 to

12. Congressional Budget Office, Changes in the Distribution of 

Workers’ Hourly Wages Between 1979 and 2009 (February 2011).
14 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

and analytical tasks. Those researchers have also surmised 

that the demand for workers performing “low-skilled” 

service jobs has not been affected because many of those 

jobs—such as health aides, security guards, orderlies, 

cleaners, and servers—are not amenable to automation.13

Owing to those various changes, firms have increased 

their demand for highly skilled workers. 

At the same time, changes in the relative supplies of 

higher- and lower-skilled workers have been more gradual. The growth in the educational attainment of the 

workforce has slowed, leading to slower growth in the 

number of higher-skilled workers compared with the 

number of lower-skilled workers. That change, coupled 

with the increasing demand for such workers, has led to 

the rising relative compensation observed in recent 

decades for skilled and educated people. 14

Changes in labor market institutions have also contributed to that trend. Some researchers have noted that the 

early part of the 1979–2006 period saw a substantial 

decline in the inflation-adjusted value of the minimum 

wage, which, they argue, accounted for the slower growth 

in wages at the bottom of the distribution.15 Other 

researchers have noted large declines in the rate of unionization in the United States, especially in the 1980s, and 

have shown that the decline has reduced the equalizing 

effect of unions on wages.16

Developments in trade and immigration may also have 

affected the distribution of wage rates. The United States 

has seen increases in both international trade and immigration in recent decades, and the nation has substantially 

increased its consumption of imported goods. To the 

extent that imported goods compete with domestic goods 

produced by lower-skilled workers, an increase in imports 

would be expected to hold down wages of domestic 

workers. The empirical research on that effect is inconclusive, however.17 In addition, changes in the supply of 

workers attributable to a rising number of foreign-born 

people in the workforce increase the availability of workers with a broad range of skills, potentially putting 

downward pressure on wage rates in jobs where they 

work. Empirical research, however, indicates that the 

impact of foreign-born workers on wage dispersion has 

been modest.18

Annual Earnings. Another recent CBO study examined 

the distribution of annual earnings, which is the product 

of hours worked and wages per hour.19 That study found 

that annual earnings have grown more unequal over time 

for men but not for women and that changes in the number of hours worked have tended to reduce inequality. For 

men, the ratio of the annual earnings of high earners to 

those of median earners was larger in 2007 than in 1979, 

whereas the annual earnings ratio for median and low 

earners was roughly the same in the two years. Men with 

the lowest annual earnings increased their work hours 

somewhat over the period; otherwise, inequality in 

annual earnings would have grown even more. For 

women, in contrast, the ratio of the annual earnings of 

high earners to those of median earners was roughly the 

same in 2007 as it was in 1979, but the ratio of annual 

earnings of median earners to those of low earners was 

smaller in 2007 than it was in 1979. Women at the 10th 

percentile of their earnings distribution experienced a 

rapid rise in annual earnings in large part because of 

increases in the number of hours they worked.

Increases in Women’s Labor Force Participation and 

Earnings. The role of women in the labor market 

changed dramatically over the time period studied here. 

Women’s participation in the labor force rose rapidly, and 

the gaps between hourly wage rates and annual earnings 

for men and women narrowed. In addition, inequality in 

13. David H. Autor, Lawrence F. Katz, and Melissa S. Kearney, 

“Trends in U.S. Wage Inequality: Revising the Revisionists,” 

Review of Economics and Statistics, vol. 90, no. 2 (May 2008), 

pp. 300–323. 

14. Claudia Goldin and Lawrence F. Katz, “Long-Run Changes in the 

U.S. Wage Structure: Narrowing, Widening, Polarizing,” Brookings Papers on Economic Activity, no. 2 (Fall 2007), pp. 135–165.

15. David Lee, “Wage Inequality in the United States During the 

1980s: Rising Dispersion or Falling Minimum Wage?” Quarterly 

Journal of Economics, vol. 144, no. 3 (August 1999), pp. 977–

1023.

16. David Card, Thomas Lemieux, and Craig Riddell, “Unions and 

Wage Inequality,” Journal of Labor Research, vol. 25, no. 4 

(December 2004), pp. 519–562.

17. Paul Krugman, “Trade and Wages, Reconsidered,” Brookings 

Papers on Economic Activity, no. 1 (Spring 2008), pp. 103–154.

18. Congressional Budget Office, The Role of Immigrants in the U.S. 

Labor Market (November 2005); and David Card, Immigration 

and Inequality, Working Paper 14683 (Cambridge, Mass.: 

National Bureau of Economic Research, January 2009).

19. Congressional Budget Office, Changes in the Distribution of 

Workers’ Annual Earnings Between 1979 and 2007 (October 2009).
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 15

CBO

Figure 8.

Summary Measures of Market Income 

Inequality for Different Types of 

Households

(Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

wage rates among working women grew, though that 

change was more than offset by changes in hours worked, 

so inequality of annual earnings did not grow. 

Even if the distribution of women’s earnings had been 

unchanged, trends in women’s earnings could have 

changed the inequality of household income. Because 

married couples tend to have higher income than single 

people, even after adjusting for differences in household 

size, an increase in the earnings of women could boost 

inequality by raising the income of couples relative to 

that of households headed by single people. The effect of 

women’s earnings on the inequality of household income 

also depends on the correlation between husbands’ and 

wives’ earnings: Relatively faster growth of earnings for 

women married to men with high earnings would tend to 

exacerbate the inequality of household income, whereas 

faster growth of earnings for women married to men with 

low earnings would tend to decrease it, even holding 

constant the inequality of women’s earnings. Empirical 

studies on the effect of women’s earnings on the inequality of family income have found mixed results, with 

estimates depending on the period studied and the methodology used.20

The data used by CBO in this study are not sufficient for 

isolating the effect of women’s earnings, for two reasons: 

Sex is not reported in the tax return data, and only the 

combined earnings of married couples are directly 

reported on tax returns.21

How Did the Distribution of Market Income Change 

for Different Types of Households?

Trends in market income for the entire population mask 

significant variations in the amount, composition, and 

distribution of market income among subgroups of 

the population. Income dispersion is smaller among 

households with children (households with at least one 

member under age 18) and nonelderly childless households (households headed by someone under age 65 with 

no member under age 18) than among elderly childless 

households (those headed by someone age 65 or older 

with no member under age 18) (see Figure 8). The levels 

and trends in the dispersion of market income for households with children and nonelderly childless households 

are virtually identical. Because they account for the 

majority of households, and an even larger share of 

1980 1985 1990 1995 2000 2005

0.9

0.8

0.7

0.6

0.5

0.4

0

Elderly Childless Households

Nonelderly Childless 

Households

Households with

Children

0.9

0.8

0.7

0.6

0.5

0.4

0

20. Sheldon Danziger, “Do Working Wives Increase Family Income 

Inequality?” Journal of Human Resources, vol. 15, no. 3 (Summer 

1980), pp. 444–451; Lynn A. Karoly and Gary Burtless, “Demographic Change, Rising Earnings Inequality, and the Distribution 

of Personal Well-Being,” Demography, vol. 32, no. 3 (August 

1995), pp. 379–405; Gary Burtless, Effects of Growing Wage 

Disparities and Changing Family Composition on the US Income 

Distribution, Working Paper 4 (Center on Social and Economic 

Dynamics, July 1999); and three articles by Maria Cancian and 

Deborah Reed: “The Impact of Wives’ Earnings on Income 

Inequality: Issues and Estimates,” Demography, vol. 36, no. 2 

(May 1999), pp. 173–184, and “Sources of Inequality: Measuring 

the Contributions of Income Sources to Rising Family Income 

Inequality, Review of Income and Wealth, vol. 47, no. 3 (September 

2001), pp. 321–333, and “Assessing the Effects of Wives’ Earnings 

on Family Income Inequality,” Review of Economics and Statistics, 

vol. 80, no. 1 (February 1998), pp. 95–107.

21. CBO has estimated the split of earnings between spouses based on 

a combination of information reported on tax forms and in the 

Current Population Survey and examined the effect on household 

income dispersion of the earnings of so-called secondary earners—

the spouses with lower earnings. The Gini index for household 

income including the earnings of secondary earners was about 

1 percent lower than the Gini index excluding those earnings over 

the 1979–2007 period.
16 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 9.

Summary Measures of Market Income 

Inequality, With and Without the 

Top 1 Percent of Households

(Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

market income, the overall trend in market income dispersion closely mirrors that of those two subgroups.

In contrast, because many elderly people no longer work, 

the composition of market income and the extent of market income dispersion among elderly childless households 

differ from that of other households. On average, compared with households headed by the nonelderly, elderly 

households have much less labor income and substantially more income from accumulated savings—in the 

form of pension income, interest and dividends, and 

capital gains. On average, elderly households have less 

market income than other households. Indeed, the bottom fifth of elderly childless households has essentially no 

market income, and the second fifth has very little. Most 

of the income for those groups comes from Social Security benefits or other government transfer programs 

(which are examined later). And among the upper threefifths of the distribution, income is a little more skewed 

to the top for elderly childless households than for other 

types of households.

The trend in income dispersion for elderly childless 

households has differed from trends for the rest of the 

population during the past 30 years. The difference in the 

early 1980s is especially striking, when dispersion for 

elderly childless households fell while dispersion for other 

households rose. That period saw an increase in the concentration of labor income accompanied by a decrease in 

the dispersion of capital income. Because many elderly 

people no longer work, the latter effect was relatively 

more important for elderly childless households than for 

the overall population and caused a decline in income 

inequality among them. The elderly also saw less of an 

increase in income inequality in the late 1990s, when the 

dispersion in labor income again grew rapidly.

Changes in Market Income for the Top 

1 Percent of the Population

The rapid growth of average market income for the 1 percent of the population in households with the highest 

income was a major contributing factor to the increase in 

household income dispersion between 1979 and 2007. 

Average market income for the highest income group tripled over that period. 

Without the income growth at the very top of the distribution, income dispersion still would have increased, but 

not by as much (see Figure 9). The Gini index for market 

income rose from 0.479 in 1979 to 0.590 in 2007, a 

23 percent increase. Recalculating the Gini index by 

excluding the 1 percent of the population in households 

with the highest income in each year reduces the increase 

to 14 percent (from about 0.435 in 1979 to 0.495 in 

2007).22

Composition of Income for the Top 1 Percent of the 

Population

Between 1979 and 2007, the composition of market 

income for the 1 percent of the population in households 

with the highest income changed significantly. The share 

of market income from wages and other labor compensation rose and then fell for little net change, while the 

1980 1985 1990 1995 2000 2005

0.7

0.6

0.5

0.4

0

Including 

Top 1 Percent

Excluding 

Top 1 Percent

0.7

0.6

0.5

0.4

0

22. A recent paper argues that any substantial increase in U.S. income 

inequality from 1993 to 2004 is confined to the top percentile of 

the income distribution (see Burkhauser and others, Estimating 

Trends in US Income Inequality). In contrast, CBO finds that the 

growth in income for the top percentile accounted for just a bit 

more than half of the rise in market income inequality over that 

period. 
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 17

CBO

Figure 10.

Shares of Market Income, by Source, 

for the Top 1 Percent of Households

(Percentage of market income, excluding capital gains)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

share of income from capital assets declined. Business 

income was the fastest growing source of income for the 

top 1 percent.

Because of the volatile nature of income from capital 

gains realizations and its significance for the highestincome households, it is more illuminating to look at 

sources of income as shares of market income excluding 

capital gains. Wages and other labor compensation rose 

from 40 percent of market income excluding capital gains 

in 1980 to close to 50 percent in 2000 and 2001 before 

dropping back to about 40 percent in 2007 (see 

Figure 10).

Capital income excluding capital gains—in other words, 

interest, dividends, and rents—has generally been a 

declining source of income among the highest-income 

households. Its share dropped from 42 percent of market 

income excluding capital gains in 1979 to 21 percent in 

2002 and then increased to about 30 percent by 2007. 

Over the same period, the share of income from business 

activities grew sharply, increasing from a low of 10 percent of market income excluding capital gains in 1981 to 

a high of 27 percent in 2005 before dipping slightly in 

2006 and 2007. 

Capital gains are the most volatile source of income, and 

their importance as a share of household income for the 

top 1 percent of the population has fluctuated. That fluctuation appears to reflect movements in stock prices and 

changes in tax law.23 Between 1979 and 1985, capital 

gains for the top 1 percent were equal to 20 percent to 

30 percent of market income excluding capital gains; in 

1986, they spiked to more than twice that share. The 

ratio of income from capital gains to other market 

income declined in the late 1980s and then began to pick 

up in the mid-1990s before entering a period of rapid 

growth starting in 1995. That ratio peaked at 35 percent 

of market income in 2000 before falling to 16 percent in 

2002 and then rebounding to 37 percent in 2007.

