Introduction

What Is in This Report?

The Congressional Budget Office regularly analyzes how income is distributed among households in the United States to provide Congress with information about the effects of federal taxes and government spending on households in that distribution. In this report, the agency examines the distribution of income—and of the means-tested transfers and federal taxes that affect it—from 1979 (the earliest year for which relevant data from tax returns are available) to 2022 (the most recent year for which such data are available). The report places a particular emphasis on the distributions of those three measures in 2022 and how they differed from the distributions in 2019, 2020, and 2021—the years immediately surrounding the onset of the COVID-19 pandemic.

Terms Used in This Report

Income before transfers and taxes. Consists of market income (which includes labor income, business income, capital income, and realized capital gains) plus social insurance benefits (which include benefits from Social Security, Medicare, unemployment insurance, and workers’ compensation).1

Means-tested transfers. Cash payments and in-kind services provided through federal, state, and local government assistance programs, such as Medicaid and the Children’s Health Insurance Program (CHIP), the Supplemental Nutrition Assistance Program (SNAP), and Supplemental Security Income. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. This analysis focuses on the average means-tested transfer rate, which is average means-tested transfers for a given group expressed as a percentage of that group’s average income before transfers and taxes.

Federal taxes. Consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The average federal tax rate is calculated by dividing total federal taxes for an income group by that group’s total income before transfers and taxes.

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

Gini coefficient. A measure of income inequality that summarizes how equally income is distributed across the population. It ranges from zero (the most equal distribution) to 1 (the least equal distribution).

Summary of CBO’s Main Findings for the 2019–2022 Period

In 2022, average income before transfers and taxes grew for all income groups except the highest quintile (or fifth), whereas average income after transfers and taxes fell for all groups. (All measures of growth in this report are presented in real terms—that is, they have been adjusted to remove the effects of inflation.) From 2019 to 2022, income before transfers and taxes grew for the top quintile, remained stable for the middle three quintiles, and fell for the lowest. Over the period, income after transfers and taxes increased for all income groups.

Average means-tested transfer rates fell in 2022, especially for households in the lowest quintile, after the temporary expansion of unemployment compensation during the pandemic expired at the end of 2021. Nonetheless, means-tested transfer rates remained higher than they were in 2019.

Average federal tax rates rose across the income distribution in 2022 after the pandemic-era recovery rebate credits and the expanded child tax credit expired at the end of 2021. This increase was largest among households in the lowest quintile. For most income groups, tax rates in 2022 were about the same as those in 2019.

In 2022, income inequality decreased, in large part because income from realized capital gains—which mainly accrues to high-income households—fell from a record high in 2021. From 2019 to 2022, however, inequality increased.

Summary of CBO’s Main Findings for the 1979–2022 Period

Average income, both before and after transfers and taxes, grew for all quintiles of the income distribution, but it increased most for households in the highest quintile.

Means-tested transfers’ contribution to income grew, especially for households near the bottom of the income distribution. As a percentage of income before transfers and taxes, means-tested transfers rose over time, driven primarily by an increase in Medicaid spending and especially for households near the bottom of the income distribution.

Households with higher income typically paid a higher average federal tax rate than households with lower income. Average federal tax rates fell over the past four decades for all income groups, especially the lowest quintile.

Income inequality, whether measured in terms of income before transfers and taxes or income after transfers and taxes, rose. The degree to which transfers and taxes reduced income inequality increased over the past four decades.

Notes About This Document

All dollar amounts are expressed in 2022 dollars. They were adjusted by using the Bureau of Economic Analysis’s price index for personal consumption expenditures. Growth rates were calculated after converting amounts to 2022 dollars.

Some of the figures have shaded vertical bars that indicate the duration of recessions. (A recession begins just after a peak in economic activity and runs through the subsequent trough.)

For details about the methods CBO uses for its analysis of the distribution of household income, see Congressional Budget Office, The Distribution of Household Income in 2021 (September 2024), Appendix A, www.cbo.gov/publication/60341, and Bilal Habib, How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses, Working Paper 2018-07 (Congressional Budget Office, July 2018), www.cbo.gov/publication/54234.

Overview of the Distribution of Income From 2019 to 2022

Income Before Transfers and Taxes

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 income (including capital gains), and other income.

Social insurance benefits consist of Social Security and Medicare benefits, regular unemployment insurance (but not the expanded unemployment compensation provided during the pandemic), and workers’ compensation.2

The effects of government policies carried out through means-tested transfer programs or the federal tax system are not reflected in income before transfers and taxes.

