The Distribution of Household Income in 2020

For more than 30 years, the Congressional Budget Office has reported on the distribution of household income and federal taxes. This report focuses on the distribution of household income in 2020, the most recent year for which relevant data from tax returns are available. It also examines how the distribution of household income in 2020 differed from that in 2019, before the onset of the coronavirus pandemic in the United States.

The roughly 129 million households in the United States in 2020 received a total of about $16 trillion in annual income, CBO estimates.1 That income was distributed unevenly among the quintiles (or fifths) of the income distribution: The average income of households in the highest quintile was about $357,800, CBO estimates, roughly 16 times the average income of households in the lowest quintile, which was $21,900.

Many households experience changes in their income, transfers, taxes, or household composition from year to year. As a result, the households in any given group of the income distribution in 2020 are not the same households that were in that group in 2019. Therefore, this analysis focuses on the changes in the overall distribution of household income rather than the experiences of particular households.

Overview of Changes in Income

The pandemic had a significant effect on the U.S. economy in 2020. The unemployment rate rose from 3.5 percent in February 2020 to a peak of 14.7 percent in April 2020, the highest level since the Great Depression. By the end of 2020, the unemployment rate had declined to 6.7 percent, but both employment and labor force participation remained significantly lower than before the pandemic.

As a result, labor income per household decreased for households in the four lower quintiles, on average, and those decreases were larger (in percentage terms) for lower-income households. The Paycheck Protection Program (PPP) and other federal policies mitigated some of those decreases by helping businesses retain their employees. In contrast to labor income, income from realized capital gains grew by about 29 percent in 2020, to $1.1 trillion. Most of that income accrued to households in the highest quintile. In combination, those changes to labor income and income from capital gains increased income inequality.

In terms of its contribution to income inequality over the long run, 2020 was an unusual year. According to CBO’s estimates, income inequality before transfers and taxes was higher in 2020 than in any year since 1979, and inequality after transfers and taxes was lower in 2020 than in any year since 2009—in large part because of new temporary policies enacted in response to the pandemic. Although the benefits of those policies were broadly dispersed across the income distribution, they constituted a larger share of income for low-income households. CBO has produced a complementary analysis (available at www.cbo.gov/publication/59510) that examines trends in the distribution of household income, means-tested transfers, and federal taxes from 1979 to 2020.

Overview of the Effects of Transfers and Taxes on Household Income

Federal fiscal policies greatly affect the economic resources available to U.S. households. In 2020, average income among all households before means-tested transfers and federal taxes were taken into account was $123,400, CBO estimates. The net effect of those transfers and taxes was to decrease household income by $10,700, on average, bringing average household income to $112,700. Means-tested transfers provided households with an additional $9,600 in income, on average, in that year. Federal taxes reduced household income by $20,300 per household, on average.2

Those averages obscure a large amount of variation in household income and in how transfers and taxes affect income. Typically, transfers and taxes reduce income inequality because low-income households receive a larger share of their income as means-tested transfers than high-income households do and because high-income households pay a larger share of their income in federal taxes than low-income households do.

In 2020, new policies were enacted that provided households with financial support and had significant effects on the distribution of household income.3 The two largest policies—recovery rebate credits and expanded unemployment compensation—together increased income by more than $800 billion, or more than $6,000 per household, on average (see Appendix B for more details about those policies). In this report, recovery rebate credits are considered refundable tax credits, and expanded unemployment compensation is considered a means-tested transfer.

Both programs provided benefits to households across the income distribution. A little more than half of those benefits went to households in the three highest quintiles in 2020. By contrast, 23 percent of means-tested transfers went to households in those quintiles in 2019.

Legislation also expanded existing means-tested transfer programs—such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP)—and reduced the taxes households owed by expanding or introducing tax credits, exclusions, and deductions.

In addition, the federal government implemented policies that provided support to other entities. The Paycheck Protection Program, for example, supported businesses and nonprofit organizations, and the Coronavirus Relief Fund supported state and local governments. The effects of those policies are included in this analysis to the extent that they indirectly affected household income (by altering wages and employment, for example). Other effects of such policies—for example, PPP benefits that ultimately boosted businesses’ profits—are not included in this analysis. Also excluded are policies that did not increase household income but that nevertheless increased the resources available to households, such as the suspension of student loan payments.

Even without policy changes, transfers and taxes would have lessened some of the increase in inequality because of the effect of budget mechanisms known as automatic stabilizers, which take effect when economic conditions deteriorate. As income and employment decreased in 2020 in response to the pandemic, more people became eligible for means-tested transfers and unemployment insurance because their income fell below certain thresholds. Also, more people were pushed into lower tax brackets, which reduced their individual income tax rate.