The fall in capital income and the increase in business 

income may in part reflect a recharacterization of income. 

Following the Tax Reform Act of 1986, which lowered 

the top statutory tax rate on individual income below the 

top rate on corporate income, many C corporations 

(which are taxed separately from their owners under the 

corporate income tax) were converted to S corporations 

(which pass corporate income through to their shareholders, where it is taxed under the individual income tax). As 

a result, corporate dividend income and capital gains 

from the sale of corporate stock were converted into S 

corporation income, which is counted here as part of 

business income. Business income jumped in the 1986–

1988 period as those conversions began, and it continued 

to grow rapidly throughout the 1990s and 2000s as more 

conversions occurred and new businesses were formed as 

S corporations rather than C corporations. 

The changing composition of income for the highestincome households reflects a much longer trend. Over 

the entire 20th century, capital income declined sharply 

in importance for high-income taxpayers.24 The labor 

share of income for the top income groups was higher in 

2007 than before World War II, as highly compensated 

workers have replaced people whose income is from property or securities at the top of the income distribution. 

1980 1985 1990 1995 2000 2005

60

50

40

30

20

10

0

Labor Income

Capital Income

Business Income

Other Income

60

50

40

30

20

10

0

23. See Congressional Budget Office, Capital Gains Taxes and Federal 

Revenues (October 2002).

24. Piketty and Saez, “Income Inequality in the United States.” 
18 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

What Explains the Rise in Income for the Top 1 

Percent?

Rising labor income was a major component of the 

increase in income for the top 1 percent. A number of 

factors may have contributed to the rapid rise in earnings 

among the highest-income households. One potential 

explanation is that the compensation of “superstars” 

(such as actors, athletes, and musicians) may be especially 

sensitive to technological changes.25 Unique characteristics of that labor market mean that technical innovations, 

such as cheap mass media, have made it possible for 

entertainers to reach much wider audiences. That 

increased exposure, in turn, has led to a manyfold 

increase in income for such people.

Another body of research has focused on the very large 

pay increases for top corporate executives.26 Some 

researchers have argued that this growth in compensation 

can be accounted for by increases in firms’ size. As firms 

grow larger and more complex, the impact on profits of 

corporate executives’ decisions becomes greater, so firms 

may be more willing to pay large salaries to attract and 

keep the best executives. Other researchers have argued 

that weaknesses in corporate governance have enabled 

corporate executives to overpay themselves. Still others 

have focused on the form of compensation, arguing that 

the increasing importance of stock options in executive 

compensation has caused that compensation to grow rapidly during periods of rapid appreciation in the stock 

market. 

Some researchers have attempted to evaluate the 

competing theories by dividing the highest earners into 

subgroups and by observing which subgroups saw the 

greatest increases in income. One study compiled the 

earnings in 2004 of the highest earners in various sectors 

of the economy on the basis of publicly available data, 

such as corporate annual reports and industry publications.27 Using that approach, the authors were able to 

identify 9 percent of the taxpayers in the top 0.5 percent 

of the earnings spectrum. They found that corporate 

executives were a fairly small percentage of the highest 

earners, as were athletes and celebrities, and they did not 

grow in importance over the 1994–2004 period. In contrast, employees in the financial and legal professions 

made up a larger share of the highest earners than people 

in those other groups. The authors concluded that their 

findings are most consistent with the theories that technical changes have enhanced the value of certain skills and 

that the increasing scale of corporate and financial activity has raised the value of corporate executives and financial professionals, rather than that weak corporate governance has led to excessive compensation.

A similar study compiled data on the highest-income 

households on the basis of occupations reported on tax 

returns in the 1979–2005 period.28 That study reached 

different conclusions. Its authors found that the rise in 

the highest-income households’ share of income is 

explained by the prices of assets in financial markets and 

possibly by the evolution of corporate governance and 

entrepreneurship, rather than by superstar theories or by 

technological change that complemented certain skills. 

The study found that nonfinancial executives, managers, 

and supervisors made up the largest subgroup of the 

highest-income households, accounting for 31 percent of 

the top percentile. Medical professionals were the second 

largest occupational category, making up 16 percent, 

while financial professionals accounted for 14 percent 

and lawyers for 8 percent. No other single occupational 

group accounted for more than 5 percent of the top percentile. Some occupations have maintained steady shares 

of the top percentile over time, whereas others’ shares 

have changed. Since 1979, nonfinancial executives saw 

their share decline a bit, from 36 percent to 31 percent. 

Within that group, the share attributable to salaried professionals declined sharply, while the share for executives 

of small businesses grew. The share of financial professionals almost doubled from 1979 to 2005. The study 

found that income growth was high for all the topearning professions but varied substantially both within 

and across professions between those at the very highest 

part of the income scale and the rest of the top percentile. 

Executives, managers, supervisors, and financial 

25. Sherwin Rosen, “The Economics of Superstars,” American 

Economic Review, vol. 71, no. 5 (December 1981), pp. 845–858. 

26. For a review of that literature, see Robert J. Gordon and Ian DewBecker, “Selected Issues in the Rise of Income Inequality,” Brookings Papers on Economic Activity, no. 2 (Fall 2007), pp. 169–190. 

27. Steven N. Kaplan and Joshua D. Rauh, “Wall Street and Main 

Street: What Contributes to the Rise in the Highest Incomes?” 

Review of Financial Studies, vol. 23, no. 3 (March 2010), 

pp. 1004–1050.

28. Jon Bakija, Adam Cole, and Bradley T. Heim, Jobs and Income 

Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data, Working Paper 2010-24 

(Williamstown, Mass: Williams College, November 2010).
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 19

CBO

professionals accounted for 60 percent of the increase in 

income accruing to the top percentile of the income distribution between 1979 and 2005. 

Because of the important role of the financial sector, 

some researchers have focused on the pattern of compensation in that sector over a long period.29 They found that 

the financial sector has become more complex since the 

1980s and has thus needed more skilled labor. But even 

accounting for the education and skills of the workforce, 

the compensation differential between the financial sector 

and the rest of the economy appears inexplicably large 

from 1990 onward. The authors believe that deregulation 

and corporate finance activities linked to initial public 

offerings and credit risk are the primary causes of the 

higher compensation differential. However, because that 

particular study did not focus on the highest earners, it is 

not clear to what extent its findings can explain the rapid 

rise in income shares at the top of the distribution.

Others have argued that the observed growth in the conversion of C corporation income into S corporation 

income has contributed to the rapid growth in income 

for the highest-income households. That effect arises 

because such conversion can alter the timing of income. 

S corporations are required to pass all of their profits 

through to their shareholders in the year that they are 

earned, while C corporations face no such requirement. 

That phenomenon might be a contributing factor, but it 

can explain only a portion of the increase in the share of 

market income for the top 1 percent, much of which has 

come from increases in earnings.

The Effect of Government Transfer 

Payments and Federal Taxes 

Even though an increasing concentration of market 

income was the primary force behind the growing dispersion in after-tax household income between 1979 and 

2007, shifts in the distribution of government transfer 

payments and federal taxes also contributed to the 

increase in after-tax income inequality.30

Overall, transfers and federal taxes reduce income 

inequality. Transfers tend to make income more equal by 

boosting income for people at the bottom of the scale, 

and federal taxes tend to make income more equal 

because average tax rates (taxes as a percentage of household income) increase as income rises. In addition, the 

earned income tax credit, which in this analysis is 

included with federal taxes (though some of its benefits 

are conveyed in the form of government payments), has 

an effect on the income distribution similar to that of 

transfers by raising the after-tax income of lower-income 

households. 

The effect of transfers and taxes on the dispersion of 

household income can be seen by comparing the 

Gini index for market income with the Gini index for 

after-transfer, before-tax income and the Gini index 

for after-transfer, after-federal-tax income. A proportional 

transfer and federal tax system would leave the Gini index 

for after-transfer, after-federal-tax income equal to that 

for market income. Transfers that are a decreasing percentage of market income as income rises (progressive 

transfers) lower the Gini index, as do federal taxes that are 

an increasing percentage of before-tax household income 

as income rises (progressive taxes). Because both transfers 

and federal taxes are progressive in the United States, they 

reduce the Gini index (see Figure 11). The dispersion of 

after-tax income in 2007 is about four-fifths as large as 

the dispersion of market income. Roughly 60 percent of 

the difference in dispersion between market income and 

after-tax income is attributable to transfers and roughly 

40 percent is attributable to federal taxes.

The redistributive effect of transfers and federal taxes was 

smaller in 2007 than in 1979 (see Figure 12). In 1979, 

transfers and federal taxes reduced the Gini index from 

0.479 to 0.367, a decrease of 11 percentage points (or 

23 percent). In 2007, transfers and federal taxes reduced 

the Gini index from 0.590 to 0.489, a decline of 10 percentage points (or 17 percent). If transfers and federal 

taxes had had the same proportional equalizing effect in 

2007 as they did in 1979, the Gini index for household 

income after transfers and federal taxes would have been 

0.452 in 2007 instead of its actual value of 0.489. 

Expressed in 2007 dollars, transfers and federal taxes 

reduced the average income difference between pairs of 

households in 1979 from $34,500 (twice 47.9 percent of 

market income) to $22,600 (twice 36.7 percent of 

income after transfers and federal taxes). In 2007, 

29. Thomas Philippon and Ariell Reshef, Wages and Human Capital 

in the U.S. Financial Industry: 1909–2006, Working Paper 14644 

(Cambridge, Mass.: National Bureau of Economic Research, 

January 2009).

30. This study does not include state and local taxes, an issue discussed in more detail in Appendix A.
20 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 11.

Summary Measures of Income 

Inequality, With and Without 

Transfers and Federal Taxes

(Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

transfers and federal taxes reduced the average difference 

from $66,600 to $48,900. Those reductions occurred 

because income after transfers and federal taxes is more 

evenly distributed than market income and because it is 

smaller, on average.

As a result of the diminishing effect of transfers and federal taxes, the Gini index for income after transfers and 

federal taxes grew by more than the index for market 

income. Between 1979 and 2007, the Gini index for 

market income increased by 23 percent, the index for 

market income after transfers increased by 29 percent, 

and the index for income measured after transfers and 

federal taxes increased by 33 percent. 

The equalizing effect of transfers and taxes depends on 

their degree of progressivity and on their size relative to 

household income. Holding the size of transfers and taxes 

constant, an increase in the progressivity of transfers and 

taxes will reduce income inequality. Holding the degree 

of progressivity constant, an increase in the size of transfers and taxes will also reduce inequality (assuming that 

both transfers and taxes are progressive). 

The equalizing effect of transfers declined over the 1979–

2007 period primarily because the distribution of transfers became less progressive. The equalizing effect of federal taxes also declined over the period, in part because 

the amount of federal taxes shrank as a share of market 

income and in part because of changes in the progressivity of the federal tax system.

Government Transfer Payments

The amount of government transfer payments—including federal, state, and local transfers—relative to household market income was relatively constant from 1979 

through 2007, ranging between 10 percent and 12 percent with no discernible trend (see Figure 13). Social 

Security benefits accounted for between 55 percent and 

60 percent of the value of all transfers in each year of the 

period, equaling about 61⁄2 percent of market income, on 

average. Even though average Social Security benefits 

grew more slowly than average income, the population 

receiving benefits grew faster than the overall population.

Figure 12.

Reduction in Income Inequality from 

Transfers and Federal Taxes

(Percentage reduction in Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

1980 1985 1990 1995 2000 2005

0.7

0.6

0.5

0.4

0

Market Income

Market Income

Plus Transfers

Market Income

Plus Transfers 

Minus Federal Taxes

0.7

0.6

0.5

0.4

0

1980 1985 1990 1995 2000 2005

25

20

15

10

5

0

Reduction from

Transfers and Federal Taxes

Reduction from 

Transfers

Reduction from

Federal Taxes

25

20

15

10

5

0
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 21

CBO

Figure 13.

