CBO income inequalityThe Congressional Budget Office released a new report on income inequality this week, confirming what most families already know: few but the wealthiest Americans have seen their income grow appreciably since 1979.

As the graph on the right shows, the real after-tax income of the middle class (broadly defined as those between the 20th and 80th percentiles) has improved little more than 1 percent per year on average, while incomes for the richest 1 percent have surged nearly 300 percent, or 7 percent per year. Income for the top quintile as a whole grew 65 percent during the period, substantially more than the bottom eighty but still nowhere near that of the top one percent.

The CBO suggests several theories as to why the wealth gap has widened so dramatically in recent years (although in keeping with their mandate “to provide objective, impartial analysis,” the study provides no recommendations). The first is that technological changes have increased returns for entertainers like athletes, actors and musicians, as new forms of mass media have allowed them to access wider markets. A related theory is that executives have seen their paychecks skyrocket as corporations have merged, growing in size and scope relative to 1979, igniting a bidding war between firms seeking to retain the best (and best compensated) talent. The CBO also notes a 2010 study that identifies surging income growth in the financial and legal sectors as a primary source of growing inequality; another pinpoints financial deregulation and risky new financial instruments like derivatives.

Reduction in income inequality from transfers and taxesWhatever the cause, the CBO report concludes that government policy has done little to mitigate income inequality, and may even have exacerbated the problem over the course of the period studied. Typically, the government uses transfers and federal taxes to reduce income inequality, by boosting income for the poor and taking more taxes from the rich. But the effective tax rate for the rich has fallen since 1979, while programs that disproportionally help the poor—like Social Security, Medicaid, food stamps and unemployment insurance—have grown less effective. As the graph on the left shows, those programs are doing less today to reduce income inequality than they did in 1979. Tax rates for the rich, meanwhile, are at their lowest levels in fifty years.

Still another way to consider this growing gap is to compare Gini coefficients, where a more distorted line (in the charts below) indicates a greater degree of inequality. The CBO report helpfully breaks down these calculations in terms of labor income, business income (income derived by owners of private businesses), capital income (dividends and rental income), and capital gains for both 1979 and 2007. Interestingly, while labor income inequality has remained much the same, business and capital income inequality has increased substantially. The concentration of capital gains, unsurprisingly, has always been the most unequal of income sources, and it has only grown more unequal in recent years.

Gini Concentration of Major Sources of Market Income