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Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide Chart 2 Shares Of Income, After Tax And Transfers, By Income Group, 1979-2010 01979 = E a o = = a = Lak} wn =| o = — a Cc a rar | 4 i = Pai ua = Lowest quintile Second quintile Third quintile Fourth quintile Highest quintile Source: Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2070," 2013. © Standard & Poor's 2014. While the size of transfer payments rose by a small amount from 1979-2010, the distribution of transfers shifted away from households in the lower part of the income scale. The bottom 20% of households received only 36% of transfer payments in 2010, after receiving 54% in 1979 (18). This was largely because of the growth in spending on programs for the elderly (such as Social Security and Medicare), and benefits of these programs aren't limited to low-income households. Benefits for other programs that largely benefit the poor were also reduced (19). In addition, tax expenditures mostly benefit the affluent: Tax credits and tax deductions benefit those more at higher tax rates. Changes in federal government tax policy have also exacerbated income inequality in recent decades (20). According to the CBO, the average rate for each income group in 2012 was below the rate that prevailed for that group in the 1990s and most of the 2000s even with the increases in average federal tax rates in 2010 (21). Indeed, the federal income tax rate for the top income earners fell to 35% in 2012 from 70% in 1979, while the government didn't reduce the payroll tax rate until the temporary Payroll Tax Holiday of 2010 (22). Keep in mind that the payroll tax that funds Social Security is levied on pay below a certain threshold ($117,000 this year). In practice, this means that those earning less than the cap pay a higher rate of Social Security tax than those who earn more than the cap. So, the composition of federal revenues has shifted away from progressive income taxes to less-progressive payroll taxes, and income taxes have become slightly more concentrated at the higher end of the income scale. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 5, 2014 8 1351366 | 302136118 HOUSE_OVERSIGHT_025770