Income Inequality Greatly Exacerbated By U.S. Tax System: Study

06/17/2013 01:33 pm ET
AP

Income for the country's top 1 percent has soared by 275 percent over the past 30 years, while growth for the rest of us has stagnated. A new study finds that policymakers' decisions to make the tax code less progressive played a large role in widening that gulf.

About 30 percent of the expansion of the after-tax income gulf between the rich and not-so-rich between 1979 and 2007 was due to tax and budget policies becoming less redistributive, according to a recent paper from the Economic Policy Institute, a left-leaning think tank. In addition, the boost in income for the top 1 percent and the top 0.01 percent of households is correlated with tax cuts, the study found.

In short: Policymakers' decisions to slash taxes -- especially on the rich -- contributed to income inequality.

Andrew Fieldhouse, the paper’s author and a budget policy analyst at EPI, said that while market forces are largely to blame for the growth in income inequality, the government bears responsibility for making it worse.

“This is just another piece of evidence, at the broadest level, that Washington’s model for tax reform is completely divorced from economic research,” Fieldhouse told The Huffington Post. “Federal budget policy not only failed to push back these market forces, but exacerbated income inequality.”

While EPI’s analysis is one of many to find that keeping taxes low -- especially for the rich -- widens the gap between the haves and have-nots, that hasn’t stopped policymakers from fighting tax increases. The budget President Barack Obama proposed earlier this year boosted taxes on the wealthy -- but still by not has high of a margin as he originally promised -- and it was met with opposition by leading Republicans.

Recent research has found that slashing taxes on the rich doesn’t lead to the boost in economic growth promised by many proponents. And while some have argued that raising taxes on the rich will disincentivize them to work hard, another EPI study that rich households don't respond to increases by being less productive -- rather, the study found, they simply shift their income to categories that are taxed at lower rates (like investment income).

Indeed, the jump in income inequality over the past few decades is correlated with a simultaneous boost in investment income, which is largely concentrated in the hands of the rich and is taxed at lower rates than the income earned from good old-fashioned work, according to EPI.

The preferential tax treatment of investment income has increased over the past few decades, a factor which “almost certainly played a role” in widening the income gulf, the EPI paper found.

More income inequality has consequences for Americans at all places along the income ladder. The large gap between the rich and the poor is slowing the nation's recovery from the recession, Nobel Prize-winning economist Joseph Stiglitz wrote in a New York Times op-ed earlier this year. And reducing income inequality could prolong periods of economic growth, a 2011 study from the International Monetary Fund found.

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