If you care about rising income inequality in America and you think it needs fixing, don’t look to taxes as your prime tools for change, says a new study.
Boosting the top rates for high earners produces “an almost imperceptible reduction in overall income inequality,” not even if there is an effort to redistribute the money to lower-income households, according to a paper released today by economists at the Brookings Institution, which is generally considered a liberal think tank.
The study was done by William G. Gale, co-director of the Urban-Brookings Tax Policy Center and senior fellows Melissa S. Kearney and Peter R. Orszag.
They analyzed the effect of several scenarios, including raising the top income tax rate from 39.6 percent – where it is now – to 45 percent and also to 50 percent. They also looked at what it would mean to raise the top rate to 50 percent for couples with income greater than $1 million for joint filers and individuals with income of more than $750,000.
Raising the rate to 45 percent would mean $49.4 billion in added revenue, they said. Divvy that up among the households in the bottom fifth – that’s 36.1 million families – and you’d have payments of $1,370 to each household.
Raise the rate to 50 percent and you’d get $95.6 billion in revenue, the economists said. That could be divided into payments of $2,650 for each of the lowest 20 percent.
They tried other similar scenarios and wrote in their report: “The reduction in income inequality resulting from each of these tax and redistributive plans is quite modest.”
Of course, not everybody agrees that inequality is a problem. And even among those who do, not everyone always agrees that Something Should Be Done.
Realistically, higher taxes – even just limited to the top end — have been always been a tough sell in Congress. And if Brookings is right, the path to a less lopsided income would have to be through even more controversial terrain.
But many social critics have argued that inequality is not the result of simple competition and is affected by many political and economic choices the nation has made.
And while not even all liberal economists think so, some economists say that inequality is an economic drag since it piles up money that could be spent with rich people who don’t need spend it.
In which case, what policy would make sense?
he three Brookings economists ask: “This analysis … leaves us with the open and important question: if neither a substantial expansion in education nor a big increase in the top marginal tax rate would significantly affect measured income inequality, what would?”
They do not suggest an answer.