Lately, there’s been a lot of discussion about how progressive the federal income tax should be given rapidly rising levels of economic inequality in the United States. The debate typically finds liberals arguing for a more progressive system with increases in the top rate and perhaps an increase in the number of tax brackets to better reflect gradations among the wealthiest taxpayers. I’m on board with more progressivity, but I keep thinking about this post/chart from Lane Kenworthy:
The [above] chart shows the amount of inequality reduction achieved by taxes and by government transfers (social security payments, unemployment benefits, the Earned Income Tax Credit, and so on) in the United States and nine other rich countries. The calculations are mine, using data from the Luxembourg Income Study database, which provides the best available comparative data on incomes. Inequality is measured using the Gini coefficient. I calculate inequality in each country using household incomes before and after taxes are subtracted; the difference between the two is the amount of inequality reduction achieved by taxes. I do the same for government transfers. Being farther to the right in the chart indicates greater reduction of inequality.
Prof. Kenworthy’s conclusion is that the “tax” part of “tax and spend” does very little to reduce inequality. The US tax system is slightly more progressive than what’s found in OECD counterparts, but in all cases the egalitarian effects are modest.
It’s the spending that’s doing the heavy lifting. Which makes sense: even universal programs like Social Security, unemployment insurance, and Medicare that we normally don’t include in the US definition of “welfare” have a redistributional effect. The difference between the US and more egalitarian countries isn’t how progressive taxes are, but the quantity of taxes collected and the the generosity of the programs those taxes fund.
From this, Kenworthy concludes that liberals should support a national consumption tax to fund initiatives like “universal preschool, and/or high-quality child care.” Maybe! But if we’re going to spend outrageous amounts of political capital convincing voters of the need for more revenue, we should really kill two birds with one stone and make the tax incident on carbon-intensive activities rather than on any kind of consumption. Market-based environmentalism + egalitarian transfers = success. Something to consider.
This is a great example on how the redistribution of wealth (taken by the government from taxpayers to subsidize the poor) can reduce inequality. I just wish we weren’t terrified of the phrase “redistribution”.