One of the most common tools in adjusting the wealth gap is the tax code.
Some more liberal economists argue that the tax code doesn’t put enough of a burden on the country’s top earners. On the other hand, some conservative economists make the argument that if top earners didn’t have to pay so much in taxes, they’d be able to spend their money directly within the economy, which would (in theory) result in a healthier economy with a smaller gap (see trickle-down economics).
But let’s take a look at the current tax system. Does it actually shrink the gap between the rich and the poor?
In a video for the Brookings Institution, David Wessel uses Lego bricks to illustrate the tax system.
Each stack represents the average income before taxes for each 20% segment of the population.
The next 20% (massage therapists, substance abuse counselors) made around $35,551.
The next (pharmacists, experienced programmers), $105,666.
And finally, the top 20% (CEOs, surgeons), averaged $306,320.
The average income of the top 1% is a whopping $2 million pear year.
So what does all of this look like after taxes? Kind of the same.
Sure, top earners saw almost 25% of their income go to taxes, but it’s still pretty massively unequal.
So wait, since the average income for the top earners dropped by a higher percentage than others, does that mean income is being redistributed?
Again, kind of.
It’s extremely hard to live on barista wages.
For the tax system to actually have a large impact on the U.S.’s wealth distribution, it would have to get significantly more progressive.
That is, it would need to tax the top earners even higher and the lower earners even less.
So, as much as it’s a political talking point, no, the tax code is not a form of socialism. (I wish!) It is not some massive redistribution of wealth. (Again, I wish!) It’s just the bare minimum the country needs to avoid completely burying the lower and middle economic classes.
So while taxes don’t have a huge effect on income inequality, the good news is that they CAN have an effect.
All we need to do is push for a system that puts more of a burden on the high earners.