The Center's work on 'Income Inequality' Issues

John Oliver Debunks Some Estate Tax Myths

July 14, 2014 at 4:55 pm

John Oliver’s HBO show this weekend featured a segment on income and wealth inequality (warning: colorful language!), and Oliver cited our paper showing that 99.86 percent of all estates in 2013 owed no estate tax (see chart).

As Oliver mentioned and our paper explains, contrary to the myth that many people face the estate tax, the first $5.25 million of every estate (effectively $10.5 million per married couple) is exempt from tax (with that level indexed for inflation).  That means that very few estates owe any tax.  For those few that did in 2013, the “effective” tax rate — that is, the percentage of the estate’s value that is paid in taxes — was 16.6 percent, on average.  That’s far below the top estate tax rate of 40 percent.

Rather than cutting investments in areas like education, medical research, and environmental protection in order to reduce the deficit, policymakers should be looking to strengthen the estate tax.  Learn more about the myths and realities of the federal estate tax here.

IMF Joins Calls for Strengthening EITC and Minimum Wage

June 18, 2014 at 2:47 pm

We noted yesterday a new report by the Organisation for Economic Co-operation and Development (OECD) describes the Earned Income Tax Credit (EITC) as “effective in fighting poverty and encouraging work” and calls for expanding the EITC and lifting the federal minimum wage.  My colleague Jared Bernstein points out today that the International Monetary Fund (IMF) has just made a nearly identical recommendation.

In its latest look at the U.S. economy, the IMF says that strengthening the EITC and the federal minimum wage would aid the recovery and improve the nation’s long-term economic outlook:

An expansion of the Earned Income Tax Credit — to apply to households without children, to older workers, and to low income youth — would be another effective tool to raise living standards for the very poor.  Similarly, the government should make permanent the various extensions of the EITC and the improvements in the Child Tax Credit that are due to expire in 2017.  Finally, given its current low level (compared both to U.S. history and international standards), the minimum wage should be increased.  This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households.

OECD Calls for Strengthening EITC and Minimum Wage

June 17, 2014 at 1:47 pm

The Earned Income Tax Credit (EITC) “has been effective in fighting poverty and encouraging work,” the Organisation for Economic Co-operation and Development’s (OECD) new Economic Survey of the United States finds.  The report recommends expanding the EITC to reach those largely left out — and lifting the federal minimum wage to make such an expansion more effective.  These are timely messages, given that proposals before Congress would accomplish both goals.

The EITC “encourages low-income parents to take up work by lowering their tax rate and by providing a financial bonus for their work,” the OECD explains, noting that the research shows any negative effect on employment from the credit’s gradual phaseout at higher income levels is limited.  As we’ve pointed out, studies show the EITC is particularly successful at raising employment among single mothers.

To make the EITC even more effective, the OECD suggests strengthening the credit for childless workers (including non-custodial parents) by expanding their credit and lowering the age eligibility threshold from 25 to 21.  Since childless workers now receive little or no EITC, it’s “less effective at increasing employment and reducing poverty” among this group, according to the OECD.

In part because the EITC for childless workers is so meager, childless workers are the sole group that the federal tax system taxes into poverty.

The President’s 2015 budget and a number of congressional proposals would address this glaring hole in the EITC by strengthening the credit for childless workers.  The President’s proposal, for example, would lift about half a million people out of poverty and reduce the depth of poverty for another 10.1 million, the Treasury Department estimates.

The OECD report also recommends that expanding the EITC “would be more effective supported by a higher minimum wage.”  We strongly agree.

As we’ve explained, the EITC and federal minimum wage are complementary ways to support low-wage workers, not alternatives.  One reason is that the EITC, by increasing the number of people seeking jobs in the low-wage sector, can put downward pressure on the wages that employers offer potential workers.  A higher minimum wage helps offset that effect.

The OECD points out that the effects of minimum-wage increases on employment are “uncertain” and recommends carefully monitoring the impact of any such increase.  But it also notes, “[t]he value of the minimum wage has declined significantly in real terms over time” and “[r]elative to the median wage, the current federal minimum wage is well below the average statutory minimum wage in OECD countries.”

