The Parallel March of the Ginis: How Does Taxation Relate to Inequality and What Can Be Done About it?
11 Pages Posted: 10 Feb 2014 Last revised: 18 Feb 2014
Date Written: February 9, 2014
The United States currently has one of the highest levels of inequality among industrialized economies. In addition, numerous scholars have shown that social mobility in the United States is significantly lower than it was in the period between 1945 and 1970, when inequality was also declining. The combination of these trends is dangerous because it risks transforming the US into a society where small elites capture most of the gains, a pattern in which growth cannot be sustained over time (Acemoglu and Robinson 2012, Zingales 2012). The level of inequality in the US after taxes and transfers are taken into account is much lower, but it is still higher than in most OECD countries and the trend is still for inequality to increase. This paper explores how the US tax system can be used to counter these trends and concludes that the key is not to increase taxes on the rich (although some reforms in this direction can be adopted), but instead to adequately fund and even strengthen the social safety net. The only way to do this in the medium to longer term is to adopt a broad-based federal consumption tax.
Keywords: taxation, inequality, Gini coefficient, income tax, VAT
JEL Classification: H00, H20, H50
Suggested Citation: Suggested Citation