NEW YORK — Tax the rich more. It’s a popular idea on the 2016 campaign trail, but a new study says that won’t do much to dent inequality in America.
Experts at the Brookings Institute examined what would happen to the gap between the wealthy and the poor if the U.S. raised the income tax rate on the highest earners to 50 percent–it’s currently 39.6 percent.
They found it would have a “trivial effect” on overall income inequality.
“That such a sizable increase in the top income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge,” wrote economists William Gale, Melissa Kearney and Peter Orszag.
Orszag served as President Obama’s budget director early in his first term and is now an executive at Citigroup.
Some billionaires are willing to pay more in taxes
If all the extra money raised from the tax hike on the rich was given to America’s poorest, those lower-income families would receive about $2,650 a year. That redistribution would lessen inequality a little bit, but the country would still remain far more unequal than it was in the 1970s.
A big part of the problem is that the richest Americans have already accumulated so much wealth. Their annual incomes — which would be subject to the higher taxes — are a small part of their overall empires.
In the past, America’s top income tax rate has been as high as 91 percent. It was 50 percent as recently as the mid-1980s. The current top rate is the same as it was during President Bill Clinton’s time in office.
2016 candidates want some to pay more
Bernie Sanders has proposed a “billionaire surtax” of 10 percent that he says would only impact the nation’s 530 billionaires. He also wants to increase the inheritance tax — what people pay when they transfer land or money to their kids — from 40 percent to a top rate of 55 percent.
Donald Trump, Jeb Bush and Hillary Clinton have all proposed eliminating the “carried interest loophole” that allows many hedge fund managers to tax their investment income at a lower tax rate of 20 percent versus 39.6 percent.
Clinton has yet to release a full tax plan, but she also wants to increase the capital gains tax that investors pay when they sell a profitable investment.
The Brookings analysis only looked at what would happen if the income tax rate increased on the rich. The researchers say that increasing taxes on the wealthiest could be useful to help pay for government programs or aid the poor, but it’s important to realize that it wouldn’t do much to curb inequality.