Transfers as a Percentage of 

Household Market Income

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

Medicare, Medicaid, and Children’s Health Insurance 

Program benefits—measured here as their so-called fungible value—rose from under 2 percent to over 3 percent 

of market income.31 Other transfers declined from nearly 

3 percent of market income at their peak in 1982 to 

under 2 percent by 2007.32

For transfer payments other than Social Security and 

unemployment insurance benefits, CBO relied on estimates of participation and benefit amounts from the 

Census Bureau’s Current Population Survey.33 Those payments are underreported in the survey. Adjusting for 

underreporting to the extent possible would reduce the 

estimated inequality of after-transfer income but would 

have little effect on trends in inequality measured over 

long periods (see Box 3).

Effects of Transfers on Different Income Groups. The 

shifts in the relative importance of different transfer 

programs since 1979 moved the distribution of transfer 

benefits away from households in the lower part of the 

income spectrum to some extent (see Figure 14 on 

page 24). Rapid growth in Medicare, which is not meanstested (in other words, not provided to people based on a 

test of need determined by their income and assets), 

tended to shift more transfer income to middle- and 

upper-income households. At the same time, spending on 

Aid to Families with Dependent Children and its successor, Temporary Assistance for Needy Families, has 

declined relative to market income; benefits from those 

means-tested programs are heavily concentrated at the 

bottom of the income scale. As a result, households in the 

lowest-income quintile received 54 percent of federal 

transfer payments in 1979 and 36 percent in 2007.

As a consequence of those shifts, the redistributive effect 

of transfers has changed over time and changed in different ways for subgroups of the population. Largely 

because of the decrease in the share of transfers accruing 

to households in the lower part of the income scale, the 

overall redistributive effect of transfers lessened between 

1979 and 2007 (see Figure 12). That decline was irregular, though, as the effect of transfers increased in periods 

in which transfer income grew more quickly than market 

income (such as the recessions of 1990–1991 and 2001) 

and decreased in periods in which transfer income grew 

more slowly than market income. 

Effects of Transfers on Different Types of Households.

Because outlays on programs focused on the older population (such as Social Security and Medicare) have grown 

31. Fungible value is a measure developed by the Census Bureau and 

used in its alternative income definitions. It is generally the 

amount of resources freed up for other uses by the services provided through a transfer program; the measure is intended to capture the value of the in-kind benefit to the recipient. The fungible 

value of Medicare, Medicaid, and the Children’s Health Insurance 

Program has grown more slowly than expenditures for those programs because the fungible value is constrained by slow income 

growth among low-income recipients. Appendix C provides more 

details on the concept, as well as a general discussion of the effect 

of health care benefits on measures of income inequality.

1980 1985 1990 1995 2000 2005

14

12

10

8

6

4

2

0

Total

Social Security

Medicare, Medicaid, and 

Children’s Health 

Insurance Program

Other

14

12

10

8

6

4

2

0

32. Transfers as measured in this study do not equal total government 

expenditures on the same transfer programs, for several reasons. 

Importantly, health care programs are valued at their fungible 

value as defined by the Census Bureau, not by their expenditures. 

Also, some transfer payments are received by individuals not in 

the scope of the Census Bureau’s survey data, such as the institutionalized population, and some recipients misreport the amount 

of transfer payments they receive.

33. Information used in this study on recipients and benefit amounts 

for Social Security and unemployment insurance came primarily 

from tax returns.
22 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Continued

faster than outlays on other transfer programs, the share 

of transfers received by elderly childless households has 

likewise increased, while the portion going to households 

with children has declined. Elderly households received 

62 percent of total transfers in 1979 and 68 percent in 

2007 (see Figure 15 on page 24). Households with children received a much smaller and declining share of 

transfers—19 percent in 1979 and 12 percent in 2007.34

Nonelderly childless households saw the smallest 

fluctuations in their share of transfers, which ranged 

between 17 percent and 21 percent over the period. The 

most significant sources of cash transfers for nonelderly 

childless households are Social Security disability benefits 

and retirement benefits for early retirees (those who retire 

between age 62 and age 65), unemployment insurance 

benefits, and workers’ compensation. Some of those 

households also receive health insurance through Medicare or Medicaid.

Transfers have a large redistributive effect for elderly 

childless households because those households receive a 

Box 3.

The Misreporting of Transfer Income

In its measure of transfer income, the Congressional 

Budget Office (CBO) includes payments from most 

government transfer programs: Social Security, 

Medicare, Medicaid, the Supplemental Nutrition 

Assistance Program (SNAP, formerly called the 

Food Stamp program), Supplemental Security 

Income (SSI), Temporary Assistance for Needy Families (TANF, and its predecessor, Aid to Families with 

Dependent Children, AFDC), unemployment insurance, and state and local government cash transfers, 

as well as housing subsidies, energy assistance, and 

free or reduced-price school breakfasts and lunches. 

Those sources of income are quite important for 

many low-income households. 

Tax returns contain little information about transfer 

income because most of it is not taxed. For Social 

Security and unemployment insurance benefits, 

which are partially taxable, CBO uses information 

from tax returns together with information from 

the Current Population Survey (CPS). CBO’s estimates of income from those sources generally exceed 

90 percent of the amount that the government agencies that administer the programs report paying in 

benefits. 

For transfer payments other than Social Security and 

unemployment insurance benefits, CBO relies on 

estimates of participation and benefit amounts from 

the CPS. Unfortunately, the shares of different types 

of transfer payments that are reported in the CPS are 

relatively low, and they have generally been declining 

over time. A recent study found that the share of 

Food Stamp benefit dollars captured in the CPS 

declined from 67 percent in 1993 to 55 percent in 

2005.1

 For AFDC and TANF, reporting rates 

declined from 75 percent in 1993 to 57 percent in 

2005. In contrast, reporting of SSI benefits rose from 

76 percent to 82 percent over the same period.

To analyze how the misreporting of transfer income 

might affect estimates of the income distribution, 

CBO tabulated data from the Transfer Income Model 

(TRIM3).2

 That model corrects for the misreporting 

1. Laura Wheaton, “Underreporting of Means-Tested Transfer 

Programs in the CPS and SIPP,” 2007 Proceedings of the 

American Statistical Association, Social Statistics Section [CDROM] (Alexandria, Va.: American Statistical Association, 

2007), pp. 3622–3629.

2. The model was developed and is maintained by the Urban 

Institute, with funding primarily from the Department of 

Health and Human Services, Office of the Assistant Secretary 

for Planning and Evaluation. TRIM3 requires users to input 

assumptions and interpretations about economic behavior 

and the rules governing federal programs. Therefore, the conclusions presented here are attributable only to CBO.

34. In this analysis, the full amount of the earned income tax credit, 

including the refundable portion, is counted as a reduction in federal taxes (although some of those amounts are paid to people 

because they exceed the recipients’ other tax liabilities).
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 23

CBO

large share of transfers and because they have belowaverage market income. Over the 1979–2007 period, 

transfers ranged from 45 percent to 60 percent of market 

income for the elderly. Those transfers reduced income 

inequality (measured by the Gini index) among elderly 

households by between 25 percent and 35 percent during 

that period (see Figure 16). The redistributive effect of 

transfers for those households fluctuated throughout the 

period, largely reflecting changes in the size of transfers 

relative to other income. There has been a trend toward a 

smaller share of transfer payments that accrue to elderly 

households accruing to the low-income elderly, lessening 

the redistributive effect over the period. 

The effect of transfers on income inequality is much 

smaller for households with children and nonelderly 

childless households. For those groups, transfers equaled 

between 4 percent and 6 percent of market income. Early 

in the 1979–2007 period, transfers had a larger redistributive effect on households with children, but that effect 

diminished in the mid- to late 1990s to the level 

experienced by nonelderly childless households. That 

convergence occurred because transfers as a share of 

income decreased for households with children and 

because the share of those payments accruing to lowerincome households fell.35 For both groups, the redistributive effect of transfers rose in years near the 1990–1991 

Box 3. Continued

The Misreporting of Transfer Income

of transfer income by applying the rules of several 

transfer programs to each household in the CPS to 

determine if households are eligible for benefits and, 

if so, the size of the benefit they can receive. Households that report receiving benefits, and who appear 

to be eligible, are assigned the computed amount of 

the benefit. Households that report receiving 

benefits but who appear to be ineligible are assumed 

to receive no benefits. For households that do not 

report receiving benefits but who appear to be eligible, new participants are created in such a way as to 

match the number and characteristics of recipients 

reported in government agencies’ program data. The 

model targets the number of recipients rather than 

the overall amount of benefits, but the estimated benefit amounts approximate the agencies’ totals.

To assess the sensitivity of its main analysis to the 

misreporting of transfers, CBO combined estimates 

of transfer payments from TRIM3 with its own 

merged data from tax returns and the CPS. For the 

programs covered by TRIM3—Food Stamps, SSI, 

TANF/AFDC, and housing subsidies—CBO 

replaced benefits as reported in the CPS with benefits 

as estimated using TRIM3. CBO then recalculated 

income, reranked households according to their corrected income, and tabulated new estimates of the 

distribution of income. CBO did that analysis for 

1993 and 2004, the earliest and latest years for which 

TRIM3 estimates are available.

Underreporting of transfer income increased between 

1993 and 2004. However, transfer income increased 

more slowly than market income over that period. As 

a result, the reporting adjustments were larger in 

2004 than in 1993 as a share of transfer income, but 

smaller as a share of total household income. Therefore, the reporting adjustments had a smaller effect 

on the Gini index in 2004 than in 1993.

Adjusting for the misreporting of transfer payments 

adds income for households at the bottom of the 

distribution of income. Consequently, the Gini index 

adjusted for misreporting is lower than the unadjusted Gini index. For 1993, reporting adjustments 

cause the Gini index to fall from 0.455 to 0.450, or 

by about 1 percent; for 2004, reporting adjustments 

lower the Gini index from 0.502 to 0.498, or by 

0.8 percent. 

35. An increase in the refundable portions of the earned income tax 

credit and the child tax credit (which are not counted as transfers 

here) largely offsets the decline in transfer payments to lowincome families with children.
24 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

and 2001 recessions, when transfer payments grew faster 

than market income.

Federal Taxes 

Changes in the effect of taxes on the distribution of aftertax income can come about because of a change in the 

overall average tax rate, a change in the composition of 

taxes, or changes in the progressivity of particular taxes. 

Over the 1979–2007 period:

 The overall average federal tax rate (combined federal 

taxes as a share of household income including transfers) fell by a small amount, 

 The composition of federal revenues shifted away 

from income taxes to payroll taxes (which are less 

progressive), 

 The federal individual income tax became slightly 

more progressive, and 

 The payroll tax became slightly less progressive.

Figure 14.

Share of Total Transfers, by Market 

Income Group

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

Figure 15.

Share of Total Transfers, by Type of 

Household

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

On balance, those factors reduced the extent to which 

federal taxes lessened the degree of income inequality.36

As a result, the increase in inequality of after-tax incomewas greater than the increase in inequality of before-tax 

income.

A Lower Average Federal Tax Rate. The overall average 

federal tax rate dropped from 22 percent in 1979 to 

20 percent in 2007 (see Figure 17). The average tax rate 

declined in the early 1980s, then rose through much of 

the 1980s and 1990s. It peaked at 23 percent in 2000, 

and then fell sharply following the 2001 recession and tax 

legislation enacted in 2001 and 2003, reaching just under 

20 percent in 2003, the lowest rate since 1979. By 2007, 

the overall rate had risen to just above 20 percent, a percentage point below the average for the 29-year period. 

1980 1985 1990 1995 2000 2005

60

50

40

30

20

10

0

Lowest Quintile

Second Quintile

Middle Quintile Highest Quintile

Fourth Quintile

60

50

40

30

20

10

0

36. CBO’s measure of federal taxes includes individual and corporate 

income taxes, social insurance (payroll) taxes, and excise taxes. 

CBO did not include state and local taxes in this analysis because 

of the difficulty of estimating them over a long time period. It is 

unclear how that omission affects conclusions about the redistributive effect of taxes (see Appendix A for more discussion).

1980 1985 1990 1995 2000 2005

80

70

60

50

40

30

20

10

0

Elderly Childless Households

Nonelderly

Childless Households

Households

with Children

80

70

60

50

40

30

20

10

0
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 25

CBO

Figure 16.

Reduction in Income Inequality from 

Transfers for Different Types of 

Households

(Percentage reduction in the Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

A Shift from Income Taxes to Payroll Taxes. The composition of federal taxes changed between 1979 and 2007, 

as payroll taxes grew faster than income taxes. The average payroll tax rate (social insurance taxes as a percentage 

of household income including transfers) was slightly 

higher in 2007 than it was in 1979, but the average 

individual income tax rate was slightly lower. Those variations stemmed from a combination of legislative changes 

and economic developments. 

