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

William G. Gale,
William G. Gale Senior Fellow - Economic Studies, The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Co-Director - Urban-Brookings Tax Policy Center

Melissa S. Kearney, and
Melissa Kearney is the Neil Moskowitz Professor of Economics at University of Maryland, researching domestic social policy, poverty, and inequality. Director of the Aspen Economic Strategy Group, she’s a research associate at the National Bureau of Economic Research and nonresident Senior Fellow at Brookings Institution. Previously, Kearney directed the Hamilton Project at Brookings and co-chaired J-PAL’s State and Local Innovation Initiative. She is a senior editor of the Princeton/Brookings journal The Future of Children, editorial board member of American Economic Journal: Economic Policy and Journal of Economic Literature, and advisory board member for the Notre Dame Wilson-Sheehan Lab for Economic Opportunities, Smith Richardson Foundation, and Russell Sage Foundation.Melissa S. Kearney is the Neil Moskowitz Professor of Economics at the University of Maryland. She is also Director of the Aspen Economic Strategy Group; a Research Associate at the National Bureau of Economic Research (NBER); a non-resident Senior Fellow at Brookings; a scholar affiliate and member of the board of the Notre Dame Wilson-Sheehan Lab for Economic Opportunities (LEO); and a scholar affiliate of the MIT Abdul Jameel Poverty Action Lab (J-PAL). She is a senior editor of the Future of Children, an editorial board member of the American Economic Journal: Economic Policy and Journal of Economic Literature, and a former co-editor of the Journal of Human Resources. She serves on the Board of Governors of the Smith Richardson Foundation. Kearney served as Director of the Hamilton Project at Brookings from 2013-2015 and as co-chair of the JPAL State and Local Innovation Initiative from 2015-2018.Kearney's academic research focuses on domestic policy issues, especially issues related to social policy, poverty, and inequality. Her work has been published in leading academic journals and has been frequently cited in the popular press. She has testified before Congress on the topic of U.S. income inequality. Kearney teaches Public Economics at both the undergraduate and PhD level at the University of Maryland. She holds a BA in Economics from Princeton University and a PhD in Economics from the Massachusetts Institute of Technology, where she studied on a National Science Foundation graduate student fellowship and a Harry S Truman fellowship.
Melissa S. Kearney Nonresident Senior Fellow - Economic Studies, Center for Economic Security and Opportunity, The Hamilton Project

Peter R. Orszag
Peter R. Orszag
Peter R. Orszag Chief Executive Officer - Lazard

September 28, 2015

  • 1 min read

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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Urban-Brookings Tax Policy Center