Does the tax code reduce income inequality?
Since it’s (almost) Tax Day, that April 15 deadline for filing tax returns, it’s a good time to ponder a very simple question: How much does the US tax system shrink the gap between rich and poor?
This post originally appeared on Up Front, the Brookings Institution's blog.
There is, for good reason, a lot of focus these days on the widening gap between the top and the bottom in the US economy.
Since it’s (almost) Tax Day, that April 15 deadline for filing tax returns, it’s a good time to ponder a very simple question: How much does the US tax system shrink the gap between rich and poor?
Now you can tell this story long or you can tell it short. And you can tell it with tables of numbers, charts and graphs—or you can tell with Legos.
To explain how much the U.S. tax code evens out the distribution of income, we’ve made a 3-minute video—with Lego bricks—that illustrates just how unequal the U.S. is before taxes and how much (or how little, depending on your perspective) the tax code changes that.
Watch for yourself above, but here are a few of the basic facts:
The average before-tax income of the top 20% of the population in 2014 was $306,320, according to estimates by our friends at the Urban-Brookings Tax Policy Center. That’s more than 21 times the average income ($13,809) of those in the bottom 20%, or quintile (as economists put it.)
And after federal taxes—income taxes, payroll taxes, etc.? Because the government takes more from best-off than from those at the bottom, the average after-tax income of the top quintile **($229,360)** is about 17 times that of the bottom ($13,809.) In other words, the U.S. tax system does reduce inequality, but there’s still a lot of it left after taxes.
And what about the famous 1%, the really well off? Their income averaged slightly more than $2 million before taxes in 2014—and $1.34 million after taxes. Put differently, the before-tax income of the richest 1% was 32 times the income of the folks smack in the middle of the middle; after taxes, it was 25 times larger.
The post How much does the tax code reduce inequality? appeared first on TaxVox.