The increase in the payroll tax rate in the 1980s resulted 

from legislated increases in the cap on earnings subject to 

the Social Security payroll tax and from legislation 

enacted in 1983 that accelerated previously scheduled 

increases in the Social Security payroll tax rate. Subsequent legislation in the early 1990s first increased and 

then eliminated the cap on earnings subject to the 

Hospital Insurance payroll tax (which is used to finance a 

portion of Medicare). The payroll tax rate declined in the 

late 1990s and early 2000s as labor income grew more 

slowly than other income sources and as earnings above 

the maximum level subject to Social Security taxes grew 

more rapidly than earnings below that level. 

The average individual income tax rate peaked at 12 percent of household income in 1981. That rate then fell as 

the reduction in tax rates enacted in 1981 took effect. 

The average individual income tax rate rose again in the 

late 1990s because of legislation enacted in 1993 and 

because of rapidly rising incomes. After 2000, the rate fell 

once more as a result of the 2001 and 2003 tax cuts and 

the recession in 2001.

An Increase in the Progressivity of Federal Individual 

Income Taxes. Virtually all of the progressivity of the 

federal tax system derives from the individual income tax. 

Average federal income tax rates in 2007 ranged from 

-5.6 percent for households in the lowest income quintile 

to 18.8 percent for the 1 percent of the population with 

the highest income (see the top panel of Figure 18). The 

lowest income quintile has a negative average federal tax 

rate because, as a group, households in that quintile qualify for more in refundable tax credits than they owe in 

Figure 17.

Federal Taxes as a Percentage of 

Household Income Including Transfers

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

1980 1985 1990 1995 2000 2005

40

35

30

25

20

15

10

5

0

Elderly Childless Households

Households with

Children

Nonelderly

Childless Households

40

35

30

25

20

15

10

5

0

1980 1985 1990 1995 2000 2005

25

20

15

10

5

0

Excise

Corporate Income

Social Insurance (Payroll)

Individual Income

Total

25

20

15

10

5

0
26 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 18.

Federal Taxes as a Percentage of Household Income, by Income Group

(Percent)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

1980 1985 1990 1995 2000 2005

25

20

15

10

5

0

-5

-10

Lowest Quintile

21st to 80th Percentiles

81st to 99th Percentiles

Top 1 Percent

Individual Income Taxes

1980 1985 1990 1995 2000 2005

12

10

8

6

4

2

0

Top 1 Percent

Lowest Quintile

81st to 99th Percentiles

21st to 80th Percentiles

Payroll Taxes

1980 1985 1990 1995 2000 2005

40

30

20

10

0

Top 1 Percent

81st to 99th Percentiles

21st to 80th Percentiles

Lowest Quintile

All Federal Taxes

25

20

15

10

5

0

-5

-10

12

10

8

6

4

2

0

40

30

20

10

0
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 27

CBO

income taxes before the credits are applied. Average federal income tax rates were lower in 2007 than in 1979 

across the income distribution. The pattern in the intervening years is more varied, reflecting the interaction of 

numerous changes to tax law and changes in the composition and distribution of income. 

After rising between 1979 and 1983, average federal individual income tax rates declined almost continuously 

thereafter for the 60 percent of the population in the 

three middle income quintiles. For example, the income 

tax rate for the middle quintile declined from approximately 8 percent in 1981 to about 3 percent in 2003 and 

remained at about that level through 2007. The rapid 

decline in the rates between 2000 and 2003 reflects 

numerous changes in law enacted in 2001—such as the 

expansion of the child tax credit, reductions in tax rates, 

and reductions in the income tax burden on married couples—that lessened taxes for households in the middle 

quintiles. The decline in the average federal individual 

income tax rate since 1979 was largest for those in the 

lowest income quintile, primarily because of increases in 

the earned income tax credit. 

The average federal income tax rate for the 1 percent of 

the population with the highest income fell in the early 

1980s and then rose following enactment of the Tax 

Reform Act of 1986. The average tax rate for that group 

then fell somewhat again in the latter half of the 1980s 

before climbing in the 1990s. That increase reflected 

changes in law that raised tax rates for that group as well 

as rapid increases in their income, which caused their 

average tax rate to rise as more income was taxed in 

higher tax brackets. Tax rates for the highest-income 

households declined after 2000. The decline was especially rapid in 2003, when a reduction in the tax rate for 

the top tax bracket enacted in 2001 took effect and further changes in law reduced tax rates on dividends and 

realized capital gains. 

To measure the level and change over time in the progressivity of taxes, researchers have developed various 

approaches to summarizing the distribution of taxes into 

a single number. One such approach compares the Gini 

indexes for before-tax and after-tax income, essentially 

defining progressivity as the degree to which taxes equalize the distribution of income (see Appendix B). A Gini 

index for after-tax income that is smaller than the 

corresponding index for before-tax income indicates that 

the distribution of after-tax income is more equal than 

the distribution of before-tax income; a larger index for 

after-tax income than before-tax income indicates the 

opposite. Under this approach, the federal individual 

income tax was slightly more progressive in 2007 than in 

1979; that tax became more progressive between 1990 

and 2000 and less progressive after 2001 (see the top 

panel of Figure 19). 

An alternative measure of progressivity compares the 

share of taxes with the share of income for households 

ranked by income. That index effectively defines progressivity as the degree to which tax payments are more 

concentrated than income. (A measure that only compared the shares of taxes paid across households would be 

an inappropriate indicator of tax progressivity because it 

would not account for the shares of income across households.) By that measure of tax concentration, the federal 

individual income tax was notably more progressive in 

2007 than in 1979; it became more progressive from 

1990 through 1995 and again between 2000 and 2003, 

and it became slightly less progressive after 2003 (see the 

bottom panel of Figure 19).

A Decrease in the Progressivity of Payroll Taxes. In 

contrast to federal individual income taxes, which are 

progressive over the full range of household incomes, payroll taxes are not. In 2007, payroll taxes as a share of 

household income ranged from 8 percent for the lowest 

quintile to about 9 percent for other income groups up 

through the 80th percentile (see the middle panel of 

Figure 18). Average payroll tax rates were lower for higher 

income groups, dropping to under 2 percent for the highest income percentile. The average rate was lower for 

higher income households because a large portion of their 

earnings were above the maximum taxable amount for 

Social Security payroll taxes and because a larger fraction 

of their household income was not from earnings and 

thus not subject to payroll taxes.37

37. Although Social Security payroll taxes are not progressive, the program as a whole is generally thought to be progressive because the 

ratio of the lifetime benefits received from Social Security to the 

lifetime payroll taxes paid for the program is higher for people 

with lower lifetime earnings than for people with higher earnings. 

See Congressional Budget Office, Is Social Security Progressive?

(December 2006).
28 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 19.

Indexes of the Progressivity of Federal Taxes

(Percent)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

The indexes in the top panel are calculated as the difference between the Gini indexes for income before and after federal taxes. The 

indexes in the bottom panel are based on a comparison of shares of federal taxes with shares of income for households ranked by

income. 

1980 1985 1990 1995 2000 2005

0.4

0.3

0.2

0.1

0

-0.1

-0.2

Payroll Taxes

All Federal Taxes

Individual 

Income Taxes

Indexes Based on Concentration of Tax Payments

0.4

0.3

0.2

0.1

0

-0.1

-0.2

1980 1985 1990 1995 2000 2005

0.05

0.04

0.03

0.02

0.01

0

-0.01

-0.02

Payroll Taxes

All Federal Taxes

Individual 

Income Taxes

Indexes Based on Equalization of Income Distribution

0.05

0.04

0.03

0.02

0.01

0

-0.01

-0.02
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 29

CBO

The average payroll tax rate rose for all income groups 

from 1979 through the end of the 1980s as a result of legislated increases in the tax rate and expansions in the tax 

base. The rate rose again for the lowest income quintile 

after 1993, reflecting an increased share of income from 

wages for that group. The payroll tax rate also rose in the 

early 1990s for the highest-earning taxpayers following 

legislated increases to the maximum taxable amount for 

Hospital Insurance payroll taxes, but that rate fell thereafter as total income for those taxpayers grew more 

rapidly than the maximum taxable amount for Social 

Security.

Both approaches to measuring tax progressivity indicate 

that payroll taxes are regressive overall. The measure that 

compares shares of taxes with shares of income is negative, indicating that higher-income households pay a 

smaller share of payroll taxes than their share of income. 

The measure that compares the Gini indexes for beforetax and after-tax income is also negative, indicating that 

income after payroll taxes is more unequally distributed 

than income before payroll taxes. Both measures have 

become more negative over time, indicating that payroll 

taxes have become more regressive over the 1979–2007 

period. That change occurred because payroll tax rates 

rose the most for households at the bottom of the income 

distribution, as their labor income grew more rapidly 

than their other sources of income over the period.

The Change in the Overall Progressivity of the Federal 

Tax System. Taken as a whole, the federal tax system is 

progressive. In 2007, total federal tax rates ranged from 

under 5 percent of income for households in the bottom 

quintile to 14 percent for households in the middle 

quintiles to just under 30 percent for households in the 

highest income percentile (see the bottom panel of Figure 

18).38 From the mid-1980s through the mid-1990s, tax 

rates rose for the top quintile but fell for the lowest 

income quintile. Rates for all income groups declined 

from 2000 through 2007.

Because tax rates were lower for all income groups in 

2007 than in 1979, it is not immediately apparent from 

examining tax rates alone whether combined federal taxes 

became more or less progressive over that period. By the 

progressivity measure that compares the Gini indexes for 

before-tax and after-tax income, the federal tax system as 

a whole was slightly less progressive in 2007 than in 1979 

(see the top panel of Figure 19). By that measure, combined federal taxes became much less progressive in the 

first part of the 1980s, much more progressive in the first 

part of the 1990s, and slightly less progressive since then. 

By the alternative measure of tax concentration (discussed 

above) that compares shares of taxes with shares of 

income, the federal tax system as a whole was about as 

progressive in 2007 as it was in 1979 (see the bottom 

panel of Figure 19).39 Combined federal taxes became 

slightly less progressive in the early 1980s and slightly 

more progressive in the early 1990s and have been mostly 

unchanged since then. 

The difference in estimated changes in progressivity 

reflects different concepts of progressivity. Although federal tax payments were about as concentrated relative to 

the concentration of income in 2007 as in 1979, the 

equalizing effect of federal taxes on household income 

was smaller. That result reflects the decrease in the average tax rate over the period. If federal taxes had represented the same share of household income in 2007 as 

they did in 1979, the similar concentration of tax payments would have implied a similar equalizing effect. 

Federal Taxes on Different Types of Households. The 

impact of the federal tax system varies across types of 

households. Some differences arise because several provisions of federal tax law explicitly provide benefits to 

certain types of households. For example, the child tax 

credit, exemptions for dependents, head of household filing status, and the earned income tax credit all reduce tax 

burdens on households with children relative to those 

without children. Other differences arise because income 

from various sources is more or less significant for different types of households and is taxed at different rates. For 

example, payroll taxes apply only to earnings (and thus 

are quite important to nonelderly households), whereas 

special tax rules apply to income from Social Security, 38. In addition to federal individual income taxes and payroll taxes, 

total federal taxes include federal taxes on corporate income and 

federal excise taxes. Those sources accounted for 94 percent of 

federal receipts in fiscal year 2010. The federal estate tax, customs 

duties, and miscellaneous receipts are not included in the analysis.

39. A related tax progressivity index, the Suits Index, shows similar 

trends in tax progressivity over time.
30 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Figure 20.

Indexes of Federal Tax Progressivity 

Based on Equalization of Income 

Distribution for Different Types of 

Households

(Percentage reduction in the Gini index)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction 

of inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

capital gains, and dividends (and are relatively more 

important to elderly households, for whom those sources 

represent a larger share of their income). Other differences arise because of the interaction between the distribution of income and the progressive nature of the federal tax system. 

Even though elderly childless households have a lower 

average federal tax rate than any other group, federal taxes 

have a greater redistributive effect on them than on other 

types of households (see Figure 20). Because earnings are 

a relatively small source of income for elderly households, 

payroll tax burdens, which tend to be regressive, are low. 

In contrast, capital income is a more important source 

of income for elderly households, and federal taxes on 

capital income and the portion of the federal corporate 

tax attributed to elderly households, which are very progressive under the assumption that owners of capital bear 

the economic burden of corporate income taxes, are 

relatively high. 

