It’s become an article of faith in political conversations of late, and not just exclusively on the left, that the richest Americans are growing richer at the expense of average Americans. But a new analysis from two of the foremost income inequality researchers should call into question this conventional wisdom.
Pushes for radical new taxes on wealth by Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) have been largely driven by the research of Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, which suggests that U.S. income inequality has grown at a breakneck pace over the past decades and advocating a wealth tax to address it. Though Piketty, Saez, and Zucman’s conclusions have relied heavily on faulty assumptions and cherry-picked data, they have proved greatly influential in progressive circles.
New research from Gerald Auten and David Splinter, researchers at Treasury’s Office of Tax Analysis and Congress’s Joint Committee on Taxation, respectively, provides a clearer picture of how income inequality has changed between 1960 and 2019. While Piketty and Saez find that the share of income going to the top 1 percent has increased from 10 percent in 1960 to 27 percent in 2019, Auten and Splinter estimate that it has remained essentially unchanged.
That’s because Auten and Splinter factor in not just income, but also the policy tools that have already been put in place to combat income inequality. After all, looking only at the incomes of the rich to claim that taxes are too low and social programs are insufficient misses half of the equation.
By factoring in taxes and “transfers” (social welfare programs, low-income credits, etc.), Auten and Splinter find that the share of income earned by the 1 percent has stayed steady, rising mildly from 8.1 percent in 1960 to 8.8 percent in 2019 without major deviations over the intervening years.
Too often lost in debates about income inequality is the fact that the United States already has a progressive tax code and robust social programs. The latest IRS data shows that the top 1 percent of income earners paid over 42 percent of all individual income taxes despite earning 22 percent of adjusted gross income (AGI). The bottom 50 percent of income earners, on the other hand, earned 10 percent of AGI but paid only 2 percent of all individual income taxes.
That’s not an accident — our tax code is based upon the premise that wealthier Americans can afford to pay a higher proportion of their income than less wealthy Americans. But those who suggest that the tax code is rigged in favor of the wealthiest Americans should acknowledge that, at the very least, the wealthy are doing a very bad job of rigging the tax code.
On top of that, the United States spends a great deal of its revenue on social programs. More than half of federal revenue last year went towards Social Security and the major healthcare programs alone. Add on top of that other social programs such as refundable tax credits, higher education programs, veterans’ programs, SNAP, unemployment insurance, and so on, and most of what the federal government does takes money from wealthy taxpayers and transfers it to less wealthy Americans.
What’s more, Auten and Splinter’s work should cast serious doubt on radical tax proposals that are based upon the premise that income inequality is soaring rapidly and the current policy tools meant to address it are insufficient. Stripped of that justification, the case for a wealth tax in any form is a weak one indeed.
Auten and Splinter’s analysis provides a badly needed sober look at how the state of income inequality has changed over time. Policymakers should be sure to consider it before embarking upon half-baked crusades against taxpayers already paying more than their “fair share.”
