Does the Tax System Reduce Inequality?

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There is, for good reason, a lot of focus these days on the widening gap between the top and the bottom in the U.S. economy.

Since it’s (almost) Tax Day, that April 15 deadline for filing tax returns, 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 three-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 percent 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 percent, 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 percent, 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 percent was 32 times the income of the folks smack in the middle of the middle; after taxes, it was 25 times larger.

David Wessel is director, the Hutchins Center on Fiscal and Monetary Policy, and senior fellow, economic studies at the Brookings Institution. This article first appeared on the Brookings Institution site.

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Correction: This article originally incorrected stated that the average after-tax income of the top quintile of U.S. earners was $63,142, and that the average after-tax income of the bottom quintile was $63,142. Those numbers are $229,360 and $13,809, respectively.