Our results confirm a statistically significant negative effect of average and marginal tax rates on income inequality. In the baseline analysis a one percentage point increase in the average tax rate is associated with a decline in the Gini coefficient of 0.73 points. The marginal tax has a similar effect of 0.66.
Taxing wealth at the top
Governments can then use the revenue raised from the tax to close the wealth inequality gap by improving essential services like education, building more social housing, or increasing supplements for low-income households.
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.
Wealth redistribution can be implemented through land reform that transfers ownership of land from one category of people to another, or through inheritance taxes, land value taxes or a broader wealth tax on assets in general. Before-and-after Gini coefficients for the distribution of wealth can be compared.
The evidence suggests that corporate tax cuts increase income inequality over a three-year period. Focusing on the share of income accruing to the top 1%, we find that a 1 percentage point (pp.) cut in corporate taxes increases this share by 0.90pp.
Pros and Cons of a Wealth Tax
Critics allege that wealth taxes discourage the accumulation of wealth, which they contend drives economic growth. They also emphasize that wealth taxes are difficult to administer. Administration and enforcement of a wealth tax present challenges not typically entailed in income taxes.
Income inequality is caused by a variety of factors, including historical racial segregation, governmental policies, a stagnating minimum wage, outsourcing, globalization, changes in technology, and the waning power of labor unions.
The constitutionality of a wealth tax, particularly on unrealized gains, is uncertain and would face significant legal challenges. The tax would likely be classified as a direct tax, necessitating apportionment among the states—a requirement that is practically unfeasible.
We find that the steep decline in union strength and deregulation of the financial industry that occurred after Ronald Reagan's presidency began in 1981 has contributed to the stagnation of middle incomes and the rise of income inequality.
Wealth taxes disincentivize entrepreneurship, leading to less innovation and less long-term growth. A wealth tax reduces wages, destroys jobs, and reduces the stock of capital.
Governments can reduce inequality through tax relief and income support or transfers (government programs like welfare, free health care, and food stamps), among other types of policies.
Most of the government's federal income tax revenue comes from the nation's top income earners. In 2021, the top 5% of earners — people with incomes $252,840 and above — collectively paid over $1.4 trillion in income taxes, or about 66% of the national total.
Excessive inequality can erode social cohesion, lead to political polarization, and lower economic growth.
The Poor are Left Poorer
We find that while high-income countries ensure their fiscal policies have a positive impact on poor households, in two-thirds of low and middle-income countries, incomes of poor households are lower by the time they pay taxes and receive transfers and subsidies.
As an illustrative example, over $1 trillion could be raised through implementing a one-off windfall tax of 27 percent on each billionaire. The billions of dollars raised from these wealth taxes could fund countless crucial inequality-busting investments for working families across the US and abroad.
The Revenue Act of 1935 put a new progressive tax, the Wealth Tax, in place. Those making more than $5 million a year were taxed up to 75 percent. Unlike their Civil War grandparents, the wealthy were not happy to pay income taxes during crisis times. Loopholes in the tax code were used.
Taxpayers can sue the Internal Revenue Service (IRS) in either Tax Court or Federal Court. The rules for suing the IRS in tax vs. federal court differ — especially when it involves FBAR litigation. Generally, to sue the IRS in Tax Court, the petitioner (you) must simply meet the timelines for filing.
They include: Globalization – Lesser-skilled American workers have been losing ground in the face of competition from workers in Asia and other emerging economies. Changes in labor demand – The rapid pace of progress in information technology has increased the relative demand for higher-skilled workers.
The average wealth of households in the top 1 percent was about $35.5 million. In the top 0.1 percent, the average household had wealth of more than $158.6 million.
The poorest 10% of Americans went from having $23 in debt to having $450 in wealth. Families in the middle-income segment almost quadrupled their prior average wealth. Families in the top 10% had more than six times their prior wealth. Families in the top 1% had more than seven times their prior wealth.
A Wealth Tax Might Not Be Constitutional
The Constitution says that direct taxes must be apportioned by state population and it may not be feasible to do so with a wealth tax. An 1895 ruling by the Supreme Court stated that an income tax was a direct tax and would therefore need to be apportioned to be valid.
Tax evasion is the use of illegal means to avoid paying taxes . Typically, tax evasion schemes involve an individual or corporation misrepresenting their income to the Internal Revenue Service .
Countries such as Belgium, Finland, Portugal, and Slovenia have the highest income tax rates for high-income individuals, with rates reaching at least 57%. In contrast, the United States ranks 22nd with a combined all-in rate of 46%.