HOUSTON – (Oct. 28, 2020) – Analysis of Federal Reserve survey data shows U.S. wealth inequality has declined for the first time in nearly 30 years, while income inequality has seen its largest decline in three decades, according to a new working paper from Rice University's Baker Institute for Public Policy.
The results come from the Survey of Consumer Finances (SCF), a triennial family survey conducted by the Federal Reserve. The survey data for 2019, which was released in late September, gives one of the best insights into U.S. households’ wealth composition, said Jorge Barro, fellow in public finance at the Baker Institute and author of the paper, titled "Decline in U.S. Wealth and Income Inequality Between 2016 and 2019."
What makes the shift particularly surprising is that it comes after a significant tax cut signed into law in 2017, Barro said. This tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA), reduced the corporate tax rate from 35% to 21%.
"Given that this tax cut largely benefited those who hold corporate equity, many expected this change would actually increase wealth and income inequality," Barro wrote. "A recent working paper at the National Bureau of Economic Research, however, notes that higher corporate taxation shifts corporate income to noncorporate businesses, increasing the dispersion of income and generating a rise in income inequality — an outcome that would reverse with a decline in the corporate tax rate."
Wealth inequality rose persistently between 1992 and 2016 — a trend that saw a reversal in 2019, Barro found. "Income inequality also experienced the largest decline since 1992," he wrote. "Both changes are a result of gains in the total shares (of wealth and income) by lower deciles (groups). While there are many plausible explanations, changing age demographics and the economic impact of the TCJA may have played a role in generating this outcome."
Barro said an aging of the population shifts the age distribution from a large share of young and a low share of old to a low share of young and a large share of old. Because people generally have low assets early in life and higher assets later in life, this demographic shift can alter the wealth distribution from fewer high-wealth individuals to relatively many high-wealth individuals. Consequently, an aging of the population can plausibly generate a reduction in wealth inequality.
The SCF collects granular data on the financial positions of U.S. families, with regards to assets and liabilities. The extent to which a family’s assets exceed their liabilities determines their net worth, which in turn defines the family’s wealth. Between 2016 and 2019, real median family wealth grew 17.7% from $103,460 to $121,760. Even as broad measures of wealth grew over this time period, the dispersion of wealth contracted, Barro said.
Between 2016 and 2019, real median U.S. family income rose 5.4% from $56,019 to $59,051. Over that period, income inequality experienced its sharpest decline since the decline between 1989 and 1992, Barro said.
Rising wealth and income inequality have been focal points in debates in the economics profession for many years, Barro said. "Researchers and institutions have allocated considerable resources to understanding the causes of inequality and how policy can affect it. A decline in both income and wealth inequality between 2016 and 2019 will require researchers to rethink the mechanisms driving inequality."
Barro's area of research involves the development of dynamic macroeconomic models for fiscal policy evaluation. Prior to joining the Baker Institute, Barro was an economist at the University of Pennsylvania’s Wharton Public Policy Initiative, where he led the development of its dynamic macroeconomic model and helped launch the nonpartisan Penn Wharton Budget Model.
To schedule an interview with Barro or for more information, contact Jeff Falk, director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.
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Related materials:
Paper: www.bakerinstitute.org/media/files/files/5bc75df7/cpf-wp-us-inequality-102620.pdf
Barro bio: www.bakerinstitute.org/experts/jorge-barro
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Founded in 1993, Rice University’s Baker Institute ranks as the No. 2 university-affiliated think tank in the world and the No. 1 energy think tank in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blog.bakerinstitute.org.