Income taxes don’t reduce income inequality. Instead they do quite the opposite, according to December-dated analysis published by the National Bureau of Economic Research.
The paper looked at three major 20th century U.S. tax reforms and found that they did nothing to decrease income inequality and everything to increase it.
“I find that all the considered tax policy reforms raised economic inequality, instead of lowering it, as was intended by the policymakers,” states the paper titled “Do Taxes Increase Economic Inequality? A Comparative Study Based on the State Personal Income Tax” by Ugo Troiano, professor of economics at the University of Michigan.
The tax policy reforms he references are the introduction of state income tax, the introduction of tax withholding along with reporting by employers, and the agreement between the federal government and the states to coordinate audits.
Why did income inequality increase when that wasn’t the goal of the reforms?
“The fact that the only effect that these reforms had in common was raising the revenues from income tax and making the government bigger and the private sector smaller, suggest that a bigger government, at least in the recent history, had the effect of higher inequality,” the report states.
In other words, bigger government ends up retarding the private sector and reducing the size of the wealth pie. Naturally, the poorer come out worst in such a situation, while the well-heeled can get top tier advice to dodge the tax bullet. Hence, the rich get richer and the poor stay skint.