Transfers and Taxes Produced a More Even Distribution of Income

In 2020, means-tested transfers and federal taxes increased income among households in the lowest quintile by $23,900 (or 110 percent), on average, to $45,800. Among households in the highest quintile, income decreased by $82,100 (or 23 percent), on average, to $275,700, as a result of transfers and taxes.

In 2019, the effects of transfers and taxes were smaller among low-income households but similar among high-income households. In that year, transfers and taxes increased average income among households in the lowest quintile by $15,700 (or 65 percent) to $39,900 (in 2020 dollars) and decreased income among households in the highest quintile by $81,000 (or 24 percent), on average, to $256,500.

Income Before Transfers and Taxes Grew Only for Higher Income Groups, but Income After Transfers and Taxes Grew Across the Distribution

In 2020, income before transfers and taxes decreased for households at the bottom of the distribution and increased for households at the top of the distribution. Among households in the lowest quintile, income declined by 10 percent, on average; among households in the top 1 percent, income increased by 14 percent. Income was nearly unchanged among households in the middle quintile.

By boosting income, means-tested transfers and federal taxes significantly altered the distribution of household income from 2019 to 2020. The gains in income were spread throughout the distribution but were largest as a percentage of income for low-income households. Income after transfers and taxes increased by nearly 15 percent, on average, among households in the lowest quintile, by 11 percent among households in the middle quintile, and by 14 percent among households in the top 1 percent. The overall increase for the top quintile was smaller than those for the other income groups.

Income Before Transfers and Taxes

CBO’s measure of income before transfers and taxes consists of market income plus social insurance benefits. Market income comprises wages and other forms of labor income (including cash wages, employers’ contributions for health insurance premiums, and payroll taxes paid by employers), business income, capital gains, and other income sources. Social insurance benefits include Social Security and Medicare benefits, regular unemployment insurance (but not expanded unemployment compensation, which is considered a means-tested transfer), and workers’ compensation. Notably, income before transfers and taxes excludes the effects of government policies carried out through means-tested transfer programs or the federal tax system.

The composition of income before transfers and taxes varies across the distribution. For most households, labor income makes up the bulk of their income. But among households at the top of the distribution, capital gains constitute a greater portion of income before transfers and taxes than they do for other households. Additionally, as income rises, social insurance benefits tend to decline as a share of income.

Overall Income Growth Was Largely Attributable to Increases in Capital Gains and Social Insurance Benefits

The income of the average household grew by 1.6 percent in 2020 (after adjustments for inflation), from $121,500 to $123,400. Capital gains increased by $1,900, on average, and social insurance benefits increased by $1,700. Labor income, by contrast, decreased by $700, largely as a result of pandemic-related job losses. Average business income declined by $100, and all other income decreased by $900, on average.

Income Increased at the Top of the Distribution and Decreased at the Bottom

The distribution of household income was uneven across the five quintiles in 2019—and became more uneven in 2020 because the quintiles’ income grew at different rates. For example, the average income before transfers and taxes of households in the lowest quintile decreased from $24,200 to $21,900, whereas that of households in the highest quintile increased from $337,400 to $357,800.

Income Grew Unequally Because of Differing Changes in Its Components

For households in the highest quintile, income increased more in 2020 than it grew per year, on average, between 1979 and 2020. Those increases in 2020 were largely attributable to larger capital gains and higher business and labor income. By contrast, income among households in the lowest quintile decreased from 2019 to 2020, driven primarily by a decline in labor income arising from pandemic-related job losses.

Means-Tested Transfers and Federal Taxes

Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are typically designed to assist individuals and families who have low income and few assets.4 Those transfers go largely to households near the bottom of the income distribution.5

In 2020, means-tested transfers were particularly large, mainly because of three key factors. First, in this analysis, that category includes the temporary expansion of unemployment compensation (whereas regular unemployment insurance is still included in income before transfers and taxes). Second, legislative changes temporarily expanded SNAP and Medicaid.6 Third, reductions in income, especially for households at the bottom of the distribution, increased the number of people eligible for means-tested transfers.

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

High-income households generally pay a larger share of federal taxes. In 2020, for example, households in the highest income quintile received about 56 percent of all income and paid 81 percent of federal taxes. (In 2019, households in that quintile received 55 percent of all income and paid 69 percent of federal taxes.) For households across the income distribution, federal taxes were lower in 2020 in large part because recovery rebate credits—which are counted as refundable tax credits in this analysis—reduced the taxes households owed.

