This Burtless Brookings Blog post really is a must read.
Burtless notes that taxes and transfers (including both ARRA and automatic responses to the recession) prevented huge income declines for the lower 60% of US households during the great recession. In contrast high income households were hammered. Federal policy actually worked.
The post is a guided tour of a Congressional Budget Office pdf
Burtless notes
Thus, about nine-tenths of the average drop in market income was erased as a result of lower federal taxes and higher public benefits. Instead of falling 10.4%, after-tax, post-transfer income in the middle quintile fell only 1.3%
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Families in the second quintile from the bottom saw their market incomes shrink slightly more than 13%, but tax reductions and benefit improvements meant their net or after-tax incomes fell just 0.7%. By 2009 households in the bottom one-fifth experienced a decline in market income equal to more than 8% of their pre-recession market income, but their post-tax, post-transfer income actually increased slightly.
In contrast, high income households weren’t protected
Among households in the top one-fifth of the pre-tax income distribution, average after-tax income fell more than 16%. In the top 1% of the distribution, after-tax income fell 37%
Also
But CBO’s latest numbers sharply contradict the widespread impression that U.S. economic gains in the 21st century have been concentrated among the nation’s top income recipients. On the contrary, they show that the top 1% sustained the biggest income losses since 2000. In fact, every income group below the top 1% saw average after-tax income rise between 2000 and 2011 (see Chart 3). Middle-income families saw their after-tax incomes grow 11%. Only the top 1% of households experienced a drop in real, after-tax income. Their average income, after federal taxes are subtracted, fell 5%.
Notice that 2011 is before the expiration of Bush tax cuts for families with incomes over $450,000 (2013) and before the Obamacare surtax was collected (2014). I’d guess that the main explanation of this pattern was the sharp decline in high pre-tax incomes due to the recession (which was mostly reversed in the recovery). There was a small contribution to the reduction of inequality from the 2011-2 partial payroll tax holiday.
