New CBO data reveal some quite powerful tax and transfer effects offsetting the income losses from the Great Recession. The data so far go only through 2009, but they provide a heretofore unseen look at the effectiveness of the tax and transfer system at a time of severe economic stress.

Each figure below shows the change in real income, 2007-09 (in 09 $’s), for different income groups. The first bar shows the loss in market income — mostly earnings for low and middle-income households, and mostly capital losses for the top 1%. The second bar shows the change in transfers, or the safety net — programs like unemployment insurances or the cash value of food stamps. The third bar is the change in federal tax liability and the last bar is the net of all of the above, i.e., the change in income after taxes and transfers. (I include a table at the end so you can see the underlying income levels.)

For example, the first figure shows that the real income of the lowest fifth of households fell $1,300 between 2007-09, from $16.3K to $15K. But their transfers rose and their federal taxes fell enough to more than offset the loss, such that their post-tax-transfer income was $600 higher in 2009 than in 2007.

Other numbers from this CBO study show that our tax and transfer system has become less progressive over time, but at least in these years — and Recovery Act programs played an important role here (e.g., Making Work Pay, UI, EITC, Food Stamp expansions) — it was still strong enough to make a huge difference to the poorest households.

Middle income households were $1,000 worse off over these years, but taxes and transfer offset $5,000 of their losses. Transfers are typically less important for working-age, middle-class households compared to poor households, but data in the CBO report suggest that UI benefits played an important role here (I’m not sure about that — I’ve inferred it from the fact that the “other” category of transfers is the only one that grew as a share of transfers over these years for the middle fifth).

As incomes rise, transfers tend to fade, and for the top 1% (last figure) they did not grow at all over these years. Taxes fell by almost $200K for the richest households, but that offset less than a third of what they lost. These were mostly capital losses associated with declines in asset values. In fact, capital gains went from accounting for almost a third of the income of the top 1% in 2007 to 14% in 2009.

However, as the CBO reports, higher income households appear to have rebounded most quickly post-2009. They note, for example, that IRS tabulations for 2009-10 show that “[i]ncome went up more rapidly for higher-income taxpayers than for other taxpayers — by more than 10 percent for those filing returns with income in the top 1% of the distribution of all returns.”

It is all too common to hear conservative politicians complain that the Recovery Act failed, or the safety net is becoming a hammock. These data, from the rigorously non-partisan CBO, show just how wrong that is. The private sector failed dramatically and guess what happened? The public sector stepped up and mopped up a lot of the damage.

Source: CBO

Underlying Data:

Source: My analysis of CBO data.