Income Inequality and the U.S. Tax System
Posted: 26 Oct 2007
While the extent of income inequality is debated periodically, one rarely discussed aspect of inequality is its impact on the tax system. Given the nature of the U.S. federal tax system, changes in the distribution of income can have significant implications for who pays the taxes, how much they pay, and federal tax revenues. Hungerford reports that inequality has increased over the past 25 years. Between 1980 and 2004, the Gini coefficient (a common measure of inequality or the dispersion of income) for household income increased from 0.403 to 0.466 - a 15.6 percent increase. The Gini coefficient for earnings increased by 22.4 percent, from 0.331 in 1980 to 0.405 by 2004.
This report examines how income inequality interacts with the rules of the U.S. tax system, in particular, the rules of the regular individual income tax, the alternative minimum tax, and the Social Security payroll tax. It also examines the long-term trend in inequality and how that may be related to taxable income and tax revenues. The report also investigates, through illustrative tables, the implications of rising inequality for tax policy.
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