Thursday, July 11, 2019
Kimberly Clausing (Reed College), Taxing the Rich:
The Issue: Many Americans have not felt the benefits of strong GDP growth in recent decades, as thirty-five years of rising income inequality have concentrated the income growth at the top of the distribution. While the federal income tax system is progressive, it has failed to counter these trends, and some of our tax policy changes have in fact exacerbated inequality. At present, many feel that the U.S. government needs more revenue for urgent fiscal priorities such as infrastructure, yet the federal government is operating with high budget deficits and debt. Thus, as policy-makers search for new revenues, some are eager to increase tax payments by those at the top of the income distribution.
The Facts: Economic inequality has increased dramatically in the United States, and because of this, gains in real GDP per-capita are often not felt by many in our society. (See chart.)
In the 35 years after World War II, economic growth was more widely shared, and real incomes doubled for those in the bottom 90 percent of the distribution while growing more slowly for those at the top. However, in the most recent 35 years, the bottom 50 percent of the distribution have experienced stagnant incomes, and those in the 50-90th percentile have experienced far slower income growth than in the prior generation. However, income growth for those in the top 10 percent, and especially the top 1 percent and the top 1/10 of one percent, has been enormous: Over this time period, cumulative income growth has exceeded 200 percent for those in the top one percent, and over 300 percent for those in the top 1/10 of 1 percent. ...
What This Means: In recent decades, gains in national income have failed to reach many Americans due to increasing income inequality; countering such trends requires increasing the progressivity of our tax system. Proposals that seek to reduce tax avoidance and harmonize the tax treatment of different types of income are likely to raise more revenue at lower rates than more narrow proposals. Many new proposals provide a useful starting point, but they all need careful consideration in order to be ready for implementation. It is also important to remember that economic inequality is not just a “top end” problem. The tax system can also usefully help those at the bottom of the income distribution who have experienced stagnant wage growth in recent decades. Proposals to expand the earned income tax credit do just that, by subsidizing the wages of low-income workers. Pairing an expansion of the earned income tax credit with careful, efficient methods of taxing the rich would tackle economic inequality from both ends.