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The Federal Tax Code and Income Inequality

Posted on April 20, 2012 by TRP

From 1979 to 2007 there were a number of major tax changes, but the cumulative effect was to render the federal tax code less progressive and therefore less able to dampen income inequality. By one measure of inequality, the federal tax code in 2007 was about one-third less effective at reducing income inequality than it had been in 1979.

This issue brief will examine the consequences of these changes to the federal tax code on the income distribution. It will begin with a review of several measures of income inequality. The second section will briefly explain why federal taxation has the effect of reducing income inequality. Next up is a close look at how changes in the tax code since 1979 have affected its impact on the after-tax income distribution. The final section will compare how some proposed changes to today’s tax code would affect income inequality in the future.

Measuring income inequality

In order to measure the impact of the tax code on income inequality, it is important to understand how income inequality itself is measured. There are a variety of different ways to measure income inequality, each with its own strengths and weaknesses. Each metric, however, tells essentially the same story about income equality in the United States: We have relatively high levels of income inequality, income inequality has gotten worse over time, and the federal tax code can make a significant difference in income inequality. So let’s look briefly at three different metrics for measuring income inequality.

SOURCE:  The Federal Tax Code and Income Inequality.

 


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