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Does Raising Taxes On The Rich Actually Reduce Inequality? Sometimes

Higher taxes on the 1% won’t do much–unless we change the underlying tax system first.

Does Raising Taxes On The Rich Actually Reduce Inequality? Sometimes
[Top Photo: Allan Danahar/Getty Images]

If you’re going to do something about income inequality, the tax system is the obvious place to start. So, how much would we have to change taxes to make incomes more equal?

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Quite a lot, it turns out.

For a new report, the Brookings Institution simulated the effect of increasing the top income tax rate to 50%, then redistributing that extra revenue to the bottom 20% of income earners.

The resulting effects “on overall income inequality are exceedingly modest,” it says. Households in the 1% would pay $58,233 more on average, while the top 0.1% would pay $297,582 more. It would generate $95.6 billion in additional revenue, with $2,650 going to everyone in the bottom fifth each year. But, measured on the Gini coefficient scale (a common measure of income inequality), inequality would drop only by a smidgen, from 0.574 to 0.560. That’s hardly a sea change in the lives of ordinary people.

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“A sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality,” the paper says. Or, as they might have put it: a small bang for a very controversial policy that’s likely to be fiercely contested, by Republicans in particular.

But the study offers a limited view of the merits of raising taxes on the rich. A second study from the Tax Policy Center, a collaboration between the Urban Institute and the Brookings Institution, produces bigger-number impacts because it calculates a wider range of income. When you include wages, interest and dividends, employer contributions to health plans, overseas earnings and growth in retirement accounts, it turns out that even moderate tax increases produce substantially more revenue.

Taxing the 1%, who now pay about a third of their income in tax, at 45% would bring in $276 billion a year. Taxing the 95th to 99th percentile of earners at 30% (rather than 25% now) would bring in $86 billion. As the New York Times points out, that’s enough to pay for plenty of national priorities.

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The biggest benefit the rich enjoy is owning things, like stocks and houses. Capital and dividend gains are taxed at lower rates than wage income. Today, 70% of benefits from capital gains tax go to the 1%. “Eliminating the preferential rates on capital and dividends would generate $1.34 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office,” the New York Times says. In other words, if you’re going to raise taxes on the rich, raise them on the income the rich actually report.

An alternative to taxing income is to tax intergenerational wealth, as in Tony Atkinson’s proposed minimum inheritance in his book Inequality: What Can Be Done?. Meanwhile, there are other redistributive policies that aren’t classic tax-and-spend, including a basic-income guarantee. Indeed, some versions of basic income are combined with flat taxes, where the rich would pay less money than now.

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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