ECONOMIC REPORT OF THE PRESIDENT

Box 3-2: Income Inequality and the Business Cycle
Income inequality is highly sensitive to economic conditions, and
short-term trends can easily differ from longer-term developments (see
Box 3-1 for a description of developments over the last 30 years). As a
result, interpreting year-to-year changes in measures of income inequality,
such as the share of income accruing to the highest-income 1 percent
of households, must be done with attention to the business cycle. The
most recent business-cycle peak in 2007 saw the pre-tax income share
of the top 1 percent reach a record high of 19 percent, only to fall to 13
percent two years later in the depths of the Great Recession (Figure 3-i).
Both its sharp drop between 2007 and 2009 and subsequent rebound are
likely primarily cyclical developments.
Figure 3-i
Top 1 Percent Income Shares, 2000–2013
Percent of Total Income
20
18
Pre-Tax
16
14
After-Tax
12
10
2013
8
2000 2002 2004 2006 2008 2010 2012
Note: Households ranked by pre-tax income for both pre-tax and after-tax income shares.
Shading denotes recession.
Source: CBO (2016b); CEA calculations.
Notwithstanding this short-term cyclical variation, income inequality
has increased sharply in recent decades. This longer-term trend of rising
income inequality culminated in the record-high income share of the
top 1 percent in 2007. The top 1 percent income share in 2013, the most
recent year for which comprehensive CBO estimates are available, was
below this record level but still high by historical standards. Averaged
across years, the income share of the top 1 percent has increased through
each complete decade from the 1980s to the present (see Figure 3-ii).
164 | Chapter 3