Study: Tax Cuts Might Drive Income Inequality After All

The gap between the rich and rest has risen fastest in countries where politicians have cut taxes the most.

It's intuitive that the rich get richer when you cut their taxes. Still, economists have had a hard time proving that taxes actually cause rising income inequality.

But they might be getting closer. A new draft paper out this month from Thomas Piketty, Emannuel Saez, Anthony Atkinson, and Facundo Alverado takes a stab at making the taxes-inequality connection. As their graph below shows, there's a strong correlation between how much a country cut their top rate since 1960 and how much income went to the top 1 percent of earners.


Piketty_Saez_Alverado_Income_Top_Tax_Rates_1960.JPG

There is an old argument that cutting taxes for the rich encourages them to work harder. But the paper's authors are skeptical of that idea. If low taxes on the wealthy made them put more effort into their jobs, we'd expect the countries with the lowest taxes to grow the fastest. That hasn't happened. Instead, wealthy countries have all been growing at about the same pace for the last several decades, irrespective of their tax policies.

Here's the alternative theory. If you cut taxes for the rich, they might not work harder, but they will become greedier for more take-home pay. When taxes were higher, a huge salary was less valuable, so maybe rich people shifted their attention to corporate expense accounts and other perks. But today, it's more worthwhile for executives, doctors, lawyers, and other professionals to bargain for the absolute highest pay package possible. In the case of CEOs whose bank accounts live and die by their company's stock performance, it's also become more important to focus on short-term returns, possibly at the expense of long-term investment. 

This is all highly speculative, of course. Other factors are also probably at play. The same politicians who cut taxes on the wealthy, the paper notes, also deregulated Wall Street, which has played a huge role in the income gap.  But the story does seem to dovetail pretty well with the era of soaring CEO pay and superstar salary scales in professions like law and medicine. The world's tax codes say greed is good. And the rich appear to have gotten the message. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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