Federal Legislation Lessened the Pandemic’s Economic Disruption

The federal government enacted several major laws in 2020 to lessen the pandemic-related economic disruption for households, businesses, and state and local governments.

Among the policies put in place by that legislation were two temporary programs that provided direct payments to households in 2020. The first, recovery rebate credits, provided payments of up to $1,800 per person to those with income below specified limits. The second, expanded unemployment compensation, combined several policies that temporarily expanded the amount of, duration of, and eligibility for unemployment benefits. Eligible unemployed people (including previously self-employed people) received weekly payments of up to $600 through July in addition to their regular unemployment insurance benefits. (For more details about those policies and how CBO estimated their effects, see Appendix B.) CBO estimates that about half of the total benefits from those two programs accrued to households in the three highest quintiles.

Pandemic-related legislation also expanded the two largest means-tested transfer programs—Medicaid and SNAP—in 2020. The federal government required states to maintain coverage for all Medicaid enrollees regardless of any changes in their income or circumstances that would otherwise have caused them to become ineligible for the program. The government also allowed states to provide households with the maximum SNAP benefits for their household size and to provide benefits to replace meals that children would otherwise have received at school. CBO estimates that benefits were larger for those two programs in 2020 than in 2019—by 10 percent for Medicaid and the Children’s Health Insurance Program, or CHIP, and by over 50 percent for SNAP—in part because of those changes. As those programs expanded, slightly larger shares of their benefits (compared with shares in 2019) accrued to households that were higher in the income distribution.

Some temporary changes were made to the tax system as a result of the legislation. For example, unemployment compensation was made partially exempt from individual income taxes for people with income below $150,000 (regardless of filing status), and limits on a tax filer’s total deductions for charitable contributions were relaxed.

Some policies put in place by pandemic-related legislation in 2020 provided financial support to businesses and state and local governments. Although those policies did not directly benefit households, they altered household income through their effects on the economy. The largest such policy was the Paycheck Protection Program, which provided over $500 billion in funds to businesses in 2020.9

Other policies did not directly increase household income but did increase the resources available to households. For example, the government suspended federal student loan payments through legislative and executive action in 2020, which was equivalent to a transfer to households. Although CBO has not explicitly analyzed the distributional effects of that policy, more than half of student loan debt is typically held by households in the two highest quintiles of the income distribution.10 In CBO’s assessment, even if the agency had included the benefits attributable to that policy as a transfer, those benefits would have had little effect on the overall distribution of household income.

New Federal Policies Increased Household Income Across the Distribution

According to CBO’s estimates, households in each of the four lower quintiles received an average of about $7,000 in payments from two temporary programs—recovery rebate credits and expanded unemployment compensation—in 2020. For households in the lowest quintile, those payments amounted to $7,600 per household, on average, which was roughly evenly split between the two policies. The payments amounted to about one-third of the income of those households before transfers and taxes. In contrast, households in the top 1 percent received an average of about $3,000, which was equal to about 0.1 percent of their income.

Means-Tested Transfer Rates Increased Significantly for Low-Income Households

From 2019 to 2020, means-tested transfer rates (that is, transfers as a share of income) increased for every quintile. For households in the lowest quintile, that rate increased the most—by 27 percentage points, from 65 percent to 93 percent. In other words, total means-tested transfers received by households in that quintile equaled 93 percent of all their income before transfers and taxes. For households in the second quintile, that rate increased by 9 percentage points, and for those in the middle quintile, it rose by 4 percentage points. If this analysis had not included expanded unemployment compensation as a means-tested transfer, those increases would have been smaller. The transfer rate in the lowest quintile would have increased by 9 percentage points—of which 6 percentage points would have been attributable to increases in Medicaid and CHIP and 3 percentage points to increases in SNAP.

Tax Rates Decreased Across the Distribution Because of Recovery Rebate Credits

For all income groups in 2020, recovery rebate credits accounted for most of the decreases in average federal tax rates. The average rate was reduced by at least 4 percentage points for households in each of the four lower quintiles. For households in the lowest quintile, the rate decreased by 17 percentage points from 2019 to 2020 and became negative. (A tax rate can be negative because of refundable tax credits, which can result in net payments from the federal government that offset other taxes paid by those households.)11 Among households in the second quintile, the rate declined by 8 percentage points. In contrast, the average federal tax rate among households in the highest quintile changed very little—by less than half a percentage point.

