There is a lot of concern about income equality in the US, the gap between the high income group and low income groups. There is similar concern about the concentration of wealth in the country. In general, per capita incomes have risen across all groups, as have living standards, but a large part of our population is under financial stress, living paycheck to paycheck and struggling to pay rent, buy food and gas, and access health care. The causes and solutions are also debated. But we need to look more carefully at what the actual facts are. The Congressional Budget Office has helpfully prepared a more detailed look at income across the population. (CBO Report)
A common approach is to divide the population into fifths according to income level and compare both the current absolute level of income and the trends across those quintiles. If you look solely at earned income, the gap between the highest and lowest quintiles is substantial and that gap may appear to be growing. In fact the highest quintile appears to be the only one with substantial real (after inflation) income growth. The highest quintile and especially the top 10%, 5% or 1% have a lot of income from sources like owned businesses and stock market returns.
But the US has massive income transfers in the form of health care subsidies, housing subsidies, food stamps, and outright welfare payments. Those need to be considered. And the lowest income quintile has by far the largdest growth in receipt of these transfer payments over the study period. A major finding of the CBO was that between 1979 and 2021 income inequality actually decreased due to transfer payments.
The role of taxes also should be considered, because households can only spend after-tax income. The low-income quintile has very low income taxes, in many cases these households not only don’t pay tax, but get an earned-income credit. And in the highest quintile, while a lot of total taxes are paid, there are multiple tax-credits, deductions, deferrals and tax-dodging schemes that really only are available to and benefit the rich. Those, in my judgment, should be completely eliminated, and marginal rates lowered. But they have the effect of boosting the after-tax income of that top quintile. As an aside, note how much of federal income taxes are paid not just by the top quintile, but by the top 10% or 1%.
The three income groups in the middle quintiles have had the most stagnant income, after transfer payments and taxes, look at the chart on page 26 of the report. Those groups don’t get large amounts of welfare-type payments and they don’t benefit from all the special tax gimmicks. This is the group that actually is feeling the most pain in trying to maintain a good living standard and it is this group that in my judgment deserves some help, in the form of reduced income tax rates but also support for child care costs in particular.
I will also return to my theme of personal responsibility, particularly in regard to education and job training. Education is the number one method for people to make a difference in their income situation. I say this constantly–study and work hard in school, learn, find a profession or career that you like and you will be in good shape. Don’t do that and you are condemning yourself to a life of low-wage jobs in fast-food, hospitality, retail and other settings. We need stronger incentives for people to save and invest in the market; that is what creates wealth and wealth generates income. Everyone should be a stock or bond owner and should be constantly adding to the money invested, even if it is a few dollars a month.
Look carefully at that chart on page 31, you can see that after transfer payments and taxes are considered income inequality essentially has not changed for two decades. So let’s be careful with all the nattering about income equality. It maybe substantial but it isn’t getting worse. It could be fixed with a greater emphasis on personal responsibility to get an education, find a good job and save and invest.
The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry. Mr. Roche is available to assist health care companies through consulting arrangements through Roche Consulting, LLC and may be reached at 
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Excellent post! You clearly explain several problems with how we measure income in the US. Additionally, Thomas Sowell explains in Basic Economics (and several other of his writings) that merely focusing on quintiles ignores that fact that over time 95% of the people in the lowest quintile will in fact move into the upper quintiles as their income grows due to things like gaining work experience, education, and age. Most people entering the workforce at age 18 or 20 can expect to earn more income as they finish their education, get additional training, and experience, and progress in their careers. The upper quintile is generally full of people between the ages of 45-55 as they reach their peak earning years. Moreover, people counted in the very top 1 percent or so of wage earners are often only there for a year or two at a time as they experience a big income event in a given year and often drop out of that category the very next year. Although the divisions of quintiles is a statistical measurement that is fixed, the individuals within the quintiles move between them regularly. Only about 5% of the American population remains in the lowest quintile of income earners throughout their lifetime, and as you pointed out in your post, these individuals often receive substantial amounts of transfer payments that the government does not count as income.