The Federal Tax Code and Income Inequality

Center for American Progress

Thursday, April 19, 2012

Given the historical relationship between the average effective tax rate for the richest 1 percent and the tax code’s impact on income inequality, these results should not be too surprising. The three plans that result in a more equitable distribution of post-tax income also share the characteristic of raising the effective rate for the richest 1 percent. The Bipartisan Policy Center’s plan, President Obama’s proposal, and Bowles-Simpson’s illustrative plan all increase the effective tax rate for the top percentile by between 4.9 and 5.5 percentage points compared to today’s tax policies (we estimated that the Center for American Progress plan, by comparison, would raise the effective rate for the top 1 percent by 6.4 percentage points).

President Obama accomplishes this increase by allowing the top tax rate to return to 39.6 percent, what it was under President Clinton, by limiting the value of tax benefits for high-income households, and by returning the capital gains rate to 20 percent, also where it was at the end of President Clinton’s term. The Bipartisan Policy Center and the Bowles-Simpson plans do not raise the ordinary income tax rate. In fact they both lower it. But they compensate by limiting the value of tax benefits even more than President Obama’s proposal, by taxing capital gains as ordinary income, which effectively increases the capital gains rate to 28 percent.

2012-04-19 00:00:00
Center for American Progress
How Federal Tax Policy Changes Have Affected and Will Affect Income Inequality