Taxes No Cure for Inequality

One of the most popular prescriptions offered by Democrats — jacking up taxes on the wealthy — would do virtually nothing to narrow the gap between rich and poor, a new study finds.

The study is notable for two reasons. It was produced by the left-leaning Brookings Institution, and one of the authors is Peter Orszag, who served as President Obama’s director of the Office of Management and Budget.

“The results of this analysis lead to the conclusion that fairly substantial increases in the top income tax rate would have a relatively small effect on the distribution of after-tax income, even with explicit redistribution,” the study states.

Income inequality is one of the hottest buzz phrases on the left. It received a fair amount of attention Tuesday from Democratic candidates during their first debate of the season.

Former Rhode Island Gov. Lincoln Chafee said during the debate that inequality “all started with the Bush tax cuts that favored the wealthy.” Vermont Sen. Bernie Sanders bases much of his campaign on the notion that the gap between the wealthiest and everyone else must be narrowed, and he proposes all kinds of taxes to fund programs for the poor and the middle class.

To measure income inequality, the Census Bureau uses something called the Gini index, which shows how far apart incomes are from top to bottom. The statistic runs from zero to 1, with zero being perfect equality — everyone makes the same; and 1 being perfect inequality — one person has all the income.

Income inequality has been on the rise for decades. The Brookings researchers ran three different scenarios and then crunched the numbers to forecast the impact on inequality.

Scenario 1 — Increase the top marginal income tax rate from 39.6 percent to 45 percent

A rate that high has not been seen since the 1980s. It would increase taxes for households in the 95th to 99th percentiles by an average of $3,508. The top 1 percent would pay $58,508 on average, and the top 0.1 percent would pay an extra $297,582 a year. Overall, the government would collect $49.4 billion more than it currently does.

But the impact on inequality would be negligible, according to the study. Even if the government explicitly redistributed that extra tax revenue to the bottom 20 percent of income earners — resulting in an average bump of $1,370 for those households — the difference would be very small.

Scenario 2 — Impose a 50 percent tax on incomes above $1 million

If a 50 percent top tax rate were applied to income above $1 million for married filers and $750,000 for single filers, the government would raise an additional $63.5 billion.

That would also have only a marginal effect on inequality.

Scenario 3 — Increase the tax rate to 50 percent for all income earners in the top 5 percent

What if the 50 percent rate applied to all upper-income earners, not just the super wealthy? Surely, that would make a significant dent on income inequality.

The conclusion of the Brookings study is no. Applying the 50 percent tax rate to the entire top 5 percent would cost $6,464, on average, for households in the 95th though the 99th percentile; $110,968 for households in the top 1 percent; and $568,617 in the top 0.1 percent.

It would raise a whopping $95.5 billion and, if transferred to the bottom fifth of income earners, would increase their income by $2,650.

But it would barely reduce inequality.

In none of those scenarios does income inequality approach the 1979 level. The authors of the Brookings study were careful to say that tax increases might be desirable in order to inject more money into government to pay for government programs or to aid low-income families. But they argue the numbers show that tax policy is an ineffective way to reduce inequality.

“That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge,” the study states. “It also reflects the fact that the high level of U.S. income inequality is characterized by a wide divergence in income between higher-income households and those at the middle and below.”