“Plentiful empirical evidence suggests a modest increase in the minimum wage from such a low level will have no or only a small negative effect on employment of low-skilled workers,” the OECD concludes.  A proposal before Congress would raise the minimum wage from $7.25 to $10.10 in three annual increments and then index it to inflation.

Nine Things You Might Not Know About Minimum-Wage Workers

June 9, 2014 at 12:47 pm

In debates over raising the minimum wage, it’s important to know who we’re talking about, CBPP Senior Fellow Jared Bernstein explains today in the New York Times’ Upshot blog.  His post lists nine facts about who earns the minimum wage and who would benefit from raising it from $7.25 to $10.10.  Here’s an excerpted version:

  • Minimum-wage workers are older than they used to be.  Their average age is 35, and 88 percent are at least 20 years old.  Half are older than 30, and about a third are at least 40. . . .
  • They’re split fairly evenly between full-timers and part-timers.  Most — 54 percent — work full-time schedules (at least 35 hours per week), and another 32 percent work at least half time (20-34 hours per week).
  • Many have kids.  About one-quarter (27 percent) of these low-wage workers are parents, compared with 34 percent of all workers.  In all, 19 percent of children in the United States have a parent who would benefit from the increase.
  • One in eight lives in a high-income household.  About 12 percent of those who would gain from an increase to $10.10 live in households with incomes above $100,000.  This group highlights the fact that the minimum wage is not nearly as well targeted toward poverty reduction as the earned-income tax credit, a wage subsidy whose receipt, unlike the minimum wage, is predicated on family income.

    Still, a minimum-wage increase does much more to help low- and moderate-income households than any other groups.  Households that make less than $20,000 receive 5 percent of the nation’s total earnings, for instance — but would receive 26 percent of the benefit from the proposed minimum-wage increase.

  • Most are women.  Women make up 48 percent of the work force yet 55 percent of the would-be beneficiaries of the increase in the minimum wage.
  • Most are white, but minorities are overrepresented.  Hispanic workers account for 16 percent of the work force but 24 percent of those who would be affected by the wage increase.  For African-Americans, the comparable shares are 11 percent of the work force and 15 percent of those who would gain from the increase.
  • They’ve got some schooling, though less than other workers.  Of those who would be affected by the increase, 78 percent have at least finished high school, about one-third have some college under their belts, and about 10 percent have graduated from college. . . .
  • Their earnings are a big part of their family budgets.  The average worker in this group brings home half of his or her household’s earnings; 19 percent of those who would get the raise are sole earners.  Parents who would benefit from the increase bring home an even larger share of their families’ earnings: 60 percent.
  • They’re in every state, but are overrepresented in the South.  Because most of the states that have raised their minimums above the federal level are outside the South, a national increase would have more bite there.  Workers in Southern states make up 17 percent of the nation’s work force but 21 percent of minimum-wage beneficiaries. . . .

No, the OECD Didn’t Say We Already Do a Lot to Reduce Inequality

May 12, 2014 at 12:29 pm

Critics of proposals to reduce income inequality sometimes cite a 2008 Organisation for Economic Co-Operation and Development (OECD) report that found, among other things, that the United States has the most progressive tax system among developed countries.  But, as a whole, the report doesn’t support the implication that the United States does a lot to address income inequality; nor do more recent OECD data.

In fact, various taxes and “cash transfer” programs (such as Social Security, unemployment compensation, and means-tested benefits like SNAP) do less to reduce inequality in the United States than in any other OECD country examined except South Korea, Chile, and Switzerland, according to the OECD’s latest data (see graph).

As a result, while the United States had the tenth-highest level of inequality among the roughly 30 OECD countries studied before taxes and transfers, it had the fourth-highest level after taxes and transfers.

There are two main reasons why the U.S. tax and transfer system does relatively little to reduce inequality:

  • While the taxes that the OECD analysis examined are more progressive in the United States than in other OECD countries, they also collect less revenue (as a share of household income) than the OECD average.
  • U.S. cash transfers are only about half as large as the OECD average, measured as a share of household disposable income; they’re also less progressive than in other OECD countries.

The OECD analysis omits some taxes and transfers due to data limitations.  It’s unclear how including all of the missing pieces would affect the findings.  But citing only the OECD’s finding about the progressivity of the U.S. tax system while ignoring its other findings, as some have done, provides a misleading picture of the OECD report.