The composition of income before transfers and taxes varies across the income distribution. For example, realized capital gains constitute a greater portion of income for households at the top of the income distribution than for other households. For the average household in each income quintile, labor income makes up the bulk of income.

Means-Tested Transfers

Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are designed to assist people who have low income and few assets. Most means-tested transfers go to households in the bottom two quintiles of the income distribution.

In this analysis, CBO divided means-tested transfers into four categories: Medicaid and CHIP, SNAP, Supplemental Security Income, and other transfers.

One large component of “other transfers” in 2020 and 2021 is the expanded unemployment compensation that was in effect in those years. Congress authorized the expanded unemployment compensation, which was funded through the general fund rather than through a dedicated tax like regular unemployment insurance, to temporarily assist households during the economic disruption brought on by the pandemic.

The category other transfers also includes low-income subsidies for Part D of Medicare (which covers prescription drugs), cost-sharing subsidies established by the Affordable Care Act, Temporary Assistance for Needy Families, and benefits from housing assistance programs, child nutrition programs, the Low Income Home Energy Assistance Program, and state and local governments’ general assistance programs.

This analysis focuses on the average means-tested transfer rate, which is average means-tested transfers for a given group measured as a percentage of that group’s average income before transfers and taxes.

Federal Taxes

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The average federal tax rate is calculated by dividing total federal taxes for an income group by that group’s total income before transfers and taxes. Average federal tax rates are progressive—that is, they are generally higher for households with higher income.

The values for individual income taxes shown in this report incorporate the effects of refundable tax credits (including premium tax credits, which subsidize the purchase of health insurance through the marketplaces established by the Affordable Care Act). If the total amount of the refundable tax credits that a household receives exceeds its tax liability before the credits are applied, the household’s tax rate is negative. Such cases result in a net payment from the federal government to the household.

Some temporary changes were made to the tax system in 2020 and 2021 in response to economic disruptions caused by the pandemic:

• Recovery rebate credits provided three refundable payments to taxpayers whose income was below specified limits: a payment of up to $1,200 per qualifying adult and $500 per qualifying child in April 2020, a second payment of up to $600 per qualifying adult and child in December 2020 and January 2021, and a third payment of up to $1,400 per qualifying adult and child in March 2021.
• The child tax credit was expanded for one year in 2021 to increase the amount of the credit for certain taxpayers, expand eligibility, make the credit fully refundable, and provide advance payments for part of the credit.

Income After Transfers and Taxes

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

Because means-tested transfers account for a larger share of low-income households’ income and because higher-income households pay a larger share of their income in federal taxes, income after transfers and taxes is less skewed toward households at the top of the distribution than income before transfers and taxes.

Means-tested transfers and federal taxes played a larger role in reducing the extent to which income was skewed toward the top of the distribution in 2020 and 2021 than in all other years analyzed. That is mainly because of the temporary policies that were implemented in response to the economic downturn caused by the pandemic—the recovery rebate credits, expanded unemployment compensation, and the expanded child tax credit.

A smaller role was played by other legislative changes (including legislation that expanded Medicaid enrollment and increased SNAP benefits for many households) and by changes in the amounts of transfers and taxes that automatically occur in response to widespread shifts in household income.

Income Inequality

The Gini coefficient summarizes how equally income is distributed across the population 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 went to a single household.

This analysis compares Gini coefficients for four different income measures: market income, income before transfers and taxes, income after transfers but before taxes, and income after transfers and taxes.

Those Gini coefficients indicate that income inequality increased from 1979 to 2022. Increases in market income at the top of the distribution drove much of that increase in income inequality.

Additional Files Related to the Distribution of Household Income

The following additional resources are posted along with this document:

• Data underlying the figures—an Excel file containing the data used to make each figure in this document;
• Supplemental data—an Excel file containing 12 additional tables of data related to the distribution of household income;
• Additional data for researchers—a zipped archive of CSV files containing the supplemental data, with household rankings based on alternative definitions of income and with each ranking disaggregated by household type; and
• A table builder—an interactive Excel-based tool that allows users to create customized tables.

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1. 1. For detailed definitions of income measures, see Congressional Budget Office, The Distribution of Household Income in 2021 (September 2024), Appendix D, www.cbo.gov/publication/60341.

2. 2. In this analysis, regular unemployment insurance is categorized as a social insurance benefit, whereas expanded unemployment compensation is grouped with means-tested transfers. CBO chose that categorization because expanded unemployment compensation lacked certain characteristics of social insurance programs, such as mandatory contributions from workers or employers, dedicated revenue sources, and benefit eligibility based on contributions.