The redistributive effect of taxes on elderly households 

dropped sharply during the first five years of the time 

period studied here. That change was primarily driven by 

a decline in federal corporate income tax payments. After 

some variation in the interim, that effect was about the 

same in 2007 as it was in 1983. 

For households with children, the redistributive effect of 

federal taxes in 2007 was almost as large as for elderly 

households. That progressivity derives almost exclusively 

from the federal individual income tax, which is most 

redistributive for households with children. In addition 

to the progressive rate structure of the tax code, the 

earned income tax credit and the child tax credit are very 

progressive, mainly benefiting low- and moderate-income 

households with children. Because of those credits (and 

the structure of tax rates), households with children in 

the lowest 40 percent of the overall income distribution 

receive more in refundable tax credits than they otherwise 

owe in federal income taxes, and households with children in the middle fifth of the distribution pay less than 

2 percent of their income in federal individual income 

taxes.

The redistributive effect of federal taxes declined for 

households with children in the first years of the 1979–

2007 period as payroll taxes rose while federal individual 

and corporate income taxes fell. The redistributive effect 

rose throughout the 1990s as a series of changes to tax 

law increased the concentration of federal tax payments 

among higher-income households. Rate increases for 

high-income taxpayers coupled with an expansion of the 

earned income tax credit and creation of the child tax 

credit caused the average federal individual income tax 

rate to decrease at the bottom of the distribution while 

increasing at the top. Additionally, as income rose 

rapidly at the top of the distribution, federal income taxes 

paid by those taxpayers climbed even more rapidly 

because of the progressive nature of the tax system. After 

the late 1990s, the redistributive effect of federal taxes on 

households with children changed little. Although the 

concentration of federal income tax payments continued 

to rise, that effect was offset by a general decline in federal 

taxes as a share of income.

Over most of the 29-year period, the federal tax system 

was least redistributive for nonelderly childless households. Those households face a similar mix of taxes as 

1980 1985 1990 1995 2000 2005

8

7

6

5

4

3

2

1

0

Elderly Childless 

Households

Households with

Children

Nonelderly Childless

Households

8

7

6

5

4

3

2

1

0
TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 31

CBO

households with children, but they face a less progressive 

federal income tax system. In the early years of the 

period, the redistributive effect of federal taxes on nonelderly childless households was almost identical to the 

effect on households with children. However, the 

increases in the concentration of federal tax payments 

were not nearly as large in the 1990s for this group as for 

households with children, because low-income childless 

households did not receive new tax benefits of the same 

magnitude as low-income households with children. In 

the 2000s, the redistributive effect of federal taxes on 

nonelderly childless households declined slightly. The 

concentration of federal tax payments for such households was little changed, but federal taxes claimed a 

smaller share of income, causing the redistributive effect 

of federal taxation to decline. 

CBO

Appendix A: 

Measuring Household Income

This appendix explains the data and the assumptions 

used in this Congressional Budget Office (CBO) analysis.

Sources of Data

This analysis draws its information on income from two 

primary sources. The core data come from the Statistics 

of Income (SOI), a nationally representative sample of 

individual income tax returns collected by the Internal 

Revenue Service (IRS). The number of returns sampled 

grew over the time period studied, ranging from roughly 

90,000 in some of the early years to more than 300,000 

in the later years. CBO used the full Individual Income 

Tax file, which contains more detail than the public-use 

version of the file released by the IRS. CBO supplemented that information with data from the Annual 

Social and Economic Supplement to the Census Bureau’s 

Current Population Survey (CPS), which contains survey 

data on the demographic characteristics and income of a 

large sample of households.

One limitation of the data is that both the SOI and the 

CPS lack important information needed for estimating 

and comparing after-tax household income over time. 

The SOI lacks information on couples and individuals 

who do not file a federal tax return, does not report all 

income from government cash transfer programs, has no 

information on the receipt of in-kind transfers and benefits, and uses tax returns rather than households as the 

reporting unit. The CPS lacks detailed information on 

high-income households, does not report capital gains, 

underreports other income from capital, and lacks information on deductions and adjustments necessary to 

compute taxes.

To overcome the limitations of the two data sources, 

CBO statistically matched each SOI record to a 

corresponding CPS record on the basis of demographic 

characteristics and income. Each pairing resulted in a new 

record that took on the demographic characteristics of 

the CPS record and the income reported in the SOI. 

Some types of income, such as certain transfer payments 

and in-kind benefits, appear only in the CPS; values for 

those items were drawn directly from that survey. Because 

not all households have to file tax returns, some households do not appear in the SOI; thus, the CPS reflects 

more households. After all SOI records were matched to 

CPS records, the remaining survey records were recorded 

as households that did not file an income tax return, and 

their income values were taken directly from the CPS. 

CBO then estimated the tax liability for each matched 

record.

Measuring Income

CBO constructed three measures of household income 

for this analysis: 

 The first measure—before-transfer, before-tax household 

income (called market income in this study)—includes 

all cash income (both taxable and tax-exempt), taxes 

paid by businesses (which are imputed to households 

as described below), and the value of income received 

in-kind from sources such as employer-paid health 

insurance premiums. The taxes paid by businesses are 

the imputed value of corporate income taxes (which 

are considered to be part of capital income) and the 

employer’s share of payroll taxes (which are considered 

to be part of labor income). They are included in the 

measure under the assumption that household income 

would have been higher by a corresponding amount in 

the absence of those taxes. 

 The second measure—after-transfer, before-tax household income—adds cash transfer payments (such as 

Social Security, unemployment insurance, and welfare 

benefits) to market income, along with estimates of 

the value of in-kind benefits (from Medicare, Medic-
34 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

aid, the Children’s Health Insurance Program (CHIP), 

the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program), and other 

programs). 

 The third measure—after-transfer, after-federal-tax 

household income (called after-tax income in this 

study)—subtracts federal individual and corporate 

income taxes, social insurance (payroll) taxes, and 

excise taxes. In this analysis, CBO did not subtract 

other federal taxes (such as estate and gift taxes) or 

state and local taxes in constructing after-tax income.

CBO used the Census Bureau’s measure of so-called 

fungible value to determine the cash equivalent of inkind government transfer payments. Fungible value is 

an estimate of the value to recipients of benefits received 

in kind. Some benefits are assessed at market value—

the cost recipients would incur if they bought the goods 

themselves. The value assigned to food stamps, for 

example, equals their face value, and school meals are 

counted as the subsidy cost borne by the government. 

The value of other in-kind benefits, such as benefits paid 

by Medicare, Medicaid, and CHIP, equals the amount of 

households’ resources freed up for other uses by the 

health care services provided, up to the average cost (total 

cost to the government divided by the number of program participants) of those services. Placing an appropriate value on medical insurance is difficult, however.1

 (For 

an extended discussion of that issue, see Appendix C.)

Adjusting Income for Differences 

Among Households

CBO used households as the unit of analysis. A household includes all people living in a single housing unit. 

The presumption is that households make joint economic decisions, which may not be true in every case (in 

a group house, for example). Households may comprise 

more than one taxpaying unit, such as a married couple 

and their adult children living together.

Households with identical income may differ in ways 

that bear on their economic status. Importantly, larger 

households need more income than smaller households 

to achieve the same economic status. At the same time, 

economies of scale in at least some types of consumption—housing, in particular—mean that two people do 

not need twice the income to live as well as an individual 

living alone. As a result, assessing economic status on the 

basis of per capita income (total household income 

divided by household size) ignores the benefits of shared 

consumption. An adjusted measure of income falling 

somewhere between household income and per capita 

income is likely to offer a better perspective on economic 

status. In this study, CBO adjusted for household size by 

dividing household income by an adjustment factor equal 

to the square root of the number of people in the household, counting adults and children equally. That adjustment implies that each additional person increases a 

household’s needs but at a decreasing rate.2

It may also be desirable to adjust the income of households for other differences in their circumstances that 

affect their economic position. For example, the prices of 

goods and services vary among locations, and households 

can incur different costs associated with working, such as 

the costs of commuting and child care expenses, depending on how many members are employed. In this analysis, CBO did not adjust for those additional differences 

among households.

Income Categories

In this analysis, CBO presents data on income and taxes 

for various subgroups of the population, such as the lowest 20 percent or the top 1 percent. In constructing those 

subgroups, households are ranked by income that is 

adjusted for household size. Each subgroup of the population contains an equal number of people, but because 

households vary in size, subgroups generally contain 

unequal numbers of households.

For each of the years 1979 through 2007, Table A-1 presents the range of income in each income category for the

1. See Daniel H. Weinberg, “Income Data Quality Issues in the 

Annual Social and Economic Supplement to the Current Population Survey” (paper prepared for the American Enterprise Institute–University of Maryland Seminar on Poverty Measurement, 

October 12, 2004). 

2. For example, a household consisting of a married couple with two 

children with income of $80,000 would have an adjusted income 

of $40,000 ($80,000 divided by ) and would have the equivalent economic ranking of a single person with income of $40,000 

or a married couple with income of about $56,600 ($56,600 

divided by is approximately $40,000). See Constance F. Citro 

and Robert T. Michael, eds., Measuring Poverty: A New Approach 

(Washington, D.C.: National Academy Press, 1995).

4

2
APPENDIX A TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 35

CBO

Table A-1. 

Income Category Minimums, 1979 to 2007

(2007 dollars)

Continued

three income definitions that CBO uses in the study: 

market income, market income plus government transfers, and market income plus government transfers minus 

federal taxes. 

Incidence of Federal Taxes

CBO assumed that households bear the economic cost of 

the taxes they pay directly, such as individual income 

taxes and the employee’s share of payroll taxes. CBO further assumed—as do most economists—that the 

employer’s share of payroll taxes is passed on to employees 

in the form of lower wages than would otherwise be paid. 

Therefore, CBO included the amount of those taxes in 

labor income and counted the taxes as part of household 

taxes.

CBO also assumed that the economic costs of excise taxes 

fall on households according to their consumption of 

taxed goods (such as tobacco and alcohol). Excise taxes 

on intermediate goods, which are paid by businesses, 

were attributed to households in proportion to their overall consumption. CBO assumed that each household 

spends the same amount on taxed goods as a similar 

household with comparable income in the Bureau of 

Labor Statistics’ Consumer Expenditure Survey.

In this analysis, CBO assumed that owners of capital 

bear the economic burden of corporate income taxes in 

proportion to their income from capital, measured as 

interest, dividends, rents, and adjusted capital gains. 

Adjusted capital gains—capital gains scaled to their longterm historical level given the size of the economy and the 

tax rate that applies to them—were used in place of actual 

Lowest Second Middle Fourth 81st-90th 91st-95th 96th-99th Top 1

Year Quintile Quintile Quintile Quintile Percentiles Percentiles Percentiles Percent

1979 0 12,823 25,095 36,165 51,289 66,177 84,243 165,049

1980 0 11,679 23,884 34,837 49,952 65,052 82,035 160,192

1981 0 11,576 23,775 34,962 50,269 64,931 82,417 157,184

1982 0 10,942 22,676 34,161 49,966 65,043 81,463 157,152

1983 0 10,588 22,368 34,124 50,333 66,092 83,946 164,076

1984 0 11,575 23,811 35,804 52,660 69,339 88,492 176,324

1985 0 11,731 23,996 36,388 53,439 70,645 90,614 182,408

1986 0 11,674 24,431 37,502 55,851 73,994 96,189 211,734

1987 0 10,917 24,247 37,880 56,609 75,078 96,583 198,913

1988 0 11,269 24,935 38,524 57,719 76,637 99,333 214,137

1989 0 11,643 25,273 39,082 58,173 77,769 101,227 217,203

1990 0 12,022 25,198 38,384 57,464 76,458 99,457 207,178

1991 0 11,591 24,259 37,979 56,428 75,209 97,958 203,670

1992 0 11,028 24,098 38,111 57,027 76,416 100,258 215,111

1993 0 11,013 23,939 38,046 57,398 76,678 100,620 211,008

1994 0 11,183 24,341 38,952 58,474 78,114 102,425 218,209

1995 0 12,218 25,307 39,612 59,901 80,381 106,301 230,851

1996 0 12,181 25,445 40,083 60,965 82,462 109,621 244,785

1997 0 12,716 26,091 40,942 62,189 85,783 115,270 259,427

1998 0 13,780 27,130 42,515 64,940 88,854 120,428 277,770

1999 0 14,258 27,836 43,578 66,755 91,542 123,864 296,430

2000 0 13,930 27,539 43,729 67,308 93,072 127,167 304,593

2001 0 13,563 27,273 43,003 66,512 90,969 122,144 274,135

2002 0 12,992 26,145 41,757 64,760 88,819 118,862 259,846

2003 0 12,536 25,934 41,896 65,567 89,789 120,573 265,390

2004 0 12,847 26,727 42,855 67,083 92,368 124,797 288,190

2005 0 13,415 26,993 43,464 68,025 95,001 131,128 322,859

2006 0 13,563 27,215 44,070 69,314 96,786 133,961 337,634

2007 0 14,851 28,618 45,192 70,578 98,955 137,578 347,421

Market Income
36 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Table A-1. Continued

Income Category Minimums, 1979 to 2007

(2007 dollars)

Continued

realizations in allocating corporate income taxes so as to 

smooth out large year-to-year variations in the amount of 

gains.

