Contributor Post Created with Sketch. Why Raising Taxes on the Rich Doesn’t Reduce Inequality


shutterstock_107787821_RichTaxThe progressive/left-wing response to the new Brookings study on inequality is obvious, right? From “Would a significant increase in the top income tax rate substantially alter income inequality?”:

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.

Study authors William Gale, Melissa Kearney, and Peter Orszag (!) call their proposed tax increase “sizable.” And it is. Top marginal tax rates haven’t been so high in a generation. And few politicians are publicly contemplating such an increase. Well, maybe Bernie Sanders is, though he doesn’t think it would be such a biggie. Remember the golden age that was the 1950s! And some top left-liberal economists have been arguing the US economy would be fine with a 70 percent top rate, if not higher. Surely some inequality alarmists would love the Brookings scholars to plug higher rates into that TPC model, though it seems doubtful the results would be dramatically different.

What would make a difference? Inequality researcher and best-selling author Thomas Piketty says “the main policy to reduce inequality is not progressive taxation, is not the minimum wage. It’s really education. It’s really investing in skills, investing in schools.” That would seem to reflect the idea, put forward by Steven Kaplan and Joshua Rauh, that technology and globalization have enabled the highly talented and educated individuals to manage or perform on a larger scale, “thus becoming more productive and higher paid.”

Then there’s the much-discussed analysis by economics grad student Matthew Rognlie that suggests surging real-estate prices play a big part in the inequality story. Here’s looking at you, San Francisco. In other words, as Noah Smith explains, “it’s landlords, not corporate overlords, who are sucking up the wealth in the economy.” If so, the Economist recommends, “policymakers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.” (More here on how government drives inequality, the bad kind.) And Orszag himself has highlighted recent research showing pay inequality rising because some firms pay just pay a lot better.

Now there may be other reasons to increase high-end taxes, such as to fund expanded wage subsidies for low-income workers. But reducing inequality does not seem to be one of them.

There are 6 comments.

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  1. Johnny Dubya Member

    I take issue with the common misuse of the phrase “income inequality”, because characterizing inequality as a problem implies that the goal should be income equality. There will never be income equality, nor should there be. Anyone who thinks equality is a worthy goal should read the short story (really a proverb) “Harrison Bergeron”.

    Even lessening income disparity is arguably not the province of the state, except insofar as the state should do what it can to (1) ensure as level a playing field as possible, in order to enhance equality of opportunity, and (2) pursue policies that encourage economic opportunity and growth at all levels.

    In my opinion, having a flat tax is not at odds with the aims of (1) and (2), above. Those efforts certainly do not justify wholesale transfers of wealth via a tax code with steeply progressive rates.

    We all know what transpires when you (a) give a man a fish rather than (b) teaching him how to fish, and then promoting an environment where he is permitted and able to fish.

    At the heart of the left’s ideology is a soft bigotry regarding the poor (of all races and ethnicities). They simply don’t believe that those on the lowest rungs “have what it takes”, so therefore, we should just pay them off and keep them relatively happy with entitlements. This is what Jeb Bush was referring to when he talked about “free stuff” and was roundly criticized.

    • #1
    • October 1, 2015, at 2:05 PM PDT
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  2. Owen Findy Member

    Johnny Dubya: I take issue with the common misuse of the phrase “income inequality”, because characterizing inequality as a problem implies that the goal should be income equality. There will never be income equality, nor should there be. Anyone who thinks equality is a worthy goal should read the short story (really a proverb) “Harrison Bergeron”.

    Ditto that.

    • #2
    • October 1, 2015, at 2:51 PM PDT
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  3. I Walton Member

    Good lord the issue is tiresome, especially because those who push it are so very wealthy, enjoy most of the expansion in their wealth not from income but from unrealized capital gains. They really don’t give a rat’s behind. Who on earth will guide the nanny state as it goes about making things more fair, more equal, nicer, and risk free; the rest of us or their k street buddies? So these studies have to be done or they control the entire false dishonest, corrupt narrative. And we have to hammer them, but not by defending the rich, they can take care of themselves, but by pointing out that the loss of dynamism the increase in rent seeking and unproductive wealth accumulation, the crony capitalism is a product of the liberal administrate state.

    • #3
    • October 1, 2015, at 3:13 PM PDT
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  4. Jerry Giordano (Arizona Patrio… Member

    I think that the “investing in education” mantra is nonsense. We probably already have too many people going to college, and the unfortunate fact is that there are a great many people who either: (1) cannot be educated to do much of anything, (2) have no interest in education or work, or (3) both.

    • #4
    • October 1, 2015, at 3:48 PM PDT
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  5. Z in MT Member

    The 1950’s was an odd period where labor was dominant and capital almost non-existent because we just went through a great depression followed by a cataclysmic war. Also with the 70% marginal tax rates, the rich didn’t report income even though the relative standard of living was huge.

    Only a tiny fraction of very wealthy have domestic servants today, but in the 1950’s many upper middle class households had a maid, or a nanny, etc. How many of those family sitcoms from the 50’s and 60’s purporting to show middle class households had a domestic servant.

    • #5
    • October 1, 2015, at 5:00 PM PDT
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  6. James Madison Member

    The refutation of Piketty is the U.S. We have tossed more and more money into education modest to nil results. Yet, we remain innovative. Why?

    We take the brightest people from the around the world. Pouring money into making education better might help at the margin, but it won’t necessarily raise overall IQ, EQ or AQ. Some of that can be taught, but statistically there is a distribution of talent and you can only move that distribution so far.

    • #6
    • October 2, 2015, at 11:53 AM PDT
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