Income After Transfers and Taxes

Income after transfers and taxes includes the addition of means-tested transfers and the subtraction of federal taxes. As income rises, means-tested transfer rates decrease, and federal tax rates increase. As a result, income after transfers and taxes is less skewed toward the top of the distribution than is income before transfers and taxes.

Means-tested transfers and federal taxes played a larger role in 2020 than in 2019 in reducing the extent to which income was skewed toward the top of the distribution. That is mainly because of the introduction of recovery rebate credits and expanded unemployment compensation. To a lesser extent, the automatic stabilizer effects of transfers and taxes, as well as legislative changes (such as those affecting Medicaid and SNAP), also played a role.

Income After Transfers and Taxes Increased for All Income Groups

On average, income after transfers and taxes increased for households in all income quintiles in 2020. The distribution was more even than in 2019 (in percentage terms) because income grew at higher rates for households in the lower quintiles than for those in the higher quintiles. For households in the lowest quintile, average income after transfers and taxes increased from $39,900 to $45,800 (or by 15 percent). For households at the other end of the distribution, average income increased from $256,500 to $275,700 (or by 7 percent).

Growth Rates in Income After Transfers and Taxes Were Highest at the Top and Bottom of the Distribution

Benefits from recovery rebate credits and expanded unemployment compensation were similar in dollar terms across the majority of the income distribution in 2020, although low-income households received the largest benefits measured as a share of their income. Without those two policies, the changes in income after transfers and taxes would have resembled the changes in income before transfers and taxes—that is, income would have decreased for households at the bottom of the distribution (by 4 percent among those in the lowest quintile) and increased for households at the top of the distribution (by 14 percent among those in the top 1 percent).

However, including recovery rebate credits and expanded unemployment compensation in the income measure caused income after transfers and taxes to rise for all income groups. The increase was 15 percent among households in the lowest quintile, 11 percent among those in the middle quintile, and 14 percent among those in the top 1 percent.

Income Inequality

As the distribution of income shifts each year in the United States, so does the degree of income inequality. A standard statistical measure of income inequality is the Gini coefficient, which summarizes an entire distribution in a single number that ranges from zero to one. At the theoretical extremes, a value of zero means that income is distributed equally among all households, whereas a value of one indicates that all income is received by a single household (and none is received by any other households).12 This analysis compares Gini coefficients based on income before transfers and taxes and on income after transfers and taxes.

Transfers and Taxes Reversed the Growth of Income Inequality

When calculated using income before transfers and taxes, the Gini coefficient rose by 0.019 in 2020—that is, inequality increased from its measure in 2019. In contrast, the Gini coefficient based on income after transfers and taxes fell by 0.013. If recovery rebate credits and expanded unemployment compensation had been excluded from the calculation, the Gini coefficient would have risen by 0.016 in 2020.

Transfers and Taxes Took Inequality From an All-Time High to a 14-Year Low

When calculated using income before transfers and taxes, the Gini coefficient—at 0.533—was higher in 2020 than in any other year since 1979, the earliest year in CBO’s sample. Before 2020, the Gini coefficient was highest in 2014 (when it reached 0.525).

But when calculated using income after transfers and taxes, the Gini coefficient was 0.417 in 2020—lower than in any year since 2009, when it reached 0.413. If recovery rebate credits and expanded unemployment compensation had not been included, the 2020 Gini coefficient would have been 0.446—higher than in any year since 2007 (when it was 0.455).

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Appendix AData and Methods Used in This Analysis

The Congressional Budget Office has released its analyses of the distribution of household income and federal taxes for more than 30 years.1 This appendix provides additional details about CBO’s analytic method and its most important underlying assumptions. The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits. That measure is used to rank households when creating income groups and serves as the base income measure when calculating average means-tested transfer rates and average federal tax rates.3

The supplemental data posted along with this report include additional distributional data that rank households according to alternate income measures, such as income after transfers and taxes. Those supplemental data, available at www.cbo.gov/publication/59509#data, also include data for three types of households: households headed by elderly people (defined as those age 65 or older); households with children (defined as those under age 18); and nonelderly, childless households. The additional data, broken out by household type, are reported for each income group.

In this report, CBO assesses the distribution of annual income, which is one measure of economic well-being. CBO does not examine other measures of economic well-being, such as household income measured over a longer period, household consumption, or household wealth. Nor does this report analyze the considerable variation in income, taxes paid, and tax rates within each income group, which cannot be captured by calculating averages alone.

