income gap

How Much Does the U.S. Tax System Shrink the Gap between Rich and Poor?

David Wessel How Much Does the U.S. Tax System Shrink the Gap between Rich and Poor?

By David Wessel, Director, The Hutchins Center on Fiscal and Monetary Policy, Brookings


Financial literacy is a key component of our mission at the Hutchins Center on Fiscal and Monetary Policy, where we focus not just on improving policy, but on improving public understanding of fiscal and monetary issues. Part of what we do is explain how and why complex financial questions are relevant to a broad audience, not just policy wonks.

So it’s fitting that Financial Literacy month is also home to Tax Day, that April 15 deadline for filing tax returns. There’s a lot of focus these days on the widening gap between the top and the bottom in the U.S. economy. It’s a good time to ponder a very simple question: How much does the U.S. tax system shrink the gap between rich and poor?

Now you can tell this story long or you can tell it short. And you can tell it with tables of numbers, charts and graphs—or you can tell with Legos.

To explain how much the U.S. tax code evens out the distribution of income, we’ve made a 3-minute video—with Lego bricks—that illustrates just how unequal the U.S. is before taxes and how much (or how little, depending on your perspective) the tax code changes that.

Watch for yourself, but here are a few of the basic facts:

The average before-tax income of the top 20% of the population in 2014 was $306,320, according to estimates by our friends at the Urban-Brookings Tax Policy Center. That’s more than 21 times the average income ($13,809) of those in the bottom 20%, or quintile (as economists put it).

And after federal taxes—income taxes, payroll taxes, etc.? Because the government takes more from best-off than from those at the bottom, the average after-tax income of the top quintile ($229,360) is about 17 times that of the bottom ($13,809). In other words, the U.S. tax system does reduce inequality, but there’s still a lot of it left after taxes.

And what about the famous 1%, the really well off?   Their income averaged slightly more than $2 million before taxes in 2014—and $1.34 million after taxes. Put differently, the before-tax income of the richest 1% was 32 times the income of the folks smack in the middle of the middle; after taxes, it was 25 times larger.

POSTED: April 29, 2015 | BY: Daniel Thompson | TAGS: , , , , , ,

Is Your School Churning Out Best-Selling Engineers in Five Languages? Didn’t Think So.

April 28 Is Your School Churning Out Best Selling Engineers in Five Languages? Didn’t Think So.By Dan Kadlec, Author and Journalist.

In the era of Big Data, we can’t seem to tie our own shoes without first confirming the need through statistics. Yet some things are so big and so obvious we shouldn’t wait—like, say, stopping texting while driving or rebuilding our middle class.

Do we really need data to know that distracted drivers cause accidents? Isn’t it a given that a shrinking middle class is a drag on the economy? Financial education is like that too. Can anyone really argue against teaching money basics to kids who will come of age in a world with few financial safety nets? Read more…

POSTED: April 28, 2014 | BY: Annamarie Cerreta | TAGS: , , , , , , , , , , , ,

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