Brattle principal Michael Cragg and associate Rand Ghayad recently co-authored a research paper in The Economists’ Voice Journal, “Growing Apart: The Evolution of Income vs. Wealth Inequality,” addressing the negative impact of tax inequality on the economy and society.
Dr. Cragg and Dr. Ghayad suggest two possible causes for previous unsuccessful tax reform: whether taxpayers with similar incomes pay similar amounts in taxes (or horizontal equity), and whether high income taxpayers pay proportionately more in taxes than those with smaller incomes (or vertical inequity).They argue that it is wealth inequality, not a divergence in earned labor income inequality, that is to blame.
The authors’ analysis finds that in 2013 there was a substantially higher divide in income and wealth between the rich and poor in the top 1 percent in the U.S. than there was 25 years ago, and that the tax system mirrors these trends in inequality. They use the distribution of tax rates to measure how taxes contribute to inequality by examining the distribution of rates both vertically and horizontally. Their findings indicate that a large portion of the highest-income Americans were paying less in taxes as a share of their income than middle-class families.
The paper also suggests that efforts need to be focused on addressing the aspects of our economic and legal system that distort productive incentives and contribute to increasing inequality. Dr. Cragg and Dr. Ghayad recommend a more holistic approach that will address, at the very least, returns to rent seeking and tax inequities.
The publication can be downloaded below.
Published in The Economists’ Voice JournalView White Paper