Sunday, September 09, 2007

Income Inequality and the U.S. Tax System

"While the extent of income inequality is debated periodically, one rarely discussed aspect of inequality is its impact on the tax system. Given the nature of the U.S. federal tax system, changes in the distribution of income can have significant implications for who pays the taxes, how much they pay, and federal tax revenues. One common measure to characterize inequality or the dispersion of income is the Gini coefficient, which varies from 0 to 1. A Gini coefficient of 0 indicates that income is evenly distributed among the population (that is, everyone has the same income) while a value of 1 indicates perfect income inequality (that is, one individual has all the income). Between 1980 and 2004, the Gini coefficient for household income increased from 0.403 to 0.466 -- a 15.6% increase. The Gini coefficient for earnings increased by 22.4% from 0.331 in 1980 to 0.405 by 2004. Inequality has, therefore, increased over the past 25 years." Source: Congresional Research Service

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