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

In this report, CBO builds on its past analyses of the distribution of household income in the United States by projecting what that distribution would look like in 2021 under current law and comparing those projections with the actual distribution in 2016. In particular, this analysis focuses on how two factors—means-tested transfers and federal taxes—affect the distribution of income. Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are designed to provide assistance to individuals and families with low income and few assets. Such transfers include benefits provided through programs such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) but not social insurance benefits, such as Social Security and Medicare. Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.

Average Household Income. Average inflation-adjusted household income is projected to grow for all groups. Growth in average income—both before and after means-tested transfers and federal taxes are accounted for—is projected to be fastest for households in the highest quintile (or fifth) of the income distribution. Growth in income after transfers and taxes is more skewed toward higher-income households than is growth in income before transfers and taxes.

Cumulative Income Growth. Growth in income before transfers and taxes is generally slower than growth in income after transfers and taxes. That pattern reflects rising means-tested transfer rates and decreasing federal tax rates from 1979 (the first year for which data are available) to 2016.

In CBO’s projections, the average income of households in the top 1 percent grows more than that of other households from 2016 to 2021. That group’s average income in 2021 falls just short of the peak it reached in 2007, before the most recent recession began. For households in the bottom 99 percent of the distribution, income is projected to be higher, on average, than it has been at any point since 1979, the first year covered in this analysis.

Means-Tested Transfers. Means-tested transfer rates—that is, the ratio of means-tested transfers to income before transfers and taxes—are projected to fall for all income groups from 2016 to 2021. The largest percentage-point decreases in means-tested transfer rates in CBO’s projections are for households at the bottom of the distribution.

After rising in the mid-2010s, means-tested transfer rates—particularly those for households in the lowest quintile—are projected to fall as average income rises and fewer people qualify for transfers.

Federal Taxes. Average federal tax rates—that is, the ratio of federal taxes to income before transfers and taxes—are also projected to fall across the distribution from 2016 to 2021. The highest-income households are projected to experience the largest percentage-point decreases in average federal tax rates.

After increasing in the mid-2010s, average federal tax rates are projected to decrease for households in all income groups.

Income Inequality. Means-tested transfers and federal taxes reduce income inequality. But the reduction in inequality attributable to them varies from year to year according to changes in means-tested transfer rates and tax rates. In CBO’s projections, income is distributed less equally in 2021 than it was in 2016, though transfers and taxes still reduce inequality.

The reduction in inequality attributable to transfers and taxes is projected to be smaller in 2021 than it was in 2016.