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Income is more equally distributed after taking taxes and in-kind transfer payments into account.
Higher income households pay a higher percentage of income in taxes. In-kind transfer payments
are received disproportionately by lower income households.
Example 4: After taking federal taxes and in-kind transfer payments into account, the Highest
Income 20% of households have about 8 times the income share of the Lowest Income 20%,
according to the Congressional Budget Office.
The second way that the distribution of money income overstates the degree of income inequality
is by focusing on income distribution at a point in time (e.g. 2013) rather than over the course of a
lifetime. Income is distributed more equally over the course of a lifetime than at a point in time.
Many people in the Lowest Income 20% of households are young people at the start of their
careers. Most of these young people will move into higher Income Groups as their careers
progress and they develop more human capital.
Example 5: In 2012, only 47.3% of households in the Lowest Income 20% were headed by a
person from 35-64 years of age. 79.5% of households in the Highest Income 20% were headed
by a person 35-64 years of age.
If career incomes were compared or if incomes were compared for households at the same
career stage (e.g. compare 30-year-olds to 30-year-olds, 50-year-olds to 50-year-olds, etc.), the
gap between the highest and lowest Income Groups would be much smaller.
Distribution of Wealth
In one way, the distribution of money income understates the inequality problem. The terms “rich”
and “poor” refer to wealth distribution rather than to income distribution. The distribution of wealth
is much more unequal than the distribution of income.
Example 6: In 2010, the top 20% of wealth holders had roughly 89% of total wealth. The bottom
20% of wealth holders had roughly 0% of total wealth.
The greater inequality in the distribution of wealth has two primary causes:
1. Differences in savings rates. High-income households typically have much higher savings
rates than low-income households.
Example 7: The table below represents income, savings rate, and wealth for Max, a high-income
person, and Minnie, a low-income person. The higher savings rate for Max means that there is a
bigger gap in wealth accumulation between Max and Minnie than the gap in income. Max has 16
times as much income as Minnie, but 80 times as much wealth.
Max
Minnie
Income $160,000 $10,000
Savings Rate 10% 2%
Wealth Accumulation $16,000 $200
2. Wealth distribution is measured at a point in time. Wealth, like income, is distributed more
equally over the course of a lifetime than at a point in time.
Example 8: In 2011, households headed by a person 65 to 69 years of age had a median
household net worth 29 times greater than households headed by a person under 35 years of
age. If wealth were compared for households at the same career stage (e.g. compare 35-yearolds
to 35-year-olds, compare 65-year-olds to 65-year-olds, etc.), the gap between rich and poor
would be much smaller.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
31 - 3 Income Distribution and Redistribution