In addition, this report does not explicitly or comprehensively assess the economic mobility of households—that is, their movement among income groups from one year to the next. In developing its estimates that compare the distribution of household income in 2020 to that in 2019, though, CBO examined the movement of households among quintiles (or fifths of the distribution) between those two years and found that the amount and patterns resembled those in recent years. Other researchers have analyzed economic mobility more fully.4

Finally, this report focuses on the effects of the federal government’s fiscal (tax and spending) policies. The government’s monetary, regulatory, and trade policies also affect the distribution of household income, but the direct distributional effects of those other federal policies are not examined in this report. Most state and local governments’ fiscal policies also are not examined here, except for some state-level means-tested transfers (the largest of which are provided through Medicaid and the Children’s Health Insurance Program).

Unit of Analysis

CBO uses households as the unit of analysis in its distributional reports. A household consists of the people who share a housing unit regardless of their relationship.5 A household can consist of more than one tax-filing unit, such as a married couple and their adult child.

The data used in CBO’s analyses come from the Internal Revenue Service (IRS), which provides data on tax-filing units, and from the Census Bureau, which provides household-level data. To incorporate data on tax-filing units into its analysis, CBO creates tax-filing units from the household-level data on the basis of the information (on relationships and income) collected by household surveys. After both data sources are organized using the same unit of analysis (tax-filing units), they are statistically matched to create a database with information from both sources. For the final presentation of distributional results, data for those statistically matched tax-filing units are combined and represented at the household level.

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Statistical Matching

The first step in the statistical matching process is to align the unit of analysis by constructing tax-filing units from CPS households. A tax-filing unit is a single person or a married couple plus any dependents. In CBO’s analyses, the heads of CPS households (and their spouses, if present) are designated as tax-filing units. Tax rules are used to determine whether other members of the household can be claimed as dependents on the basis of their age, relationship with the primary tax-filing unit, and income.8 People who meet those criteria are classified as dependents; those who do not are classified as separate tax-filing units within the household. When multiple people could claim one member of a household as a dependent, CBO assumes that the household chooses the arrangement that results in the most advantageous tax situation—for example, two unmarried, cohabitating partners with two children might each claim one child and file as a head of household if doing so lowered their combined taxes.

Next, CBO divides the tax-filing unit records in each file into 15 demographic groups on the basis of marital status (married or single); number of dependents (zero, one, or two or more); whether the tax-filing unit can be claimed as a dependent (yes or no); and whether the tax filer and his or her spouse (if applicable) are 65 or older (neither, one, or both). Records from the two files are matched within the same demographic groups, with certain exceptions. Because the CPS file contains fewer head-of-household tax-filing units (single parents with dependent children) than the SOI file does, some SOI head-of-household tax-filing units are matched with single tax-filing units without children and married tax-filing units from the CPS. The deficit in head-of-household filers in the CPS data probably reflects some combination of misreporting of filing status in the SOI and a shortcoming of the algorithm that creates tax units for the CPS in accounting for complex living arrangements.

Within each demographic group, CBO estimates an ordinary least squares (OLS) regression model of total income as a function of all the sources of income that are common to both the SOI and the CPS—such as wages, interest, dividends, rental income, business income and losses, pension income, and unemployment insurance. The OLS models are estimated using the SOI data. CBO applies the coefficients estimated from the regression models to the records in both files to construct a predicted total income variable. CBO then sorts tax-unit records in both files (independently within each demographic cell) in descending order by predicted total income.

Because the SOI and CPS data come from samples, each record from both files has a sample weight associated with it. The sum of all the sample weights in the SOI file represents the total number of tax units that filed taxes in a given year. The sum of all the weights in the CPS file represents all the tax units in the United States—those that filed a tax return as well as those that did not. The SOI file contains many more records than the CPS file, yet it represents fewer total tax units. Therefore, the average sample weight in the SOI file is lower than the average sample weight in the CPS file (see Table A-1).

Those differences in sample weights mean that SOI and CPS records cannot be matched one to one. Instead, within each demographic group, matching begins with the record from each file that represents the highest predicted total income. Of the two records, the one with the lower sample weight is matched to only one corresponding record from the other file. The record with the higher weight is “split” and is available (with its weight reduced) to be matched to the next record in the other file. (In practice, the highest-income SOI records have very low sample weights, so the matching algorithm matches the top CPS record to many SOI records.)

That process is repeated until all SOI records are exhausted. Each matched pairing results in a new record with the demographic characteristics of the CPS record and the income reported in the SOI. Some types of income, such as certain types of transfer payments and in-kind benefits, appear only in the CPS records; values for those items are drawn directly from that survey. Income values for CPS records that represent nonfiling tax units are taken directly from the CPS. Residual CPS records (those with the lowest predicted income) are assumed to represent tax-filing units that did not file a tax return.

