Sarah Kliff reported yesterday on a new Congressional Research Service (CRS) study on the changes in the distribution of income from 1996-2006 -chosen for the last time of moderate economic growth before the last business cycle bust. The CRS is akin to the forgotten stepchild in the shadow of the Congressional Budget Office, but still produces fine non-partisan work from time to time. Kliff:
The report explains that the Bush tax cuts contributed significantly to growing inequality but concludes that income from capital gains and dividends — investments in stocks, bonds, real estate and other assets — mattered even more:
Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. Changes in tax policy also made a significant contribution to the increase in income inequality, but even in the absence of tax policy changes income inequality would likely have increased. Although earning inequality increased between 1996 and 2006, changes in wages and salaries appear to have had little effect on the increase in overall income inequality.
The CRS study is notable in numerous respects:
–it uses high quality tax return data;
–it provides useful breakdowns of income by source (wages, cap gains, etc.) and their impact on inequality;
–it provides before- and after-tax analysis.
Two drawbacks are the 1) data are for income tax filers only—including, however, low-income families that get tax refunds—and 2) the data years and 1996 and 2006, so the endpoint seems a bit outdated (it’s the last year of publicly available of this sort). However, as CRS convincingly states, these years are actually well-chosen:
…both years were at approximately similar points of the business-cycle with moderate inflation (about 3%), a modest unemployment rate (about 5%), and moderate economic growth (3.7% in 1996 and 2.7% in 2006). Second, 2006 was the year before the August 2007 liquidity crunch and the onset of the severe 2007-2009 recession. Third, there were major tax policy changes between these two years. Fourth, both 1996 and 2006 were three years after the enactment of tax legislation that affected tax rates and are unlikely to be affected by short-run behavioral responses to these changes.
Bernstein also graciously provides this graph:
We’ve seen this information before, yet what makes this one slightly different is this was during a time of moderate economic growth. Yet the lowest quintile still saw their real after-tax income reduced by 6%.
This is also a good opportunity to showcase the ever lovable GINI coefficient – represented with the well-known Lorenz curve – from the CRS report:
That pinkish line separating from the greenish line? Increased income inequality. Once again, Jim Pethokoukis is wrong to describe growing income inequality a myth. Say it with me now: GINI don’t preach, GINI don’t preach, GINI don’t preach. Really, it is what it is…