How much can taxes curb inequality?

How much can taxes curb inequality?

Posted by Dylan Matthews on August 6, 2012 at 4:11 pm

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The Wall Street Journal’s David Wessel has an excellent piece Monday on what academic research tells us about taxes and inequality in the United States. The short version: Inequality has exploded in the past three decades. Taxes, meanwhile, have gotten more progressive — though not enough to counteract that increase in inequality.

The rise of the Iv-B economy occurs from innovations, these are increasing because of computerization creating more booms and busts as well as winners and losers. Putting a brake on this runs the risk of collapsing the growth of some causing stagnation, it is more important to have strong I-O policing to reduce wealth inequality from fraud and predatory speculation. For example much of this inequality cam from the run up to the GFC from financial speculation rather than legitimate businesses.

I’ve made the graph below to illustrate that latter fact. The red line shows how much taxes and transfers (such as food stamps) have done to reduce inequality between 1979 and 2009. The data comes from table nine here. The blue line, meanwhile, shows how much more progressive taxes and transfers would have had to be in order to maintain 1979 levels of economic equality.

In 2009, taxes and transfers reduced inequality by 26.4 percent, around the same amount as the 24.8 percent reduction in 1979. But the tax code actually has to become more and more progressive every year to prevent inequality from growing. Taxes and transfers needed to reduce inequality by 38.2 percent in 2009 to keep it down to 1979 levels.