CBO: Income Inequality Narrowed in 2023 as Lower-Income Households Gained and Top 1% Fell

Household income inequality narrowed in 2023 as incomes rose for lower-income Americans and fell at the very top, according to a new report from the Congressional Budget Office, even as the nonpartisan agency said the broader trend since 1979 is still toward greater inequality.

The CBO said in a report published Thursday that “in 2023, the roughly 134 million households in the United States received a total of about $20 trillion in income.” It also found that means-tested transfers and federal taxes continued to make the income distribution more equal than it otherwise would have been, with about the same redistributive effect as in 2022.

The shift in 2023 was especially notable at the bottom and the top of the income scale. “Income increased by 5 percent among households in the lowest quintile … By contrast, income decreased by 9 percent among households in the top 1 percent. That decrease was largely due to a reduction in realized capital gains,” the CBO said. That distinction matters because swings at the top can reflect volatile investment gains, not simply changes in wages or salaries.

The agency also said, “The extent to which transfers and taxes reduced inequality was similar in 2023 and 2022.” For households in the lowest quintile, means-tested transfers as a share of income before transfers and taxes fell by 2 percentage points in 2023. That was partly offset by a 1 percentage-point decrease in the average federal tax rate for that group.

The report, “The Distribution of Household Income, 2023,” examines household income, means-tested transfers and federal taxes from 1979 through 2023. The CBO’s purpose is to help Congress assess how taxes and government spending affect the distribution of household income.

For this report, income before transfers and taxes includes market income plus social insurance benefits. Means-tested transfers include programs such as Medicaid, SNAP and Supplemental Security Income, while federal taxes include individual income taxes, payroll taxes, corporate income taxes and excise taxes. All dollar amounts are stated in 2023 dollars, adjusted using the Bureau of Economic Analysis’ personal consumption expenditures price index.

The longer-term picture in the report is less encouraging for those focused on inequality. The CBO said average income rose for all income groups between 1979 and 2023, but it grew fastest for households at the top. As an illustration, average annual income for the lowest quintile rose from $19,000 in 1979 to $28,500 in 2023. For the highest quintile, it climbed from $179,700 to $409,300.

As a result, the agency said income inequality increased over that period both before taxes and transfers and after them. That was true even though taxes and transfers did more to reduce inequality in later years than they did earlier in the period.

Over the long run, means-tested transfers increased, especially for lower-income households, with rising Medicaid spending a primary driver, according to the report. At the same time, average federal tax rates fell for all income groups from 1979 to 2023, with the largest declines occurring at the bottom of the income distribution. Even so, higher-income households continued to pay higher average federal tax rates than lower-income households.

Taken together, the report shows a clear contrast: inequality narrowed in 2023 because incomes improved at the bottom while falling for the top 1%, largely because of lower realized capital gains. But over the full span from 1979 to 2023, the CBO said the United States remained more unequal than it was at the start of that period.