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Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide

After-tax income
After-tax income is equal to market income plus transfer income minus federal taxes paid. In assessing the impact of various taxes, individual income taxes are allocated directly to households paying those taxes. Social insurance, or payroll, taxes are allocated to households paying those taxes directly or paying them indirectly through their employers. Corporate income taxes are allocated to households according to their share of capital income. Federal excise taxes are allocated to households according to their consumption of the taxed good or service.

Average tax rates are calculated by dividing federal taxes paid by the sum of market income and transfer income. Negative tax rates result from refundable tax credits, such as the earned income and child tax credits, exceeding the other taxes owed by people in an income group. (Refundable tax credits are not limited to the amount of income tax owed before they are applied.)

The Gini Index
The Gini Index is a measure of income inequality based on the relationship between shares of income and shares of the population. It is a value between 0 and 1.0, with 0 indicating complete equality and 1.0 indicating complete inequality (in which one household receives all the income). A Gini Index that increases over time indicates rising income dispersion.

Chart 8 details
Data from Berg, Ostry, and Zettelmeyer (2008).

Authors' calculations: The height of each factor represents the percentage change in a growth spell between 1950 and 2006 when the factor moves from the 50th percentile to the 60th percentile and all other factors are held constant. Income distribution uses the Gini coefficient. The political institutions factor is based on an index from the Polity IV Project database that ranges from +10 for the most open and democratic societies to -10 for the most closed and autocratic. Trade openness measures the effect of changes in trade liberalization on year-to-year growth. Exchange-rate competitiveness is calculated as the deviation of an exchange rate from purchasing power parity, adjusted for per capita income.

Endnotes

(1) "The General Theory," J. M. Keynes

(2) Rajan, "Fault Lines," 2010

(3) CBO, "Trends in the Distribution of Household Income Between 1979 and 2007," 2011; "The Distribution of Household Income and Federal Taxes, 2010," 2013; OECD, 2011; Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, "Redistribution, Inequality and Growth," IMF February 2014; Berg and Ostry, "Inequality and Unsustainable Growth: Two Sides of the Same Coin?," IMF April 2011; Berg and Ostry, "Equality and Efficiency," IMF September 2011

(4) "An Overview of Growing Income Inequalities in OECD Countries: Main Findings," OECD, 2011

(5) CBO, 2013

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