Finally, households are reconstructed from tax-filing units on the basis of relationships reported in the CPS. In general, CPS tax-filing units will have been matched to multiple SOI tax-filing units. When CPS tax-filing units are combined at the household level, multiple replications of a given household are created to cover all possible combinations of the matched SOI–CPS tax units. Each household replication is appropriately weighted so that the sum of all the replications equals the original CPS household-level sample weight.9

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS (see Table A-1).

Most measures of income are drawn from federal tax returns, and those income measures are not adjusted to match the Bureau of Economic Analysis’s (BEA’s) national income and product accounts. This analysis does not capture income that is underreported or misreported to the IRS as a result of tax noncompliance.10 Underreported income that is excluded from this analysis may affect the distribution of income.11

Income before transfers and taxes has five main categories: labor income, business income, capital income (including capital gains), other income, and social insurance. (For more information about each category, see Appendix B.) Those categories largely reflect how income is reported on individual income tax returns.

In this report, CBO’s measures of federal taxes are based on tax liabilities incurred in a calendar year, regardless of when those liabilities are paid. By contrast, federal receipts measure taxes paid to the government in that year, regardless of when those liabilities are incurred. The measures of individual income taxes (including taxes on pass-through business income) and payroll taxes are calculated on the basis of the income and characteristics of each tax-filing unit in the underlying dataset. Those calculated values align closely with the reported values. The measure of excise taxes is drawn from data on tax liabilities and collections from the IRS. The measure of corporate taxes comes from BEA’s estimate of taxes on corporate income plus CBO’s estimate of repatriation tax payments due.12

The measures of transfers used in this report are mostly drawn from the agencies that administer the relevant programs. For example, the measure of benefits from the Supplemental Nutrition Assistance Program comes from the Food and Nutrition Service in the Department of Agriculture. CBO then adjusts those data to align them with the CPS’s sampling frame and reporting period.13

Incidence of Federal Taxes

CBO allocates individual income taxes and the employee’s share of payroll taxes directly to the households paying those taxes. CBO also allocates the employer’s share of payroll taxes to employees because employers appear to pass on their share of payroll taxes to employees by paying them lower wages than they otherwise would.14 The incidence of those taxes could differ from CBO’s allocation, though. Research literature suggests that many factors could cause that outcome, especially in the short term.15

CBO’s approach is to allocate those taxes to households according to their consumption of taxed goods and services. Excise taxes on intermediate goods, which are paid by businesses, are allocated to households in proportion to their overall consumption. CBO assumes that household spending patterns among income and demographic groups in the CPS are similar to those observed in the Bureau of Labor Statistics’ Consumer Expenditure Survey.

Researchers disagree about how to allocate corporate income taxes (and taxes on capital income generally). CBO’s approach is to allocate 75 percent of corporate income taxes to owners of capital in proportion to their income from interest, dividends, rents, and adjusted capital gains. That measure excludes some forms of capital income that are more difficult to measure, such as investment earnings in tax-preferred retirement accounts and unrealized capital gains.16 For the purposes of that allocation, CBO adjusts capital gains by scaling them to their long-term historical level given the size of the economy and the applicable tax rate; that method reduces the effects of large annual variations in the total amount of gains realized. CBO allocates the remaining 25 percent of corporate income taxes to workers in proportion to their income from labor.17

Adjustments for Household Size

Households with identical income can differ in ways that affect their economic status. For example, a larger household generally needs more income to support a given standard of living than a smaller one does. However, economies of scale in some types of consumption—housing, in particular—can mean that two people generally do not need twice the income to live as well as one person who lives alone. For that reason, household income is an imperfect measure of economic status.

To rank households in a way that better accounts for economies of scale, CBO adjusts the income measure, dividing household income by an adjustment factor known as an equivalence scale. Various equivalence scales are in use today, and a significant, if somewhat dated (though still useful), body of literature explores why and how alternative equivalence scales should be calculated for the purpose of setting public policy parameters—specifically, parameters related to measuring poverty and setting eligibility criteria for means-tested programs.18

To account for households’ economies of scale, the equivalence scale should have a value between one and the number of people in the household. An equivalence scale equal to one would make no change to the income measure and would not account for the greater needs of larger households. An equivalence scale equal to the number of people in the household, by contrast, would imply that each person requires the same resources, which would not capture the benefits of shared consumption—most significantly, housing expenses—within the household.

