Raising taxes on the rich won’t reduce inequality in the United States, according to a new paper published by the centrist Brookings Institution.
Even if the revenue from tax hikes on the rich were given directly to low-income households, the effect on inequality would be negligible.
The paper was co-authored by Peter Orszag, who directed President Obama’s Office of Management and Budget for the first year and a half of the administration. Orszag also led the Congressional Budget Office for nearly two years when Democrats controlled Congress beginning in 2007.
The paper simulated three scenarios: Raising the top individual income tax rate from today’s 39.6 percent to 45 percent, raising it to 50 percent, and raising it to 50 percent on incomes over $1 million for joint filers and $750,000 for single filers.
In each scenario, inequality hardly budged. Researchers employed the Gini coefficient, the most commonly used measure of inequality.
Inequality aside, low-income households would still gain from redistribution. For example, raising the top tax rate to 50 percent would create $95.6 billion in tax revenue. If that were divided equally among the one-fifth of U.S. households earning least, each household would get an extra $2,650 in post-tax income.
“That such a sizable increase in the top income tax rate leads to a strikingly limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge,” the researchers wrote.
The researchers cautioned that a tax hike on higher incomes that hit more high-earners and redistributed money to low-earners may reduce inequality. It could also generate more tax revenue for needs other than welfare. Still, hitting the highest-earners alone won’t reduce inequality, and it’s unclear what would.
William Gale and Melissa Kearney co-authored the paper with Orszag.
Jason Russell is a commentary writer for the Washington Examiner.
