You have probably seen the recent headlines saying that U.S. income inequality has reached a 50-year high. They are based on the Census Bureau’s latest report on Income and Poverty in the United States, published last month.
The Census Bureau’s data, however, ignore taxes, as well as non-cash benefits such as Medicare. They measure inequality in a hypothetical tax-free world.
The data include cash benefits (such as unemployment benefits and social security), but they ignore non-cash benefits (such as, importantly, health benefits, as well as food stamps and subsidized housing). And they measure income before all taxes and social security fees are taken out.
In other words, the Census Bureau inequality measure ignores the impact of the redistribution policies we have put in place to reduce inequality. Therefore, it makes a misleading basis for a policy debate. Yet most discussions of income inequality seem to be based on pretax income measures.
The Congressional Budget Office (CBO) publishes data on income inequality after taxes and transfers; these data paint a different picture when compared with the Census Bureau’s data. Note that the latest CBO report, published last July, has data only from 1979 and up to 2016, whereas the Census Bureau’s data go to 2018 (and start in 1967); in the comparison we are therefore missing the developments of the last two years.
Inequality after taxes and transfers increased sharply between 1979 and 1986. It dropped through the mid-1990s, then rose again. But for the last 20 years (1997–2016), income inequality after taxes and transfers has remained broadly unchanged. In fact it was lower in 2016 than in 1986. A better starting point would be to ask: “How well are income redistribution policies working, and what else should we do?”