Introduction and Summary of Findings

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 U.S. households. In this report, CBO 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 2023 (the most recent year for which such data are available).

Terms Used in This Report

Income before transfers and taxes. 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 benefits (benefits in the form of goods and services instead of cash) 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 (SSI). 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. 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 one (the least equal distribution).

CBO’s Main Findings for 2023

In 2023, the roughly 134 million households in the United States received a total of about $20 trillion in income. That income was more equally distributed after transfers and taxes than before transfers and taxes.

In 2023, average income before transfers and taxes rose for households at the bottom of the income distribution and fell for those at the top. Income increased by 5 percent among households in the lowest quintile (or fifth) of the distribution from 2022 to 2023. (All measures of income in this report have been adjusted to remove the effects of inflation.) By contrast, income decreased by 9 percent among households in the top 1 percent. That decrease was largely due to a reduction in realized capital gains. Average income from other sources, on net, remained relatively unchanged among households in the top 1 percent.

The extent to which transfers and taxes reduced inequality was similar in 2023 and 2022. Measured as a percentage of income before transfers and taxes, means-tested transfers decreased by 2 percentage points among households in the lowest quintile. The effect of that decrease was partially offset by a 1 percentage-point decrease in federal tax rates for households in that quintile.

Income inequality decreased in 2023, whether measured before or after transfers and taxes. That decrease was mainly due to changes in income before transfers and taxes at the top and bottom of the income distribution.

CBO’s Main Findings for the 1979–2023 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. From 1979 to 2023, average annual income among households in the lowest quintile grew from $19,000 to $28,500, whereas among households in the highest quintile it grew from $179,700 to $409,300.

Means-tested transfers grew, especially for households in the lowest quintile. As a percentage of income before transfers and taxes, means-tested transfers rose over time, driven primarily by an increase in Medicaid spending.

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

Income inequality rose, both before and after transfers and taxes. The degree to which transfers and taxes reduced income inequality increased over time.

Notes About This Document

All dollar amounts are expressed in 2023 dollars. They were adjusted using the Bureau of Economic Analysis’s price index for personal consumption expenditures. Growth rates were calculated after converting amounts to 2023 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.

Income Before Transfers and Taxes, 1979 to 2023

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 realized capital gains), and other income.

Social insurance benefits consist of Social Security and Medicare benefits, regular unemployment insurance (but not expanded unemployment compensation provided during the COVID-19 pandemic), and workers’ compensation.2

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 quintile, labor income makes up the bulk of income.

Means-Tested Transfers, 1979 to 2023

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, SSI, and other transfers.3 The last category 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. One large component of “other transfers” in 2020 and 2021 was expanded unemployment compensation, which was meant to assist households during the economic disruption brought on by the pandemic. (CBO treats that expanded compensation differently from regular unemployment insurance, which it categorizes as a social insurance benefit.)

This analysis focuses on the average means-tested transfer rate, which reflects a group’s average means-tested transfers as a percentage of its average income before transfers and taxes.

Federal Taxes, 1979 to 2023

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. CBO calculated average federal tax rates 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.

Estimates of individual income taxes in this report incorporate the effects of refundable tax credits. Those credits include the earned income tax credit, the child tax credit, and premium tax credits (which subsidize the purchase of health insurance through the marketplaces established by the Affordable Care Act).

If a household’s refundable tax credits exceed its tax liability before the credits are applied, the household’s tax rate is negative; in such cases, the household receives a net payment from the federal government.

Large decreases in average federal tax rates in 2020 and 2021 reflect the effects of temporary tax credits (recovery rebate credits and an expansion of the child tax credit) enacted in response to economic disruption caused by the pandemic.

Income After Transfers and Taxes, 1979 to 2023

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

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

Income Inequality, 1979 to 2023

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 measures of income: market income, income before transfers and taxes, income after transfers but before taxes, and income after transfers and taxes.

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, but expanded unemployment compensation provided in 2020 and 2021 is grouped with means-tested transfers. CBO chose that categorization because the 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.

3. 3. The value of Medicaid and CHIP benefits allocated to households in this analysis is based on the average cost of providing those benefits for federal and state governments.