Report: Taxes Are a Proven Strategy for Reducing Growing Income Inequality

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A state-by-state report issued jointly by the Center on Budget and Policy Priorities and the Economic Policy Institute finds that income inequality has been increasing, and that taxes are an important tool for closing the widening gap between rich and poor. The report finds that the rate at which income inequality has been increasing has accelerated in recent years, and that the very richest Americans (those in the top 5% of the income distribution) are especially pulling away from the rest of the pack.

Federal taxes, though, are playing an important role in offsetting this trend. Using data from by the US Census, the report finds that before federal taxes are levied, the top fifth of income earners possess 9.3 times more income than the bottom fifth. After federal tax payments are taken into account, however, that number falls to 7.3 times more than the bottom fifth. So while most Americans may dread April 15, it turns out that day has some positive influences for those concerned with the continued concentration of income in the hands of the fortunate few. Unfortunately, this equalizing influence has become less pronounced in recent years, largely as a result of the benefits the rich have received from the Bush tax cuts. Reductions in federal taxes for the rich are therefore at least partially to blame for accelerated income inequality.

Like the Bush tax cuts, the report finds that changes in state tax systems over the past two decades have contributed to the accelerated rate of income inequality. In times of plenty, states were eager to cut progressive income taxes, but whenever budgets began to get tight, states turned primarily to regressive sales taxes and fees to fill the gap. The report warns that with states now "on the brink of another fiscal crisis", this habit needs to be abandoned.

Increasing taxes, especially on the wealthy, can both slow the trend of increasing income inequality, and actually close budget gaps with less harm to state economies than what typically results from large spending cuts. The report advocates increasing income taxes, enacting or expanding low-income credits, and avoiding corporate and estate tax cuts as sensible tax policies for addressing growing inequalities. As noted in the report, and documented extensively by the Institute on Taxation and Economic Policy, state tax systems, unlike the federal tax system, are regressive and therefore actually widen the income gap. The increasing income inequality documented in this report provides yet another reason for state policymakers to take the regressivity of their tax systems very seriously.

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