The incidence of the corporate income tax is uncertain. 

In the very short term, owners of corporate equity are 

likely to bear most of the economic burden of the tax; but 

over the longer term, as capital markets adjust, the economic burden of the tax is spread across owners of all 

types of capital. Moreover, the burden will fall partly on 

wage earners to the extent that domestic investment 

declines as capital shifts to other countries or domestic 

saving falls because of the tax, thereby lowering the 

growth in workers’ productivity and wages. For this analysis, however, CBO assumed that the economic burden 

of the corporate income tax is spread proportionately 

across all forms of capital income.3

State and Local Taxes 

CBO did not include state and local taxes in this analysis 

because of the difficulty of estimating them for individual 

households over a long period. State sales taxes would be 

Lowest Second Middle Fourth 81st-90th 91st-95th 96th-99th Top 1

Year Quintile Quintile Quintile Quintile Percentiles Percentiles Percentiles Percent

1979 0 17,394 27,563 37,861 52,803 67,496 85,634 167,365

1980 0 16,705 26,678 36,781 51,554 66,629 83,706 162,320

1981 0 16,473 26,487 36,988 51,982 66,629 84,379 159,784

1982 0 15,988 25,825 36,465 51,956 66,987 83,800 160,358

1983 0 15,295 25,557 36,462 52,283 67,737 85,748 167,000

1984 0 16,229 26,665 38,092 54,437 71,307 90,473 178,821

1985 0 16,304 27,093 38,689 55,204 72,538 92,686 185,834

1986 0 16,492 27,860 39,931 57,618 75,888 98,436 215,506

1987 0 15,897 27,719 40,223 58,387 76,969 98,368 202,586

1988 0 16,332 28,347 41,006 59,510 78,824 101,171 217,957

1989 0 16,720 28,774 41,448 60,316 79,959 103,537 220,654

1990 0 17,116 28,809 41,199 59,485 78,614 101,968 210,743

1991 0 17,055 28,286 40,786 58,597 77,401 100,232 206,690

1992 0 16,667 28,369 41,135 59,323 78,808 103,311 218,623

1993 0 16,899 28,483 41,075 59,840 79,225 103,024 215,061

1994 0 17,077 28,896 42,051 60,718 80,455 105,247 221,474

1995 0 17,916 29,893 42,762 62,352 83,317 109,400 235,420

1996 0 17,622 30,179 43,391 63,557 85,572 112,829 248,706

1997 0 18,076 30,591 44,069 65,054 88,139 118,285 263,875

1998 0 18,918 31,736 45,626 67,561 91,954 123,395 281,724

1999 0 19,402 32,444 46,610 69,545 94,613 127,211 300,386

2000 0 19,030 32,219 46,880 70,279 96,330 130,399 308,989

2001 0 19,204 32,352 47,091 69,709 93,970 125,600 278,582

2002 0 18,745 31,526 46,069 68,029 91,974 122,069 265,040

2003 0 18,461 31,317 46,034 68,999 92,732 123,655 269,239

2004 0 18,852 32,089 47,331 70,639 95,934 128,279 293,352

2005 0 19,092 32,632 48,109 71,740 98,573 135,153 327,829

2006 0 19,466 32,999 48,760 73,172 100,851 138,171 341,717

2007 0 20,448 34,261 49,960 74,732 102,918 141,914 352,875

Market Income Plus Transfers

3. See Jane G. Gravelle and Kent A. Smetters, “Does the Open 

Economy Assumption Really Mean That Labor Bears the Burden 

of a Capital Income Tax?” Advances in Economic Analysis & Policy, 

vol. 6, no. 1, Article 3 (2006); Alan J. Auerbach, “Who Bears the 

Corporate Tax? A Review of What We Know,” in James M. 

Poterba, ed., Tax Policy and the Economy, vol. 20 (Cambridge 

Mass.: MIT Press, 2006), pp. 1–40; William M. Gentry, A Review 

of the Evidence on the Incidence of the Corporate Income Tax, Office 

of Tax Analysis Paper 101, Washington, D.C., 2007; William C. 

Randolph, International Burdens of the Corporate Income Tax,

Congressional Budget Office Working Paper 2006-09 (August 

2006); and Jennifer C. Gravelle, Corporate Tax Incidence: Review of 

General Equilibrium Estimates and Analysis, Congressional Budget 

Office Working Paper 2010-03 (May 2010).
APPENDIX A TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 37

CBO

Table A-1. Continued

Income Category Minimums, 1979 to 2007

(2007 dollars)

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

particularly challenging, as no major survey collects data 

on sales taxes paid by households. It is unclear how the 

omission of those taxes affects conclusions about trends 

in the redistributive effect of the entire tax system. 

Between 1979 and 2007, state and local taxes ranged 

between 8.2 percent and 9.3 percent of gross domestic 

product—equal to about 40 percent to 50 percent of 

federal taxes. State and local taxes have three primary 

components, and the composition of receipts has been 

fairly stable over time. Sales taxes are the largest source, 

accounting for 34 percent of state and local tax revenue 

in 2007. Those taxes are generally assumed to be roughly 

proportional to consumption, making the tax regressive 

with respect to income (because lower-income 

households consume a greater proportion of their income 

than do higher-income households). Property taxes 

accounted for 30 percent of state and local tax revenue in 

2007. The progressivity of those taxes depends critically 

on their incidence, which is a matter of considerable 

debate. State individual income taxes, which accounted 

for 22 percent of state and local tax revenues in 2007, are 

much less progressive than the federal individual income 

tax because the rate structures for state-level income taxes 

are flatter than those at the federal level and any refundable credits are small. Thus, although different analysts 

have reached different conclusions about whether state 

and local taxes on net are proportional, progressive, or 

regressive, they are clearly less progressive than the federal 

tax system. Consequently, analysis of the entire tax system 

Lowest Second Middle Fourth 81st-90th 91st-95th 96th-99th Top 1

Year Quintile Quintile Quintile Quintile Percentiles Percentiles Percentiles Percent

1979 0 15,411 22,851 30,341 41,075 51,613 64,087 115,965

1980 0 14,763 22,065 29,416 39,920 50,418 62,330 113,485

1981 0 14,421 21,748 29,287 39,910 50,181 62,291 113,396

1982 0 14,036 21,540 29,331 40,595 51,520 63,965 118,782

1983 0 13,450 21,280 29,494 41,196 52,721 66,334 126,542

1984 0 14,057 22,079 30,652 42,868 55,152 69,345 135,171

1985 0 14,133 22,375 31,127 43,492 56,152 71,338 140,576

1986 0 14,344 22,979 32,184 45,308 58,646 75,957 162,699

1987 0 13,988 23,038 32,620 45,809 58,970 74,477 146,992

1988 0 14,342 23,453 33,094 46,544 60,453 77,074 158,133

1989 0 14,787 23,862 33,464 47,043 61,294 78,824 161,594

1990 0 14,953 23,848 33,248 46,352 60,430 77,416 154,120

1991 0 14,948 23,517 33,019 45,844 59,475 75,790 149,975

1992 0 14,751 23,726 33,299 46,480 60,648 78,412 158,908

1993 0 14,964 23,843 33,315 46,918 60,910 77,833 152,493

1994 0 15,296 24,190 34,089 47,474 61,601 79,057 154,622

1995 0 16,037 24,958 34,748 48,659 63,435 81,445 163,944

1996 0 15,893 25,143 35,305 49,592 64,996 83,950 172,247

1997 0 16,253 25,486 35,824 50,788 67,026 87,885 182,804

1998 0 17,036 26,721 37,301 52,966 69,883 91,840 195,771

1999 0 17,416 27,273 38,104 54,210 71,591 94,559 207,060

2000 0 17,084 27,244 38,320 54,784 72,857 96,771 214,484

2001 0 17,575 27,805 39,077 55,265 72,214 94,576 196,355

2002 0 17,319 27,251 38,448 54,350 71,416 92,455 188,133

2003 0 17,272 27,476 38,962 55,963 73,134 95,450 193,457

2004 0 17,620 28,161 39,984 57,337 75,357 98,628 210,028

2005 0 17,837 28,538 40,556 58,141 77,579 103,490 231,481

2006 0 18,141 28,816 41,083 59,264 79,165 105,716 242,390

2007 0 18,979 29,769 42,202 60,557 81,135 109,006 252,607

Market Income Plus Transfers Minus Federal Taxes
38 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

would show less progressivity than analysis of the federal 

tax system alone. However, it is more difficult to know 

how changes in state and local taxes over time have 

affected trends in tax progressivity.4

Limitations of Using Annual Data

This study presents a series of annual snapshots of household income from 1979 through 2007. Because the data 

represent the experiences of different people in each year, 

the analysis does not provide information about changes 

in the income of a particular household or a group of 

households over multiyear periods. 

That approach has two significant limitations. First, the 

year-to-year variation in income means that a household’s 

distributional rank based on annual income may not 

accurately represent its economic resources; for example, 

a household in one of the lower income quintiles in a particular year may have assets that make it relatively well 

off. A household’s consumption derives less from its current income than from the normal, or permanent, 

income the household expects to have over time. People 

may rely on savings or borrowing to tide themselves over 

during periods of unemployment, for example.

A second, and related, limitation is that some forms of 

income come irregularly, particularly capital gains from 

the sale of a business, shares of stock, or other assets. A 

business owner who sells his firm, for example, will 

appear wealthy in the year of the sale because of the large 

capital gain realized at that time, even though the increase 

in the firm’s value probably accrued over a much longer 

period. Placing that person near the top of the income 

distribution in the year of the sale and at a much lower 

rank in other years misstates his or her economic status in 

all years, overstating it in one and understating it in all 

others. Yet in the absence of lifetime income data, it is 

impossible to accurately apportion the capital gains realized in a single year over multiple years. Analysts must 

choose between counting the gain as income when realized or allotting only part or none of it to current income. 

Extensive examination of tax data on the sales of capital 

assets indicates that apportioning gains across years on 

the basis of a single year’s realizations would lead to significant error.5

 CBO thus counted all capital gains as 

income when realized.

4. For distributional analyses of state and local tax systems, see 

Joseph A. Pechman, Who Paid the Taxes: 1966–85? (Washington, 

D.C.: Brookings Institution, 1985); and Donald Phares, Who 

Pays State and Local Taxes? (Cambridge, Mass.: Oelgeschlager, 

Gunn, and Hain, 1980). For more-recent estimates, see Andrew 

Chamberlain and Gerald Prante, Who Pays Taxes and Who Receives 

Government Spending? An Analysis of Federal, State, and Local Tax 

and Spending Distributions, 1991–2004, Working Paper 1 (Washington, D.C.: Tax Foundation, March 22, 2007); and Institute on 

Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (November 2009).

5. See Congressional Budget Office, Perspectives on the Ownership of 

Capital Assets and the Realization of Capital Gains (May 1997).
CBO

Appendix B: 

Inequality Indexes 

This Congressional Budget Office (CBO) analysis 

uses several indexes to measure the distribution of income 

and taxes. Those indexes are derived from concentration 

curves, which generally plot the cumulative distribution 

of income or taxes against the cumulative distribution of 

the population. This appendix provides information on 

the calculation and interpretation of those indexes. 

The Gini Index

The Gini index is a widely used measure of income 

inequality. It ranges from zero to one, with increasing values of the index implying greater inequality.1

 The index 

provides a useful summary metric, characterizing the 

entire income distribution with a single number. The 

Gini index can be derived from data on the shares of 

income accruing to various income groups. (See Box 2 on 

page 8 for more discussion about deriving the index.) 

