Poverty, Not Inequality: Federal Taxes and Redistribution

The federal tax system, and the income tax in particular, is often held out as a key—perhaps the key tool—for combatting income inequality. Especially given the rapid rise in inequality seen over the last 30 years, it is natural to look to the tax code and ask what can be done in response. However, this article’s answer to that question is “not much,” because of the practical constraints on policymaking. Put simply, the effect of the federal tax system on income inequality is—and is likely to continue to be—decidedly limited. When it comes to the distribution of the tax burden, this suggests that other concerns, beyond overall inequality, should take precedence. This article offers an alternative—that of poverty. For even as the tax system can do relatively little to change the overall income distribution within the practical bounds of policymaking, it can do more, sometimes much more, when it comes to the welfare of those toward the bottom of the income spectrum. To sum up, this is a practical argument with the following practical conclusion: when it comes to the distribution of the tax burden, what matters most are metrics like poverty, not inequality and, when it comes to reducing inequality, we should be looking for tools beyond the tax system. Introduction ..................................................................................................................................... 2 I. A “Bare Bones” Normative Framework: Poverty v. Inequality ................................................ 5 A. Why A Normative Framework—and Why Bare Bones ....................................................... 5 B. The Framework: Inequality and Poverty Are Undesirable ................................................... 6 1. Inequality ............................................................................................................................ 6 2. Poverty ................................................................................................................................ 9 3. We Live in a World of Limited Policy-Making Resources .............................................. 11 C. If You Disagree with This Framework, Should You Stop Reading? .................................. 12 D. Taxes Versus Spending ....................................................................................................... 13 II. Inequality: Tax System’s Limited Effect ............................................................................... 14 A. “The Great Divergence” .................................................................................................... 14 B. Fundamental Limit on Effect of the Tax System: Size of the System ............................... 16 1. Poll Tax ............................................................................................................................ 17 2. Highest Income Americans Pay Everything .................................................................... 19 3. The Range of Outcomes for the Tax System ................................................................... 22 C. The System in Practice: Experience of the Last 30 Years ................................................. 22 D. The 2013 Tax Deal .............................................................................................................. 25 III. Poverty: Tax System’s Substantial Effect ............................................................................. 27 A. The Stubborn “Official” Poverty Rate ................................................................................ 27 B. Tax System’s Size and Poverty ........................................................................................... 29 C. A Transformation Over the Last 30 Years .......................................................................... 32 D. 2013 Tax Deal ..................................................................................................................... 36 Conclusion .................................................................................................................................... 37 * Assistant Professor of Law, New York University School of Law. With thanks to...... Forthcoming Tax Law Review