A sweeping new analysis from the Congressional Budget Office paints a clear picture of how the US economy has shifted over more than four decades. Between 1979 and 2022, income growth increasingly concentrated at the very top, while the middle class hollowed out, even after accounting for taxes and government transfers.
The data tracks market income, government benefits, and federal taxes across income groups, offering one of the most comprehensive views yet of how economic gains have been distributed since the late 1970s. The conclusion is difficult to ignore. The wealthiest households dramatically expanded their share of national income, while the broad middle steadily lost relative ground.
A widening gap since the Reagan era
In 1979, the top 1 percent of US households earned about 9 percent of total income before taxes and transfers. By 2022, that share had climbed to 18 percent, effectively doubling over the period. The shift began in earnest during the early 1980s, a time often associated with structural economic change under President Ronald Reagan, and continued across multiple business cycles, administrations, and policy regimes.
As the highest earners captured more income, pressure spread downward across the distribution. The lowest income quintile saw its share of market income decline from 5 percent to 4 percent. According to the CBO, most of the compression occurred in the middle, not at the very bottom, reinforcing the idea that the middle class hollowed out rather than collapsed outright.
What taxes and transfers did, and did not, fix
Federal taxes and social programs continue to play a meaningful role in softening inequality. When transfers such as Social Security, Medicaid, and tax credits are included, the income distribution becomes less skewed. Even so, the middle class still lost ground.
The combined share of after tax income held by the middle three income quintiles fell by roughly six percentage points between 1979 and 2022. Over the same period, the top 1 percent doubled its share of after tax income from 7 percent to 14 percent. The data suggests that while the safety net expanded, it did not fully offset the forces pushing income upward.
One striking shift occurred at the bottom of the income ladder. For households in the lowest quintile, Medicaid and CHIP benefits grew from just 9 percent of total income in 1979 to nearly half by 2022. This reflects both rising healthcare costs and a greater reliance on public benefits as wage growth lagged.
Capital gains and the rise of the ultra wealthy
The report identifies market income, particularly realized capital gains, as a central driver of long term inequality. Capital gains make up a far larger share of income for top earners, allowing wealth to surge during periods of strong asset performance.
While average income rose for all groups over the past four decades, growth at the very top was exceptional. Income for the highest quintile more than doubled, while the top 0.01 percent experienced more than sevenfold growth after taxes and transfers. These gains were closely tied to equity markets, business ownership, and other assets that are far less common among middle income households.
Who pays the tax bill now
As income concentrated, so did tax payments. In 2022, the top quintile paid about 70 percent of all federal taxes, up from 55 percent in 1979. This reflects the highly progressive structure of the US tax system, particularly on income.
Kent Smetters, director of the Penn Wharton Budget Model, has argued that this structure limits how much additional revenue can realistically be raised. He has noted that the United States already has one of the most progressive income tax systems among advanced economies in the OECD.
Post pandemic volatility and the long view
The CBO data also captures the turbulence following the COVID 19 pandemic. In 2022, average after tax income fell across all income groups. For lower income households, the decline reflected the expiration of temporary pandemic programs such as enhanced child tax credits. For higher earners, it was driven largely by a sharp drop in capital gains after a record year in 2021.
Despite this short term volatility, the long term trend remains intact. The Gini coefficient, a standard measure of inequality, is significantly higher today than it was in 1979. The data underscores a fundamental shift in the US economy, one in which the middle class hollowed out as growth increasingly flowed to the top.