One way to put the Gini index in context is to examine a 

shift in income shares that produced a particular change 

in the Gini index. For example, in 2007 the system of 

government transfers and federal taxes increased the share 

of income accruing to each of the bottom four quintiles 

of the population (a quintile is one-fifth of a distribution) 

by 1 or 2 percentage points (relative to their share of market income) while reducing the share accruing to the 

highest quintile by around 7 percentage points. Much of 

that reduction came from the top percentile, whose share 

of income shrank by 4 percentage points. Those shifts in 

income shares caused a difference of almost 11 percentage 

points in the Gini index: The Gini index for market 

income was 0.590, and the Gini index for after-tax 

income was 0.483. 

Another way to put the Gini index in context is to see the 

impact that hypothetical income shifts would have on 

that measure. Shifting money from lower-income groups 

to higher-income groups would cause the index to rise, 

whereas shifts from higher- to lower-income groups 

would cause it to fall. Shifts across large ranges of the 

income distribution would have a bigger effect on the 

index than shifts across smaller ranges. A shift of 1 percent of market income from the top percentile of the 

income distribution to the bottom quintile would lower 

the Gini index by 0.018 (see Table B-1). That shift, of 

roughly $95 billion (in 2007 dollars), would reduce 

income in the highest percentile by about 5 percent but 

would boost income in the bottom quintile by almost 

50 percent. Making that same size shift from the top 

percentile to the middle quintile would reduce the Gini 

index by 0.010, and shifting it instead to the 95th to 99th 

percentiles would lessen the index by only 0.001 percentage point. Shifting 1 percent of income from the middle 

quintile to the lowest quintile would reduce the index by 

0.008, while shifting it to the highest quintile would raise 

the index by 0.009. Shifting that money from the lowest 

quintile to the middle or highest quintile would boost the 

index by 0.008 or 0.017, respectively. 

A further way of interpreting the Gini index is as a 

statistical measure of the dispersion of the income distribution, similar to a standard deviation. In particular, the 

Gini index can be interpreted and calculated as half of the 

relative mean difference. The relative mean difference, in 

turn, is equal to the average difference in income between 

every pair of households in the population, expressed as a 

percentage of average income. So the Gini index of 0.590 

1. Researchers have developed several other inequality indexes. For a 

comparison of the properties of different measures, see Frank A. 

Cowell, Measuring Inequality (New York: Oxford University Press, 

2011).
40 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Table B-1.

Effect of Hypothetical Transfers on the 

Gini Index

Source: Congressional Budget Office.

Note: For information on income definitions, the ranking of 

households, the allocation of taxes, and the construction of 

inequality indexes, see “Notes and Definitions” at the 

beginning of this study.

for market income implies that the average income difference across pairs of households was equal to 118 percent 

(2 times 0.590) of average household market income, or 

roughly $66,600. In contrast, the index for after-tax 

income was 0.483, so the average difference between all 

households was equal to 97 percent of average after-tax 

income, or about $47,900.

Income Concentration Indexes

Concentration indexes are similar to the Gini index, 

expressing the concentration of each income source as a 

single number. A concentration index differs from a Gini 

index for each source because in calculating the concentration index, households are ranked by total market 

income rather than by income from that source, as they 

would be in calculating the Gini index. The concentration index captures two effects: the concentration of 

income from that source, and the correlation of that 

income source with income from other sources (and 

hence with total market income). The latter effect arises 

because households are sorted by total market income 

when computing the metric. Thus, for example, the concentration index for labor compensation has increased 

over time both because compensation has become more 

unevenly distributed in favor of higher-compensation 

households and because compensation has become more 

highly correlated with other unevenly distributed sources 

of income, such as capital income.

Decomposing the Gini Index by 

Income Source

To calculate the Gini index G for total income Y, CBO 

used a standard formula:

(1)

Where i is the index for each household ranked by total 

income, Y, from 1 to N. 

Other formulas for estimating the Gini index, such as one 

based on the covariance of income with the cumulative 

distribution function of income, yield identical estimates.

The Gini index for total income can be decomposed 

into contributions from each income source.2

 The 

decomposition used in this analysis is:

(2)

Where:

j is the index for each income source, from 1 to J; 

yj

 is the income from each source; 

is the average amount of income from each source; 

is the average amount of total income; 

is the share of total income accounted for by each 

income source; and 

Hypothetical Transfer

Moving 1 Percent of Income from Top Percentile to: 

Lowest quintile -0.018

Middle quintile -0.010

95th-99th percentiles -0.001

Moving 1 Percent of Income from Middle Quintile to:

Lowest quintile -0.008

Highest quintile 0.009

Moving 1 Percent of Income from Lowest Quintile to:

Middle quintile 0.008

Highest quintile 0.017

Memorandum:

Gini Index for Market Income in 2007 0.590

Gini Index

Change in

2. This derivation is reported in A.F. Shorrocks, “Inequality 

Decomposition by Factor Components,” Econometrica, vol. 50, 

no. 1 (January 1982), pp. 193–211; and John C. H. Fei, Gustav 

Ranis, and Shirley Kuo, “Growth and the Family Distribution of 

Income by Factor Components,” Quarterly Journal of Economics, 

vol. 92, no.1 (February 1978), pp. 17–53.

G Y( ) 2

N2

Y

= ---------- i N + 1

2 – -------------    

i = 1

N

×  Yi ×

G Y( ) yj

Y

---

j = 1

J

 G yj = × ( )

yj

Y

y

j

Y

---
APPENDIX B TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 41

CBO

 is the concentration index for each income source 

(sometimes called the pseudo-Gini). 

Changes in the share of total income accounted for by 

each income source are reported in the main text as shifts 

among sources of income. The pseudo-Gini differs from 

the conventional Gini for the income source because 

individuals are ranked by total income rather than 

income from that source. Changes in the pseudo-Gini are 

reported as an increased concentration of the income 

source. That term will rise if an income source becomes 

more concentrated higher in the distribution of total 

income, which occurs if the source becomes more concentrated by itself or if income from that source becomes 

closely correlated with income from other sources. 

 can be written as:

(3)

CBO’s decomposition can be mathematically derived 

from the three-factor decomposition used by some 

researchers.3

 That decomposition divides the Gini into 

three components, using the covariance formula for the 

Gini coefficient:

(4)

Where F is the cumulative distribution function of 

income.

The first term is called the Gini correlation; it measures 

how closely the distribution of income from each income 

source aligns with the distribution of total income. The 

second term is the pure Gini for each income source, and 

the third term is a weight for each income source, equal 

to its share of total income.

CBO’s approach essentially combines the first two terms 

into one factor. Multiplying the first two terms together 

yields: 

(5)

The first term equals the concentration index for each 

income source when households are ranked by their 

total income. It differs from the second term of the 

previous equation in that the numerator is the covariance 

of income from source j with the cumulative distribution 

function of total income Y rather than income source 

j(yj

).

Tax Progressivity Indexes 

Several indexes have been devised to summarize the progressivity of a tax system. Those indexes rely on so-called 

Lorenz-type concentration curves to summarize the distribution of the tax system in a single number.

One such measure, known as the Reynolds-Smolensky 

index, is equal to the difference between the Gini index 

for before-tax income and the Gini index for after-tax 

income. If the tax system is proportional (each household 

pays the same share of income in taxes), then the Gini 

indexes for before- and after-tax income are identical, and 

the Reynolds-Smolensky index takes on a value of zero. If 

the tax system is progressive (average tax rates rise with 

income), then the Gini index for after-tax income is 

smaller than the Gini index for before-tax income, and 

the Reynolds-Smolensky index takes on a positive value.

Another measure, the Kakwani index, is computed as the 

difference between a concentration index for tax payments (with households ordered by their before-tax 

household income) and the Gini coefficient for beforetax income. If the tax system is proportional, then the tax 

concentration index exactly equals the Gini index for 

before-tax income, and the Kakwani index takes on a 

value of zero. If the tax system is progressive, then the 

Kakwani index has a positive value; and if the tax system 

is regressive, then the Kakwani index has a negative value.

Although both of those indexes measure the progressivity 

of the tax system, they do so in different ways, which can 

3. See Robert I. Lerman and Shlomo Yitzhaki, “Income Inequality 

Effect by Income Source: A New Approach and Applications to 

the United States,” Review of Economics and Statistics, vol. 67 

(1985), pp. 151–156.

G yj ( )

G yj ( )

G yj ( ) 2

N2

y

j

= ---------- i N + 1

2 – -------------    

i = 1

N

×  yij ×

G Y( )

cov y (, ) j F Y( )

cov y

j F Yj (, ) ( ) ---------------------------------- 2cov y

j F yj (, ) ( )

yj

------------------------------------ yj

Y

× × -----

j = 1

J

= 

G Y( )

2cov y(, ) j F Y( )

yj

------------------------------------

yj

Y

× -----

j = 1

J

= 
42 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

lead to different conclusions about that progressivity. 

The Kakwani index directly measures the concentration 

of tax payments, comparing that with the concentration 

of income. The index is thus indifferent to the size of the 

tax system, viewing the progressivity of the tax system on 

the basis of the shares of taxes paid and the shares of 

income received by different income groups. By contrast, 

the Reynolds-Smolensky index only indirectly measures 

the concentration of payments, by comparing the distribution of after-tax income to before-tax income. That 

formula measures the redistributive effect of the tax system, and it is a function of both the concentration of tax 

payments and the share of household income claimed by 

the tax system.4

 Those two measures can yield different 

conclusions about the change in progressivity induced by 

a change in the tax code.

4. In fact, the indexes can be mathematically derived from each 

other primarily on the basis of the average tax rate. The ReynoldsSmolensky index is equal to the Kakwani index multiplied by the 

inverse of the after-tax rate, plus an adjustment for the difference 

between the before-tax and after-tax income rankings. See John 

Creedy, “Taxation Redistribution and Progressivity: An Introduction,” Australian Economic Review, vol. 32, no. 4 (December 

1999), pp. 410–422.
CBO

Appendix C: 

The Effect of Health Insurance on the 

Distribution of Income

Health insurance represents a significant and 

growing portion of labor compensation and government 

transfer payments. Employer-sponsored health insurance 

(ESI) is the largest component of nonwage compensation 

provided to workers, and the Medicare and Medicaid 

programs are two of the largest federal transfer programs. 

Because receiving health insurance allows households to 

consume more health care without giving up other forms 

of consumption, the Congressional Budget Office (CBO) 

included estimated values of that insurance in household 

income for this study. Many analyses of household 

income do not include health insurance, however, at least 

in part because assigning a value to it is difficult. 

This appendix shows how including health insurance 

affected the estimates of income inequality presented in 

this study and how valuing Medicare, Medicaid, and the 

Children’s Health Insurance Program (CHIP) in a different way would have led to different estimates. Under 

either approach to valuing those government transfers, 

including health insurance in income reduces measured 

income inequality and the measured increase in inequality between 1979 and 2007. 

Assigning a Value to Health Insurance

Receiving health insurance enhances the economic wellbeing of recipients, enabling them to obtain health care 

services at a reduced out-of-pocket cost. But recipients 

of health insurance might prefer to receive a cash payment equal to the employer’s or government’s cost of that 

insurance because then they could choose whether to use 

all of that cash payment to purchase insurance on their 

own or to use some or all of the cash payment for other 

purposes. Therefore, the value of the health insurance to 

a recipient might be lower than the cost of providing it, 

particularly for low-income recipients, whose consumption of other goods and services is tightly constrained by 

their lack of resources. 

In the main analysis of this study, CBO counted the full 

value of health insurance premiums paid by employers as 

income.1

 However, CBO counted only the so-called fungible value of Medicare, Medicaid, and CHIP as income. 

That measure, developed by the Census Bureau and used 

in some of its income definitions, equals the amount of 

resources freed up for other uses by that insurance, up to 

the average cost of those services (total cost to the government divided by the number of program participants). 

The fungible value of Medicare, Medicaid, and CHIP for 

a household thus depends not only on the average cost of 

the benefits provided by those programs but also on the 

1. The Census Bureau estimates the value of employers’ contributions to health insurance on the basis of a separate survey of 

employers. A full description of the methods used to value noncash benefits is provided in Appendix B of Bureau of the Census, 

Measuring the Effect of Benefits and Taxes on Income and Poverty: 

1992, Current Population Reports, Series P60, No. 186RD 

(September 1993), pp. viii-ix and B-1 to B-5.
44 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

income and needs of the household.2

 This appendix also 

shows results using the average cost of Medicare, Medicaid, and CHIP rather than the fungible value.