A generalized formula for calculating an equivalence scale can be expressed as follows:

ES = nc

where n is the number of people in the household and e is an elasticity parameter for household size that ranges from zero to one, with larger values implying smaller economies of scale.19 To adjust household income for differences in household size, CBO uses an equivalence scale known as the square root scale. Using that method, CBO calculates adjusted household income by dividing household income by the square root of the number of people in the household.

Calculating the equivalence scale as the square root of the number of people in the household is the same as setting the elasticity parameter for household size to 0.5 because √n = n0.5. Using 0.5 as the elasticity parameter for household size is convenient for several reasons:

• It is the midpoint in the range of possible values for the parameter (n0 < n0.5 < n1).
• It implies that each additional person increases the household’s needs but at a decreasing rate.
• The resulting household-size adjustment is similar to the family-size adjustments the Census Bureau uses in setting U.S. poverty thresholds.
• It is transparent and relatively easy to understand.

Applying the square root equivalence scale to adjust income for differences in household size means that some households with higher income but more people living in them may be considered equivalent in income to households with lower income but fewer people living in them.

CBO adjusts income for household size only for the purpose of ranking households and assigning them to income groups. (All other income measures in the agency’s distributional analyses are unadjusted.) The highest quintile is broken down into smaller, percentile-based groupings (the 81st through 90th percentiles, the 91st through 95th percentiles, the 96th through 99th percentiles, the 99th to 99.9th percentiles, the 99.9th to 99.99th percentiles, and the top 0.01 percent) to provide additional detail. Each quintile contains approximately 20 percent of the civilian noninstitutionalized U.S. population, and each full percentile (that is, a percentile expressed as a whole number) contains approximately 1 percent of the population. However, because household sizes vary, the adjusted household income quintiles contain slightly different numbers of households (see Table A-1).

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Appendix BDetails About Recovery Rebate Credits and Expanded Unemployment Compensation

The distribution of household income in 2020 was greatly affected by federal policies put in place temporarily in response to the coronavirus pandemic. The Congressional Budget Office has examined two of those policies in detail—recovery rebate credits and expanded unemployment compensation—because they had a particularly large impact.

Recovery Rebate Credits

Two recovery rebate credits were paid to households in 2020. The first credit, issued in April 2020, was up to $1,200 per qualifying adult and $500 per qualifying child for taxpayers with income below specified limits. The second credit, issued in December 2020 and January 2021, was up to $600 per qualifying adult and child. (Even though the issuance in some cases did not occur in calendar year 2020, the second credit is included in this analysis because the amount of the credit was based on the recipient’s income in 2020.) Although the federal budget counted the credits as outlays, CBO included them as part of refundable tax credits in this analysis because they were administered through the tax system.

The amount of each taxpayer’s credit was determined according to a formula. Taxpayers with adjusted gross income (AGI) below certain limits were eligible for the maximum credit. (Those limits were $75,000 for single filers, $150,000 for joint filers, and $112,500 for head-of-household filers.) The maximum credit was reduced by 5 percent of the amount by which AGI exceeded those limits.

To quickly obtain information about taxpayers’ income to determine the credit amount for which they qualified, the federal government used each taxpayer’s most recent tax return—in most cases, from 2018 or 2019. Many taxpayers who experienced changes in their income between 2018 or 2019 and 2020 received a different amount than what they would have qualified for on the basis of their 2020 income. Taxpayers who were eligible on the basis of their 2020 income but not on the basis of their prior-year income could file to receive a payment later (known as a plus-up payment). Conversely, taxpayers who were eligible on the basis of their prior-year income but not their 2020 income received a payment but were not obligated to return it—that is, they had safe harbor from repayment.

The amount of the recovery rebate credit that went to each household was not available in the underlying data CBO used for this analysis. To compute those amounts, CBO used its microsimulation tax model, which applies the rules of the tax system to calculate the tax owed by each member of a representative sample of taxpayers. That model allowed CBO to apply the eligibility formula for recovery rebate credits to the income associated with each member of its data sample for 2020.1

Expanded Unemployment Compensation

In 2020, lawmakers enacted legislation to temporarily expand unemployment compensation. The expansion took three forms.

• Pandemic Unemployment Assistance (PUA) expanded the eligibility guidelines to include people who did not qualify for regular unemployment insurance, such as self-employed workers.
• Pandemic Emergency Unemployment Compensation (PEUC) provided 13 additional weeks of compensation to people who exhausted their regular unemployment insurance benefits.
• Federal Pandemic Unemployment Compensation (FPUC) increased the benefit amount for people already receiving regular unemployment insurance or expanded benefits through PUA or PEUC by $600 per week through July 2020.

