The Center's work on 'Income Inequality' Issues


Estate Tax Repeal = More Inequality + Bigger Deficits

March 24, 2015 at 10:20 am

As our new paper explains, the House Ways and Means Committee is scheduled to consider a bill this week to repeal the federal estate tax on inherited wealth, just one week after the House Budget Committee approved a budget plan calling for $5 trillion in program cuts disproportionately affecting low- and moderate-income Americans.

Repealing the estate tax would be highly misguided — especially in the context of the House Budget Committee plan, which would repeal health reform and cut Medicaid deeply, causing tens of millions of Americans to become uninsured or underinsured; cut the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), making it harder for millions of low-income families to put food on the table; and cut Pell Grants, raising the financial hurdle for people of modest means to attend college.  Despite these and hundreds of billions of dollars in additional cuts that were largely unspecified, the budget included no revenue increases.  And while concerns of future deficits supposedly drive the budget plan’s harsh cuts, repealing the estate tax would significantly expand deficits.

Repeal would: 

  • Reduce revenues by more than $250 billion over the next ten years. The legislation before the House would not offset this cost, contrary to Republican calls for a balanced budget.
  • Do nothing for 99.8 percent of Americans. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax.  This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015.  Repeal would bestow a tax windfall averaging over $2.5 million apiece — or roughly the same amount that a typical college graduate earns in a lifetime — on the roughly 5,400 wealthy estates that will owe the tax in 2015.

  • Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show. Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top.  Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.

    In addition, despite policymakers’ frequent statements about the importance of work, repeal would reduce the incentive for heirs of large estates to work.

Evidence shows the estate tax is an economically sound tax.  Contrary to claims that the estate tax hurts the economy, it likely has little or no impact on wealthy donors’ savings, and it encourages heirs to work.  The estate tax is an economically efficient way to raise revenue that supports public services and lowers deficits without imposing burdens on low- and middle-income Americans.  The tax plays an important role in our revenue system, particularly given our long-term budget challenges.

Click here for the paper.

Wisconsin Law Would Tilt Playing Field Even More Against Workers

March 4, 2015 at 3:38 pm

My colleague Jared Bernstein recently addressed some of the canards around Wisconsin’s proposed “Right to Work” (RTW) law, which would dilute unions’ bargaining strength by making it harder for them to collect dues from the workers they represent.  The bill, which would make Wisconsin the 25th state with such a law, is part of an ongoing movement to weaken protections for workers attempting to bargain collectively — a movement that’s exacerbating the trend toward growing income inequality and wage stagnation.

As Bernstein explains:

Here’s what the legislation does:  It makes it illegal for unions to negotiate contracts wherein everyone covered by that contract has to contribute to its negotiation and enforcement. . . .

Let’s also be clear about what goes on in non-RTW states, as anti-union forces consistently distort the current reality.  In non-RTW states, no one has to join a union.  There have been no “closed shops” in America for more than 20 years.  When RTW advocates say they’re fighting against “forced unionism,” they are making stuff up.  There’s no such thing.

​By weakening unions, RTW weakens wages, Bernstein explains, citing a study that found “a significant wage advantage in non-RTW states of about 3 percent, which, for full-time workers, amounts to $1,500 per year.”  Weaker wages, in turn, place upward pressure on income inequality.

The long-term growth in income inequality is well documented.  It has many causes, including the growth in investment income (which goes mainly to those at the top of the income scale) as a share of the economic pie.  At the same time, wages have grown more unequal due to longer periods of high unemployment (which reduce workers’ negotiating power), more foreign competition, and a decline in higher-paying manufacturing jobs.  Earnings for low- and middle-income workers have frequently fallen or remained stagnant.  A range of studies (see here and here for examples) have concluded that falling union membership has played a significant role in these unfortunate trends.

Federal and state policymakers can push back against these trends by enacting (and enforcing) stronger labor standards, reforming immigration policies to bring workers out of the shadows, promoting full employment, and, importantly, protecting workers’ rights to organize.

Support for Home Visiting Programs Slated to Expire

February 13, 2015 at 10:44 am

A federal-state partnership that supports home visiting programs in every state will expire March 31 unless Congress extends it, jeopardizing programs with a proven record of strengthening high-risk families and saving money over the long term.

The Maternal, Infant, and Early Childhood Home Visiting (MIECHV) program funds programs through which trained professionals — often nurses, social workers, or specialists in early childhood development— help parents acquire the skills to promote their children’s development.

More specifically, MIECHV works to improve maternal and newborn health, prevent child injuries and abuse, help children succeed in school, reduce crime and domestic violence, and make families more economically self-sufficient.  Research shows that it helps keep children out of the social welfare, mental health, and juvenile corrections systems, with considerable cost savings for states.

A new report and 22 state and tribal profiles from the Center for American Progress and Center for Law and Social Policy explain how states and tribes use MIECHV funds to improve and expand home visiting programs to serve more vulnerable families.

For example, MIECHV funds help these programs create or expand data collection systems that enable them to evaluate and report on outcomes for children and families.  (Most MIECHV funds go to rigorously evaluated programs for which there’s well-documented evidence of success.)  MIECHV funds also support training, technical assistance, and professional development for home visiting workers.

Many families have benefited from MIECHV-funded services.  Continued federal support would help states build on that success by reaching more vulnerable families.  Congress should reauthorize the program at current funding levels.

State and Local Tax Systems Hit Lower-Income Families the Hardest

January 15, 2015 at 9:59 am

In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds.  As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”

Only California taxes the top 1 percent of households at a higher effective rate (8.7 percent) than middle-income taxpayers (8.2 percent), ITEP found.  In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors.

Washington State’s tax system is the most regressive, according to ITEP.  The bottom 20 percent of taxpayers pay 16.8 percent of their income in taxes, while the top 1 percent pay just 2.4 percent.  After Washington, the most regressive state and local tax systems are in Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Ari­zona, Kansas, and Indiana.

A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay.  Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

Our Big-Picture Look at Inequality

December 10, 2014 at 11:58 am

“The broad facts of income inequality over the past six decades are easily summarized,” our newly updated Guide to Statistics on Historical Trends in Income Inequality explains:

  • The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.
    • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
    • The income gap between those high up the income ladder and those on the middle and lower rungs — while substantial — did not change much during this period.
  • Beginning in the 1970s, economic growth slowed and the income gap widened.
    • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly. (See first graph below.)
    • The concentration of income at the very top of the distribution rose to levels last seen more than 80 years ago, during the “Roaring Twenties.” (See second graph below.)
  • Wealth — the value of a household’s property and financial assets, minus the value of its debts — is much more highly concentrated than income. The best survey data show that the top 3 percent of the distribution hold over half of all wealth.  Other research suggests that most of that is held by an even smaller percentage at the very top, whose share has been rising over the last three decades.

The guide describes common sources of income data and discusses their relative strengths and limitations in understanding income and inequality trends.  It also highlights the trends that those key data sources show and gives additional information on wealth (which helps measure how the richest Americans are doing) and poverty (which measures how the poorest Americans are doing).