Monday, September 28, 2015

"Would a significant increase in the top income tax rate substantially alter income inequality?"

Here's a Brookings piece by Gale, Kearney, and Orszag --- with some research assistance from yours truly --- which tries to perform the following accounting exercise: If we increased tax rates on the wealthy, and there were no behavioral effects, how much would the after-tax Gini decrease? The answer is "not very much at all."

Under current tax provisions, the after-tax Gini coefficient is .574. This compares to a Gini of .610 calculated over pre-tax income. Raising the top income tax rate to 45 percent reduces the Gini coefficient only from .575 to .573. Raising it to 50 percent brings the Gini to .571.
Some explicit redistribution from the rich to the bottom 20% reduces inequality a bit further, but still not much.

Why? Mostly, because we were considering changes just to the top bracket, which doesn't start until taxable income of $464,850 (for married filing jointly), which corresponds to gross income even higher. Changing the top bracket effects only the very top --- the top 0.5 percent or so --- while 90/10 inequality would be untouched.

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