In 2020, the coronavirus pandemic and the ensuing federal response had significant effects on the distribution of household income. Income inequality before transfers and taxes increased, but inequality after transfers and taxes decreased.
See the companion slide deck for more information on the trends in the distribution of household income from 1979 to 2020.
Summary
The Congressional Budget Office regularly analyzes household income in the United States. This report presents the distributions of household income, means-tested transfers, and federal taxes in 2020 and explores how they differ from the distributions in 2019.
Largely because of the economic disruption caused by the coronavirus pandemic, 2020 was an unusual year. To mitigate that disruption, the federal government implemented an unprecedentedly large amount of fiscal stimulus. The policies enacted in response to the pandemic affected household income throughout the distribution—unlike the usual means-tested transfers, which are typically targeted at households toward the bottom of the income distribution.
Those policies altered household income through their effects on wages, employment, transfers, and taxes. Some policies (such as recovery rebate credits) provided direct benefits to households, whereas other policies (such as the Paycheck Protection Program) provided financial support to other entities, such as businesses, nonprofit organizations, and state and local governments. This report focuses on the effects of policies that provided direct benefits.
The main findings from CBO’s analysis of the distribution of household income in 2020 are these:
Income before transfers and taxes was more skewed toward the top of the income distribution in 2020 than in 2019. Income from labor decreased among low-income households, and income from capital gains increased among high-income households. In 2020, the average income among households in the highest quintile (or fifth of the distribution) was roughly 16 times the average income of households in the lowest quintile.
Means-tested transfers were larger in 2020 and federal taxes were lower. Those changes stemmed in large part from policies that provided direct payments to households in all income groups—in particular, recovery rebate credits and expanded unemployment compensation. The benefits from those two policies were broadly dispersed among households across the income distribution: More than half of the benefits attributable to those policies accrued to households in the three highest income quintiles in 2020, whereas about one-quarter of means-tested transfers accrued to households in those quintiles in 2019.
Income after transfers and taxes was more evenly distributed than income before transfers and taxes. Larger means-tested transfers and lower federal taxes boosted income for low-income households by a greater percentage than they increased it for other households.
Transfers and taxes reduced income inequality by more in 2020 than in any other year in CBO’s analysis. Although inequality before transfers and taxes was higher in 2020 than in any year since at least 1979, inequality after transfers and taxes was lower than in any year since 2009.
