5 things to know about income inequality

Cute alpacas learn about income inequality
Cute alpacas learn about income inequality

The top 1% is still doing better than everyone else.

Between 1979 and 2011, Americans at the top of the income scale saw their incomes grow 200%, while incomes for those further down rose between 40% and 67%.

That's one finding in a new report by the nonpartisan Congressional Budget Office about income, taxes and government benefits.

But the report also offers a lot more intel on how to measure and understand income inequality -- one of the hot-button issues in politics today.

1. Income can be sliced and diced many ways. There's the income earned on the job, income earned in a business, income from investments such as stocks and retirement income. All those things combined are what the CBO calls "market income."

There's also income from government benefits, sometimes called "transfers." Think Social Security and Medicare payments, or food stamps and Medicaid.

Inequality can be measured across any one of these measures or across all of them collectively. How it's done will yield different degrees of inequality. The same is true if you factor in the effect of taxes and if you alter the span of years over which inequality is measured.

Based on its latest numbers, the CBO estimates income inequality has increased since 1979 across its key measures.

2. Taxes narrow the income inequality gap. The federal tax code is progressive. That means the more you make, the higher the percentage of your income you'll pay in taxes.

So, for instance, households in the top fifth of the income scale in 2011 made 58% of market income versus just 2.2% captured by those in the bottom fifth, the CBO estimated.

After taxes are factored in, however, the gap, while still large, is reduced: the top fifth captured 48.2% of after-tax income compared to 6.3% for those at the bottom.

Related: Rich-poor gap concerns Janet Yellen

3. Government benefits also narrow the gap. They boost the incomes of those lower down the income scale. Indeed, between 1979 and 2011, government transfers reduced income inequality more than federal taxes, the CBO said.

4. Taxes are on the rise. While average federal tax rates for all income groups have been relatively low by historical comparison, they are on the rise.

The biggest jump by far is on incomes of the top 1%, due to a series of tax law changes between 2011 and 2013. For example, high-income households got hit with new taxes in the Affordable Care Act, as well as higher tax rates because of the expiration of some Bush-era tax cuts.

Under 2013 tax rules, the agency said, the average federal tax rate for the top 1% would be 4.3 percentage points higher than in 2011 versus about 1 percentage point higher for other households.

5. There will always be those who make more, and those who make less. There's no objective, bright line beyond which everyone agrees the gap in incomes between the rich, the middle class and the poor is a social and economic problem.

And some policy experts contend that growing income inequality is a much less important metric than the state of economic mobility, which is the ability to move up the income ladder.

There is also disagreement about how much, if at all, growing income inequality has hurt mobility.

The debate shows no signs of letting up anytime soon.

Personal Finance


CNNMoney Sponsors