
Based on a spate of recent posts (see here and links therein), a commenter (HT: Greg) asks a good, tough question of yours truly: on the one hand, I’ve argued long and hard that while we definitely need more progressive tax policies, the fact that the growth of inequality is largely a pretax phenomenon implies that tax changes alone won’t reverse the trend.
Yet, in this post reviewing the recent CRS inequality report, I point out that a) the increase in capital gains plays a large role in driving inequality trends, and b) if we taxed such gains as regular income (instead of at much reduced rates), that would help to reduce inequality.
So how can I argue on the one hand that tax policy is inherently limited as a tool against rising inequality, and on the other, that we should employ tax policy to push back on inequality?
I could invoke Walt Whitman: “Do I contradict myself? Very well, then I contradict myself, I am large, I contain multitudes” — and leave it at that.
But better yet, let me explain. First, the evidence as shown in the chart here shows that increased inequality is a pretax story. Whether it’s the increase in earnings or wealth inequality, the latter including outsized gains from assets, that’s all occurred in the so-called primary distribution of income, before taxes and transfers get into the mix.
Now, that doesn’t mean that more progressive taxes and transfers can’t help offset higher inequality. They can, they should, and they