This paper examines how the federal budget deficit would have differed in 2018 under four scenarios that vary the distribution of labor earnings while leaving aggregate earnings unchanged.

## Summary

*By Brooks Pierce*

This paper by the Congressional Budget Office examines how the federal budget deficit would have differed in 2018 under four scenarios that vary the distribution of labor earnings while leaving aggregate earnings unchanged. The scenarios were constructed to isolate the budgetary effects of changes in the distribution of earnings and do not reflect an assessment of policies that would change the distribution of earnings.

CBO estimates that substantial changes in the distribution of earnings would have relatively modest effects on the deficit because of the offsetting effects on revenues and outlays. Under the two scenarios that decrease earnings inequality, the reduction in income tax revenues would be partially offset by an increase in payroll tax revenues and a reduction in federal spending (including federal subsidies for health insurance, spending on the Supplemental Nutrition Assistance Program, and spending on the Supplemental Security Income program). Increasing earnings inequality would have the opposite effect on revenues and spending. On net, the federal deficit would rise with a decrease in inequality and fall with an increase in inequality. Larger changes in inequality would result in larger changes in the deficit.

Under the scenario that decreases inequality by 14 percent (as measured by the standard deviation of the logarithm of earnings), the federal deficit would increase by $13 billion, or 1.7 percent. In the scenario in which inequality is reduced by 5 percent, the deficit would increase by a smaller amount, $4 billion. When inequality varies in the other direction, the scenario that increases inequality by 5 percent would lower the deficit by $7 billion, and the scenario with a 14 percent increase in inequality would decrease the deficit by $26 billion.