David Wessel

How Much Does the U.S. Tax System Shrink the Gap between Rich and Poor?

David Wessel How Much Does the U.S. Tax System Shrink the Gap between Rich and Poor?

By David Wessel, Director, The Hutchins Center on Fiscal and Monetary Policy, Brookings

 

Financial literacy is a key component of our mission at the Hutchins Center on Fiscal and Monetary Policy, where we focus not just on improving policy, but on improving public understanding of fiscal and monetary issues. Part of what we do is explain how and why complex financial questions are relevant to a broad audience, not just policy wonks.

So it’s fitting that Financial Literacy month is also home to Tax Day, that April 15 deadline for filing tax returns. There’s a lot of focus these days on the widening gap between the top and the bottom in the U.S. economy. 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 3-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% 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%, 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%, 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% was 32 times the income of the folks smack in the middle of the middle; after taxes, it was 25 times larger.

POSTED: April 29, 2015 | BY: Daniel Thompson | TAGS: , , , , , ,

Financial Literacy Month 2015 Kick Off

2014 financial literacy month 150x150 Financial Literacy Month 2015 Kick OffApril is Financial Literacy Month! Throughout the month, CEE and our affiliates will be conducting a full roster of events to shine a spotlight on the importance of economic and financial education. As part of our efforts, we will be sharing perspectives from leaders in the field right there on our blog. Look out for essays from guest bloggers throughout the month of April, including:

 

  • United States Senator Patty Murray, Senior Senator from Washington, Ranking Member on the Senate Committee on Health, Education, Labor, and Pensions
  • Congressman Steve Stivers, Ohio’s 15th District, Co-Chair of the House Financial and Economic Literacy Caucus
  • Richard Cordray, Director of the Consumer Financial Protection Bureau
  • David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution
  • Raymond W. McDaniel, Jr., President and Chief Executive Officer, Moody’s Corporation
  • Kelli Grant, Consumer Reporter, CNBC.com
  • and more!

In addition to these to these great guest bloggers, we will also be featuring “Money Math Mondays” every week to introduce key concepts focused on financial literacy. These posts will provide fun number problems that parents can do with their kids from Bedtime Math and will link to lessons that relate to the topic on EconEdLink.

POSTED: April 1, 2015 | BY: Daniel Thompson | TAGS: , , , , , ,

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