CBO: Top 1% Averaged $3.1M of Income–42 Times That of the Bottom 90%
Income inequality reached a sobering new high in 2021, with the top 1% of households reporting on average $3.1 million of income–a 31% increase from the year prior, and 42 times more income than the average household in the bottom 90%, according to a new report from the Congressional Budget Office (CBO) analyzed by Americans for Tax Fairness (ATF). That’s the most-lopsided distribution of income since the data began being recorded in 1979, when the ratio was 12-to-1. This growth in inequality was mostly due to the bonanza of capital gains enjoyed by the highest-income households. Capital gains, the profit from selling investments for more than their purchase price, are almost exclusively enjoyed by the rich and are usually taxed at a steep discount to the highest tax rates charged on labor income.
“The latest income-inequality figures from the CBO make clear that we are not adequately taxing the principal income source of the super-wealthy: the gains from their vast investments,” said David Kass, ATF’s executive director. “That means we must first raise the top tax rate charged on realized capital gains to match the top tax rate on wages. But beyond that, we must address the problem of unrealized capital gains: the profits on appreciated but unsold investments. The ultra-wealthy have techniques for living off these unrealized gains without selling the investments, and when they are passed onto the next generation, they disappear for tax purposes. Both the Biden-Harris administration and the chairman of the Senate Finance Committee Ron Wyden have plans to annually tax this huge and currently untaxed income of the ultra-rich.”
In total, CBO estimates that the top 1% of households cumulatively raked in $3.8 trillion of income, more than the bottom 80 million households combined (excluding public social benefits). But despite record income, the top 1% of families paid an effective tax rate of just 29.8%, the lowest level since 2012. (This income measure does not even account for the roughly $14.5 trillion of unrealized capital gains held by the top 1% of earners that goes completely untaxed.) If the top 1% had just paid the same average tax rate as they did during the last four years of the Obama administration (33.4%), the federal government would have received an additional $139 billion of revenue in 2021 alone. That would have been enough funding to pay for free childcare, universal preschool, expanded Medicaid homecare services, and national paid family leave, combined for a single year.
The CBO report compares income among different segments of the population both before and after taxes are paid and government transfer payments are received. Even after these adjustments–which for 2021 were relatively larger, for the lowest income households because of special COVID-related payments–the top 1% still received 25 times more income than the bottom 90%, also the highest mismatch since at least 1979, when the ratio was 8-to-1.
Source: Americans For Tax Fairness
Key Facts from the CBO Report:
Two-Thirds of all Capital Income was Captured by the Top 1%
While the CBO found that the vast majority of families earn 80% of their income from their labor (such as wages, salary, or employer-sponsored healthcare), the top 1% make over half their money from passive capital income (such as capital gains, dividends, and rental income), with just a little over a quarter coming from labor, the lowest share on record. This disparity means that the top 1% are more disconnected than ever from the economy that working families live in every day. While the average family in the bottom 90% earned just $3,100 of capital income in 2021, the average member of the top 1% received $1.6 million, over 500 times more.
The Payroll Tax System is Broken and Regressive
Even as the top 1% are making record income, they are skimping on paying into our bedrock public-insurance programs—Social Security and Medicare—both of which are funded through payroll taxes. In 2021 the top 1% paid an effective payroll tax rate of just 1.7% while the bottom 90% of families paid quadruple that amount, a 9% effective rate. The highest-income wage earners pay a lower effective payroll-tax rate because the Social Security tax is not applied to income over a certain level; in 2021, it was about $143,000.
Despite paying a smaller share of their income into Social Security and Medicare, the top 1% actually receive larger payments from those programs. The average Social Security benefit for a member of the top 1% in 2021 was $10,500 (compared to $7,670 for the bottom 90%) and the average Medicare benefit was $5,200 (compared to $4,920 for the bottom 90%). If the top 1% paid just the same payroll tax rate as the bottom 90%, those programs–which both face long-term funding problems–would have received an additional $280 billion of revenue in 2021.
Top 1% are Paying Record Low Corporate Tax Rate
Corporations made a record $3.25 trillion of profits in 2021, nearly half of which indirectly went to the top 1% of earners. Fiscal analysts like the CBO try to estimate how much of the corporate tax paid out of corporate treasuries is ultimately borne by shareholders. The CBO estimates that the effective corporate tax rate passed along to the top 1% of earners in 2021 fell to a record low of just 3.7%. That is a third of what the top 1% paid in 1979 and about half of what they paid before the 2017 Trump tax law, which slashed the statutory corporate tax rate from 35% to 21%.
Source: American For Tax Fairness