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A significant increase in the top income tax rate wouldn’t substantially alter income inequality

William G. Gale, Melissa S. Kearney, and Peter R. Orszag

The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate.

We conduct a simulation analysis, using the Tax Policy Center (TPC) microsimulation model, to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest.

That such a sizable increase in top income tax rates leads to such a limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge. To be sure, our results do not speak to the general desirability of a more progressive tax-and-transfer schedule, just to the fact that even a significant tax increase on high-income households and corresponding transfer to low-income households has a small effect on overall inequality.

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