The Distribution of Household Income in 2021
New policies implemented by the federal government affected transfers and taxes in 2021. The policies largely benefited lower- and middle-income households. But income inequality still increased, mainly because of realized capital gains.
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 2021 and explores how they differ from the distributions in 2020 and 2019. (Means-tested transfers are cash payments or in-kind services provided primarily on the basis of income.)
Largely because of the economic disruption caused by the coronavirus pandemic, 2020 and 2021 were unusual years. In response to 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 pause on federal student loan payments) increased households’ resources without providing them with additional income. Still other policies (such as the Paycheck Protection Program) provided financial support to entities such as businesses, nonprofit organizations, and state and local governments. This report focuses on the effects of policies that provided direct benefits to households.
The main findings from CBO’s analysis of the distribution of household income in 2021 are these:
- Income before transfers and taxes was more skewed toward the top of the income distribution in 2021 than in 2020 or 2019, in large part because of capital gains. Income from realized capital gains, which mostly accrues to higher-income households, was higher in 2021 than in any other year since at least 1979 (the first year in CBO’s analysis). Moreover, labor income among lower-income households increased only slightly in 2021 after a sharp decline from 2019 to 2020. As a result, in 2021 the average income before transfers and taxes among households in the highest quintile (or fifth) of the income distribution was roughly 19 times that of households in the lowest quintile; in 2020, such income among households in the highest quintile was 17 times that of those in the lowest quintile.
- Among lower-income households, means-tested transfers were nearly as large in 2021 as in 2020, and federal taxes were lower. As in 2020, the recovery rebate credit and expanded unemployment compensation provided direct payments to households. In addition, the child tax credit was expanded in 2021. The benefits from those three policies were broadly dispersed among households across the income distribution, but they constituted a larger share of income for lower-income households than for other households.
- Transfers and taxes reduced income inequality in 2021 by almost as much as in 2020, but income inequality increased nonetheless. Income inequality before transfers and taxes reached an all-time high in 2021, mainly because of increases in realized capital gains. Although high means-tested transfer rates and low federal tax rates boosted income for low-income households and reduced it for other households, income inequality after transfers and taxes was nonetheless at its highest level since 2012.