NCPA - National Center for Policy Analysis

Redistribution Doesn't Work

October 13, 2015

Recent trends in economic mobility in the U.S. are a problem. One policy option receiving attention, is increasing income taxes on top earners, and in turn giving those funds to those on the bottom. It sounds like simple math, and has an allure for many politicians and American families alike, but new research suggests that this proposal would actually do little to reduce inequality.

  • Raising the top income tax rate to 50 percent would mean an additional $6,464 in taxes owed for households in the 95-99th percentiles of income and an additional $110,968 for households in the top 1 percent.
  • Extremely wealthy households in the very top 0.1 percent could expect to experience an average income tax increase of $568,617.

In the report, raising taxes for top earners didn't move the needle on inequality, but what if these new taxes were redistributed equally to the bottom 20 percent of all American households?

According to their model, that, too, had surprisingly little impact on improving inequality, though it would appreciably increase the incomes of those at the lower end.  Redistributing revenue from the 50 percent tax rate would result in $1,760 in additional post-tax income for households in the lowest quintile of earners.

As the authors put it, "our results do not speak to the desirability of the tax-and-transfer policy, just to the fact that even a significant tax increase on the highest-income households and transfer to low-income households has a small effect on overall inequality."

Source: Alison Burke, "New research shows raising the top income tax rate won't reduce inequality," Brookings Institute, October 1 ,2015.

 

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