Oct. 26, 2011— -- The income of the richest 1 percent in the U.S. soared 275 percent from 1979 to 2007, but the bottom 20 percent grew by just 18 percent, new government data shows.
The Congressional Budget Office (CBO) released a study this week that compared real after-tax household income between 1979 and 2007, which were both after recessions and had similar overall economic activity.
While the income of the richest 1 percent nearly tripled, increases were smaller down the economic ladder. After the 1 percent, income for the next highest 20 percent grew by 65 percent, much faster than it did for the remaining 80 percent of the population but still lagging well behind the top percentile.
The changes illustrate how the better off have captured the bulk of income gains over the past three decades. The top quintile has seen its share of income rise while the other four quintiles have suffered declines in their shares, according to John Bowler, director of country risk service with the Economist Intelligence Unit.
The report states that without the growth of the top percentile, income inequality still would have increased, "but not by nearly as much." The study was prepared at the request of Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa.
The CBO said the reasons for the rapid growth at the top are "not well understood," though some possibilities include technical innovations that have changed the labor market for superstars, "such as actors, athletes, and musicians," changes in executive compensation, and increasing scale of financial-sector activities.
Technology creates opportunities for highly skilled workers while making some routine tasks redundant, said Bowler. The role of globalization, he added, is "controversial."
"Even some policymakers who would traditionally be in the free trade camp are now questioning the benefits of globalization to the middle and lower-income U.S. households, even if they have benefited from cheaper imported manufactured goods," he said.
Matthew Dowd, ABC News political analyst and former strategist for President George W. Bush, said while Americans have accepted income disparities in the country, they are becoming more frustrated at the perception that their economic opportunities, or that of their children, are diminishing.
"They don't feel any ability to move up. They feel stuck and don't feel there's a lottery ticket to take them to a higher class," Dowd said.
What makes the frustration worse is that Americans feel the wealthy, especially in business, receive preferential treatment by the government.
"They watch Wall Street, government bailouts and feel like the rich play by different rules," he said. "They think, 'Here I am, trying to make payments on my house with my own small business, trying to make ends meet, but if I need help, no one will help me.'"
On Wednesday, Douglas Elmendorf, CBO director, also revealed in prepared remarks to the congressional super-committee that the government spent about $200 billion, or 15 percent of total discretionary spending, on federal workers' salaries and benefits in the fiscal year that ended in September, the Washington Post reported.
Dowd said that frustration with increasing inequality has led to growing movements on the "right and left," such as the Occupy Wall Street protests.
"Tea Party and Occupy Wall Street both come from the same place: anger at a small group of people who are operating by a different set of rules," he said. "Americans always say they don't like the income gap, but they didn't mind the gap. But they just don't like that they don't have any ability to rise."
Bowler said he agreed that, traditionally, Americans have not envied the material success of others, as growing rich or at least becoming better off is part of the American dream.
"But it is one thing for successful entrepreneurs to attain great riches, another for poorly performing company bosses taking no risks with their own capital to award themselves large pay-outs," he said.
The "equalizing effect" of transfer payments and federal taxes on household income was smaller in 2007 than it had been in 1979, according to the CBO, sparking controversy in the debate over whether to increase taxes on the rich.
In 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. Meanwhile over that period, the overall average federal tax rate fell slightly, the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes, and income taxes became slightly more concentrated at the higher end of the income scale.
"The effect of the first two factors outweighed the effect of the third, reducing the extent to which taxes lessened the dispersion of household income," Douglas Elmendorf, CBO director, wrote on the CBO website.