US – To what extent is income being redistributed by government action ?

With changes like these in the distribution of the rewards of the American economy, the president and many on the left call for redistributing income from those at the top to those in the middle and bottom. But they seldom mention the extent to which income is already being redistributed by government action. In fact, the bottom 60 percent are already made better off by the tax and transfer system. According to the Congressional Budget Office, in 1979 households in the bottom 20 percent had only 2.9 percent of market income, but after government taxes and transfers (including the cost of health insurance) they had 7.1 percent of income, a boost of around 150 percent. In 2007 the tax and transfer system again more than doubled the share of income going to the bottom 20 percent, although the amount of redistribution was somewhat less than in 1979. Similarly, the tax and transfer system boosted the share of income going to households in the second and third quintiles in both 1979 and 2007. In 2007, even the fourth income quintile enjoyed a net gain of nearly 1 percentage point, going from 19.0 percent of market income to 19.9 percent of post-tax, post-transfer income.

By contrast, the top 20 percent and especially the top 1 percent of earners incurred major reductions in income after taxes and transfers in both 1979 and 2007. In 2007 for example, the top quintile’s after-tax, after-transfer income declined by about 12 percent, from 59.9 percent of market income to 52.7 percent after taxes and transfers. The reduction in market income by the operation of the tax and transfer system was even greater for households in the top 1 percent,about 27 percent in 1979 and about 20 percent in 2007. Thus, the impact of the government tax and transfer system is to take income from the top, especially the top 1 percent, and use it in part to increase the income of households in the middle and bottom. CBO estimates that about 60 percent of the equalizing effect was due to transfers and about 40 percent to taxes, both of which diminish income inequality.

There are no objective criteria for judging how much income redistribution government should aim to achieve through its tax and transfer programs.

Chosen excerpts by Job Market Monitor. Read the whole story at Absent Major Change, High Wealth Inequality Will Likely Remain the Norm | Brookings Institution.