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Saturday, October 3, 2015

Taxes and Inequality

Previous posts have explained that the US tax system is much more progressive than many people think.  A new study from Brookings confirms that raising the top income tax rate even more would do little to reduce inequality.  The summary:
The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as
50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest.
That such a sizable increase in top income tax rates leads to such a limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge. To be sure, our results do not speak to the general desirability of a more progressive tax-and-transfer schedule, just to the fact that even a significant tax increase on high-income households and corresponding transfer to low-income households has a small effect on overall inequality.