Evaluating the Impact on Income 

Inequality

Two recent papers have directly examined how the treatment of health insurance affects the measurement of 

income inequality.3

 In one analysis, Gary Burtless and 

Pavel Svaton used estimates of the value of health insurance from the Current Population Survey (CPS) and the 

value of health care services consumed from the Medical 

Expenditure Panel Survey (MEPS) over the 1996–2005 

period. Using the CPS-based measures of health insurance, the authors found that the inclusion of that 

insurance raised average income by about 8 percent in the 

first half of that period and by more than 10 percent in 

the latter half of the period. The relative increases in 

income were larger in the lower part of the income distribution than in the higher part, so the inclusion of health 

insurance reduced measured income inequality. The 

authors also found that including health insurance led to 

a slower measured increase in income inequality over 

time. Moreover, the authors found similar effects on 

inequality when they included the MEPS-based measures 

of health care consumption in income instead of the 

CPS-based measures of health insurance. 

Richard Burkhauser and Kosali Simon undertook a similar analysis, supplementing income from the CPS with 

insurance imputations from the MEPS. Specifically, the 

authors used the MEPS data to construct measures of the 

insurance value of health insurance rather than using the 

actual heath care services consumed. They found that 

including employer-sponsored health insurance in 

income reduced measured income inequality and the 

measured increase in income inequality over time. They 

also found that including the government-provided 

health insurance programs had an even greater effect on 

reducing both the level and increase in income inequality.

Employer-Sponsored Health Insurance

Consistent with the results presented in those two papers, 

CBO found that including employer-sponsored health 

insurance in income slightly lowered measured inequality 

and the measured increase in inequality between 1979 

and 2007.

Employer-sponsored health insurance provides the biggest proportional boost to income in the middle of the 

distribution, with a smaller boost at both extremes of the 

distribution. At the bottom of the income distribution, 

households are unlikely to have ESI, either because they 

are not working or because they are employed in jobs that 

do not offer it. At the top of the income distribution, 

high-income workers are quite likely to receive ESI, but 

because the average costs of health insurance do not rise 

proportionally with income, ESI is a relatively small part 

of their compensation. Therefore, in 2007, households in 

the lowest income quintile (or fifth of the distribution) 

received only 2.2 percent of the total value of ESI, 

whereas those in the middle quintile received 19.5 percent, and households in the highest quintile received 

40 percent (see Table C-1). That insurance represented 

1.4 percent of income in the lowest quintile, between 

6 percent and 7 percent of income in the middle three 

quintiles, and declining shares of income moving up 

within the top quintile to only 0.5 percent of income for 

the top percentile (see Table C-2). 

The Gini index for market income (including ESI) was 

slightly below that of other market income, indicating 

more equality (see Figure C-1 on page 47). That small 

net effect masks distributional shifts, however. Adding 

ESI to other income increased income in the middle of 

the distribution by more than at either end of the distribution. The equalizing effect of increasing income in the 

middle of the distribution more than at the top was 

slightly larger than the disequalizing effect of increasing 

income in the middle more than at the bottom, so the net 

effect was slightly equalizing. The equalizing effect of 

2. For each household, the Census Bureau compares the household’s 

income to an estimate of the cost to the household of meeting 

basic needs for food and housing. If a household does not have 

enough income to meet those basic needs, the Census Bureau 

assumes that the household would spend nothing on health care 

in the absence of the government transfer programs, and it sets the 

fungible value for health care benefits for that household equal to 

zero. For households with some income above what is necessary to 

meet basic needs, the fungible value is set equal to the amount of 

income above that basic standard, up to the average cost of the 

health care benefits. The Census Bureau estimates the average cost 

of health care benefits using outlays for Medicare, Medicaid, and 

CHIP by state and risk class.

3. See Gary Burtless and Pavel Svaton, “Health Care, Health Insurance, and the Distribution of American Incomes,” Forum for 

Health Economics & Policy, vol. 13, no. 1 (Frontiers in Health 

Policy Research), Article 1; and Richard V. Burkhauser and Kosali 

I. Simon, Measuring the Impact of Health Insurance on Levels and 

Trends in Inequality, Working Paper 15811 (Cambridge, Mass.: 

National Bureau of Economic Research, March 2010).
APPENDIX C TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 45

CBO

Table C-1. 

Shares of Selected Income Measures, by Income Group, 1979 and 2007

(Percent)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

CHIP = Children’s Health Insurance Program; ESI = employer-sponsored health insurance.

ESI has increased a bit over time, in large part because the 

amount spent on employer-sponsored health insurance 

has grown faster than other market income.

Medicare, Medicaid, and CHIP

Including receipt of Medicare, Medicaid, and CHIP 

significantly reduces income inequality because the 

beneficiaries of both programs are disproportionately represented in the lower part of the income distribution. 

Only families with income below specified levels are eligible for Medicaid, so very little of the program’s impact is 

on the upper reaches of the income distribution. CHIP 

also has income limits, though they are generally higher 

than the limits for Medicaid. In 2007, when measuring 

Medicaid and CHIP benefits by their average cost, about 

65 percent of the benefits accrued to the lowest income 

quintile and about 18 percent accrued to the second 

quintile (see Table C-1).4

 The fungible value of Medicaid 

and CHIP is constructed by the Census Bureau to be less 

than or equal to the average cost of the benefits, and the 

difference relative to average cost tends to be greatest for 

households that have the lowest incomes. Consequently, 

Insurance

Lowest Quintile 7.7 2.9 57.5 47.7 73.5 56.8 19.0

Second Quintile 10.9 13.3 16.6 20.3 14.2 23.9 16.0

Middle Quintile 14.8 20.4 9.0 11.0 5.6 9.1 17.0

Fourth Quintile 21.1 27.3 7.2 8.8 3.7 5.7 20.7

80th–90th Percentiles 14.7 17.1 3.6 4.2 1.2 2.3 12.6

90th–95th Percentiles 9.8 10.0 2.0 2.3 0.6 1.1 7.3

95th–99th Percentiles 11.6 7.5 2.7 3.4 0.6 1.1 5.9

Top 1 Percent 9.6 1.7 1.3 1.7 0 0 1.6 _____ _____ _____ _____ _____ _____ _____

 All Quintiles 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Lowest Quintile 5.7 2.2 46.1 30.1 64.6 31.5 15.5

Second Quintile 8.6 10.1 20.2 25.1 18.1 33.0 17.8

Middle Quintile 12.7 19.5 13.7 18.1 8.7 17.6 18.8

Fourth Quintile 18.6 28.2 9.5 12.7 4.9 10.4 20.7

80th–90th Percentiles 13.6 18.2 4.4 5.8 2.0 3.7 12.2

90th–95th Percentiles 9.8 10.6 2.5 3.4 0.9 1.5 7.0

95th–99th Percentiles 13.0 8.9 2.7 3.6 0.8 1.5 6.2

Top 1 Percent 18.6 2.3 0.9 1.2 0.2 0.5 1.7 _____ _____ _____ _____ _____ _____ _____

 All Quintiles 100.0 100.0 100.0 100.0 100.0 100.0 100.0

ESI Plus 

Cost and CHIP Value

Average Fungible 

Cost

Average Fungible Medicaid,

2007

1979

Health 

Income, 

Market

Value

Medicare Medicare, Medicaid and CHIP

Value of

Fungible

Health

Excluding

Insurance

Sponsored

Employer4. The Census Bureau combines its estimates of the value of Medicaid and CHIP benefits, so CBO did not analyze those programs 

separately. 
46 TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007

CBO

Table C-2. 

Health Insurance as a Share of Market Income, by Income Group, 

1979 and 2007

(Percent)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

CHIP = Children’s Health Insurance Program; ESI = employer-sponsored health insurance.

when measuring Medicaid and CHIP benefits by their 

fungible value, the distribution of benefits is somewhat 

less skewed, with the lowest two income quintiles each 

receiving more than 30 percent of the benefits in 2007. 

Compared with Medicaid and CHIP benefits, the distribution of Medicare benefits is not as concentrated in the 

lower part of the income distribution, but it still tilts 

notably in that direction. Although Medicare is not 

means-tested, most beneficiaries are elderly, which is a 

group with below-average income. In 2007, when measuring Medicare benefits by their average cost, the lowest 

quintile received about 46 percent of those benefits. As 

with Medicaid and CHIP, using the fungible value rather 

than the average cost reduces the impact of the program 

at the lower end of the income scale. When measuring 

Medicare benefits by their fungible value, the lowest 

quintile received about 30 percent of the benefits in 

2007. 

From 1979 to 2007, total spending on Medicare, 

Medicaid, and CHIP grew rapidly, so the increment to 

households’ incomes from the programs grew rapidly as 

well. When valued at average cost, Medicare benefits rose 

from 1.6 percent to 4.3 percent of market income over 

Lowest Quintile 1.0 10.7 7.1 4.9 2.1 10.1

Second Quintile 4.1 2.7 2.6 0.8 0.8 7.4

Middle Quintile 4.1 1.0 0.9 0.2 0.2 5.2

Fourth Quintile 3.7 0.5 0.5 0.1 0.1 4.3

80th–90th Percentiles 3.3 0.4 0.3 0 0 3.7

90th–95th Percentiles 2.9 0.3 0.3 0 0 3.2

95th–99th Percentiles 1.8 0.3 0.3 0 0 2.2

Top 1 Percent 0.5 0.2 0.2 0 0 0.7

 All Quintiles 3.1 1.6 1.3 0.6 0.3 4.7

Lowest Quintile 1.4 29.1 14.1 20.9 3.2 18.6

Second Quintile 6.3 12.5 11.5 5.8 3.3 21.0

Middle Quintile 6.9 4.8 4.7 1.6 1.0 12.6

Fourth Quintile 6.4 2.1 2.1 0.6 0.4 8.8

80th–90th Percentiles 5.4 1.3 1.3 0.3 0.2 6.9

90th–95th Percentiles 4.3 1.0 1.0 0.2 0.1 5.4

95th–99th Percentiles 2.6 0.8 0.8 0.1 0.1 3.5

Top 1 Percent 0.5 0.2 0.2 0 0 0.6

 All Quintiles 4.3 4.3 3.2 2.2 0.7 8.1

Value and CHIP

Average Fungible 

ESI Plus

Medicaid,

2007

1979

Medicare,

Value of

Fungible

Health

Medicare Medicaid and CHIP

Insurance

Sponsored

EmployerCost Value

Average Fungible 

Cost
APPENDIX C TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 47

CBO

Figure C-1.

Effect of Health Insurance on Income Inequality Measures

(Gini index)

Source: Congressional Budget Office.

Notes: For information on income definitions, the ranking of households, the allocation of taxes, and the construction of inequality indexes, 

see “Notes and Definitions” at the beginning of this study.

ESI = employer-sponsored health insurance; CHIP = Children’s Health Insurance Program.

that period, while Medicaid and CHIP benefits rose from 

0.6 percent to 2.2 percent. The fungible value of Medicare, Medicaid, and CHIP benefits did not grow nearly as 

rapidly as the average cost of those programs, but it still 

grew more rapidly than market income. Between 1979 

and 2007, the fungible value of Medicare benefits 

increased from 1.3 percent to 3.2 percent of market 

income, and the fungible value of Medicaid and CHIP 

benefits increased from 0.3 percent to 0.7 percent. The 

growth of those programs relative to market income 

increased the redistributive effect of those programs. But 

the programs became less concentrated in the bottom of 

the distribution (whether measured by insurance value or 

fungible value), which partially offset that increase in the 

redistributive effect.

Including Medicare, Medicaid, and CHIP benefits in 

income lowers the measured Gini index (see Figure C-1). 

In 1979, the Gini index for market income plus transfers 

including the fungible value of Medicare and Medicaid 

benefits was 0.407, compared with the Gini index for 

market income plus transfers apart from Medicare, 

Medicaid, and CHIP of 0.415—a reduction of about 

2 percent. Including benefits from those programs at 

their average cost would further lower the Gini index to 

0.401. In 2007, including the fungible value of Medicare, 

Medicaid, and CHIP benefits reduced the Gini index 

by 3 percent, from 0.537 to 0.521. Including the average 

cost instead would have decreased the Gini index further, 

to 0.499. 

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

0

0.3

0.4

0.5

0.6

0.7

Market Income

Without ESI

Market Income

Market Income Plus (With ESI)

Nonhealth Transfers

Market Income Plus Transfers

Including the Fungible Value of

Medicare, Medicaid, and CHIP

Market Income Plus Transfers

Including the Average Cost of

Medicare, Medicaid, and CHIP