Scholars have increasingly drawn attention to rising levels of income inequality in the United States. However, prior studies have provided an incomplete account of how changes to specific transfer programs have contributed to changes in income growth across the distribution. Our study decomposes the direct effects of tax and transfer programs on changes in the household income distribution from 1967 to 2015. We show that despite a rising Gini coefficient, lower-tail inequality (the ratio of the 50th to 10th percentile) declined in the United States during this period due to the rise of in-kind and tax-based transfers. Food assistance and refundable tax credits account for nearly all the income growth between 1967 and 2015 at the 5th percentile and roughly one-half the growth at the 10th percentile. Moreover, income gains near the bottom of the distribution are concentrated among households with children. Changes in the income distribution were far less progressive among households without children.
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All data are available through the public versions of the U.S. Current Population Survey. Full replication code is available upon request to the authors.
Pre-tax money income includes cash transfers from programs such as Temporary Assistance for Needy Families (TANF) as well as pension support from Social Security. It includes income from child support and private transfers across households but does not include child support paid or remittances to family members outside the country. It should not be confused with market income (earnings from paid labor only), which comparative studies often apply in pre-post analyses.
There are numerous alternate ways to adjust for household size, as detailed by Buhmann et al. (1988). When household income is adjusted for household size, we assume some economy of scale whereby household members share fixed costs such that each additional member lowers the household’s cost per capita. To estimate this, household income is typically divided by household size raised to some scale elasticity between 0 and 1 (Household income/household sizee, where e equals the scale elasticity). When elasticity is 0, there is no adjustment for household size, and thus each household member requires the same dollar amount to afford the same level of consumption. When elasticity is 1, there are no economies of scale, and so each member has equivalent costs regardless of household size. We choose a commonly used approach that sets elasticity between the two extremes at .5 (Johnson et al. 2005).
Given evidence of underreporting of SNAP benefits in the CPS ASEC, the actual effects of SNAP on income growth at the bottom of the distribution are likely larger than they appear in Fig. 4.
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Liana Fox contributed to this article in her personal capacity. The views expressed in this research, including those related to statistical, methodological, technical, or operational issues, are solely those of the authors and do not necessarily reflect the official positions or policies of the U.S. Census Bureau. The authors also wish to thank Irwin Garfinkel, Neeraj Kaushal, and Jane Waldfogel for their contributions to creating the data underlying this study, and also the anonymous reviewers of the study for their valuable feedback. Funding from the Annie E. Casey Foundation and The JPB Foundation is gratefully acknowledged, though all opinions and errors are the authors’ alone.
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Wimer, C., Parolin, Z., Fenton, A. et al. The Direct Effect of Taxes and Transfers on Changes in the U.S. Income Distribution, 1967–2015. Demography 57, 1833–1851 (2020). https://doi.org/10.1007/s13524-020-00903-6