U.S. Inequality, Fiscal Progressivity, and Work Disincentives: An Intragenerational Accounting

There is far less inequality in spending power than in wealth or labor earnings due to the fiscal system’s high degree of progressivity. But U.S. fiscal redistribution generally comes with very high work disincentives for households of all ages, regardless of income class. There is, however, substantial dispersion in marginal net tax rates, which seems hard to reconcile with standard norms of optimal taxation. We also find that current income is a very poor proxy for remaining lifetime resources and that current-year net tax rates can provide a highly distorted picture of true fiscal progressivity and work disincentives.

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