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Income Inequality Widens Under U.S. Tax Policy

ONE-PERCENTIncome and overall wealth for the top 1 percent of Americans has skyrocketed by 275%  during the past 30 years, while growth for the other 99%  has remained frozen. A new study by the Economic Policy Institute, a liberal-leaning think tank, indicates that lawmakers’ decisions to shift to a less progressive tax code has played a significant role to increase that chasm.

From 1979 to 2007, nearly 30% of the widening of the income gulf between rich and not-so-rich has been due to tax and budget policies becoming less and less redistributive.  In addition, the growth in income for the top 1% and the top 0.01% of Americans is related to tax cuts, the EPI researchers found.

In short: slashing taxes — especially on the rich – has made income inequality worse.

Andrew Fieldhouse, the head of the study and a policy analyst at EPI, points out that while market forces are principally to blame for the rise in income inequality, our government is also largely responsible for exacerbating the problem.

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

Workers’ Rights

While EPI’s analysis is just one of dozens to show that suppressing taxes — especially for the rich — widens the distance between the haves and have-nots, policymakers have held fast in rejecting tax increases. President Obama’s proposed budget this year raised taxes on the rich — although not by as much of a margin as he originally promised – was met by  fierce opposition among leading Republicans.

Recent research also indicates that cutting taxes on the wealthy doesn’t trigger economic growth as promised by many low-tax advocates.  And while some claim that higher taxes on the rich will disincentivize work hard, most studies show that rich households don’t become less productive as a result of higher taxes. Instead, they simply shift their income to areas taxed at lower rates, such as investment income.

In fact, the rise in income inequality during the past few decades corresponds with a boost in investment income, which is primarily concentrated in the hands of the wealthy and is taxed at much lower rates than the income of old-fashioned, on-the-job wage earning.

The widening gap in income inequality has consequences for Americans at every level of the income ladder. The disparity between he rich and the poor is hampering our recovery from the recession, as economist Joseph Stiglitz argued in a widely-publicized New York Times piece.  Lowering income inequality could actually prolong phases of economic growth, as indicated by a 2012 study from the International Monetary Fund.

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