Can Soaking the Rich Reduce Income Inequality? by Karen Walby, Ph.D.

On the campaign trail recently, Bernie Sanders, a candidate running for the Democratic Party’s presidential nomination, said that America’s leaders shouldn’t worry so much about economic growth if that growth serves to enrich only the wealthiest Americans. And that our economic goals have to be redistributing a significant amount of wealth back from those in the top one percent of households according to income to the households at the bottom of the income distribution.

Most of the candidates for the Republican presidential nomination have said in one way or another that creating economic growth and with it economic opportunity is the best way to address the issue of income inequality. The subject is so popular it even has its own website,

Income inequality refers to the extent to which income is distributed in an uneven manner among a population. In the US, income inequality, or the gap between the rich and everyone else, has been growing markedly, by every major statistical measure, for some 30 years. While there is general agreement that this is something that needs to be addressed, a consensus on how to reduce income inequality remains elusive.

Three economists from the Brookings Institute recently looked into this issue in their article “Would a significant increase in the top income tax rate substantially alter income inequality?” And their findings are enlightening: They found that even a big increase in the marginal tax rate for top earners would have “shockingly little effect” on after-tax income inequality.

To briefly summarize their findings, they hiked the top income tax rate from 39.6 to 50%, a 26% increase. For households in the 95th to 99th percentiles of income, taxes would rise by an average of $6,464 a year while for the top 0.1 percent, the average yearly tax increase would be in $568,617. This rate increase would generate $96 billion in additional tax revenues.

But what effect would increasing taxes on the richest households have on reducing the income difference between the richest and the poorest households?

To answer that, the authors calculated the Gini coefficient for after-tax income before and after the 26% increase in the tax rate for the richest households. (The Gini coefficient is an index that ranges from 0, if everyone has the same earnings (maximum equality), to 1, if a single person has all the earnings and everyone else has none (maximum inequality.)

Under the current income tax rates, the after-tax income Gini coefficient was estimated to be .574. Raising the top marginal tax rate to 50 percent would reduce the Gini coefficient to .571, only a one-half of one percent decrease in income inequality. Incredibly, even when the authors assumed that all of the $96 billion in increased tax collections would be redistributed on an equal basis to the households in the bottom 20%, the Gini coefficient was only reduced to .560, a reduction in income inequality of only 2.4 percent.

So it turns out that the primary justification for keeping the progressive income tax system, that it is more beneficial to the poor, has been exposed for the fantasy it is.

The FAIRtax, a single rate tax on all consumption which replaces all federal income and payroll taxes, avoids the pitfalls of attempting to soak the rich. Thanks to the prebate, poor households would pay no sales taxes in net terms. Second, it eliminates the highly regressive Social Security and Medicare payroll taxes.  And third, it effectively taxes wealth as well as wages:  When the rich spend their wealth and when workers spend their wages, they will both pay taxes.  This broadens the effective tax base to include wealth, not just the income earned on it (much of which is currently exempted or taxed at a low rate under the current system).  Thus, one can lower the required consumption tax rate and, thereby, reduce the tax burden on workers.

headshot3_Karen_Walby_HeadshotABOUT DR. KAREN WALBY

Karen Walby, Ph.D. is the Director of Research Americans For Fair Taxation. To learn more about the Fair Tax click here.

5 replies
  1. Slort
    Slort says:

    A few words about the first Great Depression. It really was a perfect storm. Caused almost entirely by greed. First, there was unprecedented economic growth. There was a massive building spree. There was a growing sense of optimism and materialism. There was a growing obsession for celebrities. The American people became spoiled, foolish, naive, brainwashed, and love-sick. They were bombarded with ads for one product or service after another. Encouraged to spend all of their money as if it were going out of style. Obscene profits were hoarded at the top. In 1928, the rich were already way ahead. Still, they were given huge tax breaks. All of this represented a MASSIVE transfer of wealth from poor to rich. Executives, entrepreneurs, developers, celebrities, and share holders. By 1929, America’s wealthiest 1 percent had accumulated 44 percent of all United States wealth. The upper, middle, and lower classes were left to share the rest. When the lower majority finally ran low on money to spend, profits declined and the stock market crashed.

    Of course, the rich threw a fit and started cutting jobs. They would stop at nothing to maintain their disgusting profit margins and ill-gotten obscene levels of wealth as long as possible. The small business owners did what they felt necessary to survive. They cut more jobs. The losses were felt primarily by the little guy. This created a domino effect. The middle class shrunk drastically and the lower class expanded. With less wealth in reserve and active circulation, banks failed by the hundreds. More jobs were cut. Unemployment reached 25% in 1933. The worst year of the Great Depression. Those who were employed had to settle for much lower wages. Millions went cold and hungry. FDR was elected in order to repair the damage done by his conservative predecessor. The recovery involved a massive infusion of new currency, a public works program and MUCH higher taxes on the rich. This effectively redistributed a significant portion of actual buying power from the rich back to the lower majority.

    Unemployment declined every year from 1933-1940 except 1938 when FDR listened to the GOP and cut back on the New Deal. GDP grew every year except 1938. The rest of the world was in free fall. Without government spending it would have been total collapse in America as well.

    Unemployment (% labor force)
    1933 24.9
    1934 21.7
    1935 20.1
    1936 16.9
    1937 14.3
    1938 19
    1939 17.1
    1940 14.5

    Percent change GDP
    1933 -4%
    1934 15%
    1935 10%
    1936 13%
    1937 9%
    1938 -7%
    1939 7%
    1940 9%

    The necessary and vital transfer of wealth from the rich back to the lower majority was well underway and hugely successful in terms of GDP and unemployment by 1940. GDP had been restored and the unemployment rate had been cut by over 10% in spite of the 1938 setback. The most severe depression in US history was officially over in 1939. The most fiscally liberal economic policies in US history were a proven success. The progress made in FDR’s first two terms continued and accelerated with WWII. With so many men in the service and so many women on the production line, an additional unemployment drop of 2.2% over the annual trend of 2.6% was achieved resulting in a 4.8% drop to a rate of 9.7% in 1941.

