Tags: EPI | income | inequality | tax

Study: Income Inequality Rising Because of Tax Code

By Michael Kling   |   Wednesday, 19 Jun 2013 08:05 AM

Changes to the tax code in recent decades has helped increase inequality, argues a study by the Economic Policy Institute (EPI).

The top 1 percent of earners, it says, is pulling away from the rest of the population.

Between 1979 and 2007, real income for the top 1 percent rose a cumulative 240.5 percent when including government transfers and employer-provided benefits. By comparison, income rose 71 percent for the 95th to 99th percentiles, 19.2 percent for the middle fifth and 10.8 percent for the bottom fifth of households.

Editor's Note:
The IRS’ Worst Nightmare — How to Pay Zero Taxes

Tax cuts have encouraged top executives to push for a higher share of total income at the expense of other workers' wages, the EPI says.

"Lower top marginal tax rates since 1979 have increased the rate of return to efforts by executives and managers to bargain for greater compensation — at the expense of both workers’ paychecks and even shareholders’ portfolios," the EPI states.

"Higher top tax rates reduce the payoff to bargaining for higher salaries by executives, leaving a bigger share of income for workers without changing the size of the economic pie," said EPI Tax and Budget Analyst Andrew Fieldhouse. "Raising top rates is one of the more concrete policy levers we have for pushing back against income inequality, and there is plenty of room to do so without hurting economic growth."

The rising share of investment income that's concentrated at the top of the income pyramid explains much of the wealth disparity, the report states, saying investment income is one of the most regressive parts of the tax code.

Top income tax rates, as well as tax rates on corporate income, capital income and inheritances, have declined markedly since the end of World War II, making taxes less progressive.

"The income share of the top 5 percent, particularly the top 1 percent, of households by income is high and rising; realistically, this is the major tax revenue base for the progressive income tax code," the report states.

"Empirical research and theoretical models to date suggest that the most effective way of using the tax code to push back against income inequality would both raise top effective income tax rates for ordinary income and capital income, while also narrowing the tax differential between these rates."

Income inequality is slowing the economic recovery, argues Nobel-prize winning economist Joseph Stiglitz, in an editorial in The New York Times.

A weak middle class, he says, will be unable to stimulate the economy through spending, provide the government with adequate tax revenue and finance education for themselves or their children.

"Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined," Stiglitz writes.

Editor's Note: The IRS’ Worst Nightmare — How to Pay Zero Taxes

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