Reducing Poverty, Not Inequality: What Changes in the Tax System Can Achieve

Abstract

The federal tax system, and the income tax in particular, is often held out as a key — perhaps the key tool — for combatting income inequality. Especially given the rapid rise in inequality seen over the last 30 years, it is natural to look to the tax code and ask what can be done in response. However, this article’s answer to that question is “not much,” because of the practical constraints on policymaking. Put simply, the effect of the federal tax system on income inequality is — and is likely to continue to be — decidedly limited. When it comes to the distribution of the tax burden, this suggests that other concerns, beyond overall inequality, should take precedence. This article offers an alternative — that of poverty. For even as the tax system can do relatively little to change the overall income distribution within the practical bounds of policymaking, it can do more, sometimes much more, when it comes to the welfare of those toward the bottom of the income spectrum. To sum up, this is a practical argument with the following practical conclusion: when it comes to the distribution of the tax burden, what matters most are metrics like poverty, not inequality and, when it comes to reducing inequality, we should be looking for tools beyond the tax system.

Keywords: tax, inequality, poverty, redistribution

JEL Classification: E62, D63, I32