By Scott Hodge, Tax Foundation

Underlying every fiscal policy discussion in Washington is the question of progressivity: how much should tax and spending policy redistribute from high-income households to low-income households?

This debate is often more rhetorical than substantive, but a recent study by the Congressional Budget Office (CBO) fills this void by presenting data showing that the current fiscal system—both taxes and direct federal benefits—is very progressive and very redistributive.

The CBO study estimates the impact of federal fiscal policy on household incomes in 2019 (the most recent data). It does this by contrasting how much households benefited from social insurance programs (e.g., Social Security and Medicare) and means-tested transfer programs (e.g., Medicaid, SNAP, and Supplemental Security Income) with how much they paid in total federal taxes—including individual income taxes, payroll taxes, corporate income taxes, estate taxes, and various excise taxes.

These policies lift the incomes of many households (who receive more in federal benefits than they pay in total federal taxes) while reducing the income of others (who pay more in federal taxes than they receive in direct federal benefits). CBO’s data allows us to measure the impact of these policies on the average household within various income groups and then aggregate the results to measure how these policies redistribute income between groups of households.

To be sure, households do benefit from other federal programs such as national defense, highway spending, and public education, but CBO does not include the benefits of such programs in this exercise. The study is solely focused on fiscal policy that directly impacts household incomes.

Federal benefit programs and taxes can either raise market incomes or reduce them. For example, in 2019, households in the lowest quintile paid almost no federal income taxes but received nearly $22,000 in transfer benefits. As a result, these policies more than doubled their household incomes, an increase of 126 percent.

The story is very similar for households in the second and middle quintiles, although not as extreme. After netting their federal taxes paid, direct federal benefit policies raised the incomes of households in the second quintile by 39 percent and the incomes of households in the middle quintile by 11 percent.

The story changes completely for average households in the top two quintiles. On average, they paid more in taxes in 2019 than they received in direct federal benefits. Households in the fourth quintile, for example, saw their incomes fall by 4 percent, while households in the highest quintile saw their incomes fall by 21 percent.

At the very top of the income scale, the story is even more dramatic. Households in the top 1 percent paid an average of roughly $600,000 in federal taxes and received about $15,000 in federal benefits. As a result, federal tax and spending policies reduced the incomes of households in the top 1 percent by nearly one-third (30 percent).

It is interesting to note that federal benefit programs are distributed relatively evenly across the income scale, while federal taxes skew very heavily to higher-income earners.

Federal fiscal policy increased the overall income for households in the lowest quintile by $566 billion in 2019. Households in the second quintile gained $390 billion in income while households in the middle quintile gained $187 billion in income.

Combined, the first three quintiles gained more than $1.1 trillion in income thanks to federal benefit policies, even after netting out their federal taxes paid.

On the other end of the income scale, progressive fiscal policy reduced the incomes of households in the fourth quintile by $109 billion in 2019. However, this is a fraction of the nearly $1.7 trillion that households in the highest quintile saw their incomes fall due to federal fiscal policy. Of this amount, some $702 billion came from households in the top 1 percent alone.

Overall, federal fiscal policy lowered the incomes of the top 40 percent of American households by roughly $1.8 trillion in 2019. Of this, more than $1.1 trillion was redistributed to lift the incomes of households in the bottom 60 percent of the population, while the remaining $656 billion went to pay for other federal spending.