    With immediate and significant progress made the first year of his Presidency and 7 out of 8 consecutive years, his first two terms, ultimately ending the depression in 1939, FDR proved that unlike his fiscally conservative predecessor Herbert Hoover, he knew and understood what had to be done. His liberal policies fully intended and designed to redistribute wealth from rich to poor resulted in a full return of GDP, several double digit annual increases and a double digit reduction in unemployment rates over his first two terms thereby ending the Great Depression. This was achieved under the most difficult circumstances in modern history.

    Only a die-hard conservative coward would have the gall to suggest that FDR’s economic policies were anything less than successful. After all, there is only one place in the universe where a ‘quick’ recovery from a record wealth concentrated and severe depression like that which FDR inherited from Herbert Hoover in 1933 is even possible.

    That place is Fantasy Land.

    FDR’s liberal economic policies were such a success and so well appreciated that he was re-elected to a record 4 consecutive terms. Three of which were landslide victories.

    Mariner Eccles, Chairman of the Federal Reserve under FDR, the most fiscally liberal, the most successful, the most proven right, the most beloved and the most re-elected President in US history had this to say about the Great Depression and the related wealth concentration:

    “The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”

    Keep in mind, the above quote is of a man who along with FDR was PROVEN RIGHT.

    Proven right two full years BEFORE the US was dragged into WWII.

    With FDR’s liberal economic policies still in place and those higher taxes on the rich to help pay for WWII, more US wealth was gradually transferred back down to the lower majority from whom it was reaped. The high income taxes on the rich were left in place for many years even after FDR died. This redistribution of wealth continued until the late seventies. By 1979, the richest 1 percent held less than 20% of US wealth. This was less than 1/2 of their previous high of 44% in 1929. The lower majority held the rest.

    There you have it. Liberal economic policies were proven hugely successful in response to the Greatest Depression in US history and over a period of four decades to follow. Wealth redistribution, with or without the massive government stimulus known as war, is the only answer to wealth concentration. It has been proven to work wonders. This is true regardless of legitimate growth or wealth creation. Heavy concentrations are an absolute deal breaker. Just like they were in 1929.

    Unfortunately, a bad actor took the office of President in 1981. He cut those taxes drastically on the rich. Here we are 34 years later. The richest one percent of US households now own over 40 percent of all US wealth. The upper, middle, and lower classes are sharing the rest. This is true even after taxes, welfare, financial aid, and charity.

    America’s income and wealth have once again reached a very dangerous level of concentration.

    “The income gap between the rich and the rest of the US population has become so wide and is growing so fast that it may eventually threaten the stability of Democratic Capitalism itself.”. -Alan Greenspan, Chairman of the Federal Reserve under four administrations testifying before Congress.

    Again, the richest 1% of US households hold over 40% of our nation’s total wealth. They are within striking distance of their record high of 44% in 1929, the first year of the Greatest Depression in US history.

    The government won’t step in and do what’s necessary. Not this time. They are more sold out than ever. It’s up to us. Support small business more and big business less. Support the little guy more and the big guy less. It’s tricky but not impossible.

    For the good of society, stop giving so much of your money to rich people.

    By the way, the non-partisan CBO (Congressional Budget Office) just recently did the math and confirmed that government stimulus will be necessary, get this and get it good, FOREVER. One of the primary factors hindering growth according to the CBO, is, you may want to sit down for this one critics, that’s right, THE HIGH CONCENTRATION OF WEALTH.

    The Greater Depression will be underway by 2020 at the very latest. Sooner and more severe if we end up with more conservative economic policies.

    Greed kills. It will be our downfall.

    I will now take attacks from my utterly predictable die-hard conservative critics.

    • Dr. Rich Swier
      Dr. Rich Swier says:


      Thanks for reading and commenting on this column. It appears you have fallen victim to the myths about the Great Depression.

      Students today are often given a skewed account of the Great Depression of 1921-1941 that condemns free-market capitalism as the cause of, and promotes government intervention as the solution to, the economic hardships of the era. In this essay based on a popular lecture, Foundation for Economic Education President Lawrence W. Reed debunks this conventional view and traces the central role that poor government policy played in fostering this legendary catastrophe.

      Download the PDF.

      Listen to the Audiobook.

      • Slort
        Slort says:

        Nice try Swier but if you take the time to read my long entry instead of posting a generic response 30 seconds after it’s submitted, you’ll see that I’ve already addressed that ‘myth’ crap.

        Now how about Greenspan’s quote? Do you even understand his point? Can you visualize the issue? Have you ever played a game of ‘wealth creating’ and’wealth concentrating’ Monopoly?

  2. Slort
    Slort says:

    By the way, how would the ‘fair tax’ effect after tax income inequality? What do your sold-out pund, err, I mean ‘economists’ have to say or ‘calculate’ about that?

    Another thing. My life has already been threatened several times over this very issue. For that reason, I wish to be known only as Slort. If my identity is revealed or shared, I will sue for as much as possible, buy a security system and give the rest to a legitimate charity.

  3. Slort
    Slort says:

    Another thing. Albert Einstein saw it pretty much my way, or more importantly, FDR’s and Eccles’ way. After all, they cured the Great Depression. I’m just typing about it 8 decades later.

    Tell that to Reed and the rest of your conservative spin doctors.


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