All of those benefits were funded in full by the federal government.

This analysis accounts for expanded unemployment compensation as a means-tested transfer program, even though regular unemployment insurance is accounted for as a social insurance benefit (and is therefore included in income before transfers and taxes). CBO allocated those types of unemployment benefits separately for three reasons. First, expanded unemployment compensation was the result of new legislation enacted in response to the pandemic. Second, its benefit amounts and eligibility criteria differed from those of regular unemployment insurance. Third, it was federally funded, whereas regular unemployment insurance is funded mainly by taxes collected from employers.

The payments made to households for unemployment benefits were recorded in both the Current Population Survey (CPS) and the Statistics of Income (SOI) data, which constitute the dataset that CBO uses for its distributional analyses. For this analysis, CBO made three adjustments to those data when allocating those benefits to households.

First, CBO adjusted the data to match the total unemployment benefits that were paid out according to administrative records. Although the SOI data contain information about which taxpayers received those benefits, those data cover only people who filed taxes. For people who did not file taxes, CBO used information about unemployment benefits from the CPS with a further adjustment: Because unemployment benefits were underreported in the CPS in 2020, CBO adjusted the data to allocate unemployment benefits to those nonfilers until the total in CBO’s data matched the administrative total.2

Second, CBO reduced the total amount of unemployment benefits by about 10 percent to account for improper claims, including fraudulent claims, such as those made by individuals outside the United States using stolen identities. To determine the size of that adjustment, CBO assessed the existing literature on the eligibility and receipt of unemployment claims in 2020.3

Finally, after CBO had allocated total unemployment benefits to each household in its dataset, the agency used a rule to allocate those benefits to one of two programs: pandemic-related expanded unemployment compensation or regular unemployment insurance. To make that allocation, CBO used the weekly earnings and employment data in the basic monthly versions of the CPS. Using those data, CBO simulated the rules of the two programs to estimate benefits under them for each affected individual. The agency then used those results to compute the average proportion of total unemployment benefits that came from each program according to individuals’ total earnings and applied those averages to beneficiaries in its merged dataset. In general, individuals with lower earnings received a smaller share of their unemployment benefits in regular unemployment insurance than did those with higher earnings. That is because regular unemployment insurance benefits rise with earnings, whereas a large portion of expanded unemployment compensation benefits (specifically those provided through FPUC) were the same for all recipients. On average, about three-quarters of total unemployment benefits were allocated to expanded unemployment compensation in CBO’s analysis.

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Appendix CDetails About Income, Transfers, and Taxes

This appendix provides details about the average household income, means-tested transfers, and federal taxes for each income group in 2019 and 2020 in the Congressional Budget Office’s analysis of the distribution of household income (see Table C-1). Those measures are shown for each quintile, or one-fifth of the distribution, as well as for smaller groups. This appendix also provides data on tax and transfer rates and on each group’s share of total income, transfers, and taxes (see Table C-2 and see Table C-3).

Appendix DTerms Used in This Analysis

This appendix defines the many terms used in this analysis. The terms are listed according to the formulas used to compute the various measures. Within each category, the items are ordered from largest to smallest.

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.
• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.
• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).
• Capital income. 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 the share of corporate income taxes borne by capital owners.
• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.
• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.
• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.
• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households (see Appendix A). Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

About This Document

This report was prepared at the request of the Chairman of the Senate Committee on Finance. In keeping with the Congressional Budget Office’s mandate to provide objective, impartial analysis, the report makes no recommendations.

Bilal Habib wrote the report with guidance from Edward Harris, John McClelland, and Joseph Rosenberg. Brooks Pierce, Kurt Seibert, Naveen Singhal, and Ellen Steele contributed to the analysis. Eshika Kaul and Omar Morales fact-checked the report.

Helpful comments were provided by Christina Hawley Anthony, Meredith Decker, Richard DeKaser, Justin Falk, Jennifer Gray, Rebecca Heller, Robert Stewart, Julie Topoleski, and Chapin White (all of CBO) as well as the staff of the Joint Committee on Taxation. The assistance of external reviewers implies no responsibility for the final product; that responsibility rests solely with CBO.

Mark Doms, Jeffrey Kling, and Robert Sunshine reviewed the report. Christine Bogusz edited it, and Casey Labrack created the graphics and prepared the text for publication. The report is available at www.cbo.gov/publication/59509.

CBO seeks feedback to make its work as useful as possible. Please send comments to communications@cbo.gov.

Phillip L. Swagel

Director

November 2023