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

Not Just The Fruits Of Our Labor

Though the share of income from labor and capital, excluding capital gains, has decreased, the share coming from
capital gains and business income has increased over time. In particular, inherited wealth has increased since the
World Wars and the Great Depression, as Thomas Piketty has shown (14), and with it the earnings from that wealth.
This trend is important because labor income tends to be distributed across income levels more evenly than capital
gains--so a shift in income composition can significantly affect inequality.

While labor income accounted for nearly three-fourths of market income from 1979-2007, that figure had dropped to
two-thirds by 2007. Capital income (excluding capital gains) is the next largest source, but even at its 1981 peak, it
represented only 14% of market income before falling to about 10% of total income in 2007. Conversely, income from
capital gains rose, doubling to approximately 8% of market income in 2007 from about 4% in 1979. Business income
and income from other sources (primarily private pensions) each accounted for about 7% of total income in 2007, up
from about 4% each.

In addition, capital income has become increasingly concentrated since the early 1990s--and, despite declines in 2001
and 2002, concentration spiked from 2003 through 2007, with more than 80% of the capital gains realized by the top
5% of earners going to the top 1% alone (15). Capital gains also have become increasingly concentrated and are tied
with business income as the most concentrated income source.

The Impact Of Government Policy

Government policies on taxation and government transfers, such as Social Security and Medicare, have done little to
reduce income inequality--and may have contributed to a further widening of the gap.

Because government transfers and federal taxes are progressive, the distribution of net household income (after
transfers and federal taxes) is more evenly balanced than the distribution of market income. That said, at the federal
level, the equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.
The CBO estimates that the dispersion of market income grew by about one-quarter from 1979-2007, but the
dispersion of after-tax income grew by about one-third (16). The distribution of after-tax income in 2010 became
slightly more even among different groups than before-tax income, though the dispersion of after-tax income in 2010
remained wider than in 1979 (see chart 2) (17).

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