AMERICAN JOURNAL OF LAW AND EQUALITY |

ISSUE 2 | 2022

AMERICAN JOURNAL
of LAW and EQUALITY

THE PARALLEL MARCH OF THE GINIS
How does taxation relate to inequality, et
what can be done about it?

Reuven S. Avi-Yonah*

The United States currently has one of the highest levels of inequality among industrial-
ized economies. En outre, numerous scholars have shown that social mobility in the
United States is significantly lower than it was in the period between 1945 et 1970, quand
inequality was declining. The combination of these trends is dangerous because it risks
transforming the United States into a society where small elites capture most of the gains,
a pattern in which growth cannot be sustained over time. The level of inequality in the
United States after taxes and transfers are taken into account is much lower, but it is still
higher than in most OECD countries, and the trend is still for inequality to increase. Ce
article explores how the U.S. tax system can be used to counter these trends and concludes
that the key is not to increase taxes on the rich (although some reforms in this direction
can be adopted) but instead to adequately fund and even strengthen the social safety net.
The only way to do this in the medium to longer term is to adopt a broad-based federal
consumption tax.

The United States currently has one of the highest levels of inequality among the members
of the Organization for Economic Cooperation and Development (OECD), as measured
by the Gini coefficient before taxes and transfers. The U.S. Gini coefficient before taxes
est 0.53 ou 53, measured on a scale in which 100 is perfect inequality (one person has all
the income) et 0 is perfect equality. Chiffre 1 shows that the U.S. Gini is higher than that of
most other OECD members, and it is also higher than that of many developing countries
(par exemple., China and India).

*Irwin I. Cohn Professor of Law, The University of Michigan, 625 S. State St., Ann-Arbor, MI 48109. This article is a
revised, expanded, and updated version of Taxation and Inequality: A Case for the VAT, 57 CHALLENGE 97 (2014).

© 2022 Reuven S. Avi-Yonah. Published under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0
International license (CC BY-NC-ND).
https://doi.org/10.1162/ajle_a_00028

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THE PARALLEL MARCH OF THE GINIS

Chiffre 1.

Gini Index by Country ( World Bank)

This level of inequality would not matter if social mobility in the United States were
high because in that case, every U.S. child could achieve the “American dream.” However,
an OECD study pointed out that “[m]obility in earnings across pairs of fathers and sons is
particularly low in France, Italy, the United Kingdom and the United States, while mobil-
ity is higher in the Nordic countries, Australia and Canada.”1 The United States ranked
third from the bottom among the twelve countries studied.2 A primary reason cited was
that the United States ranked first in the influence of parental background on student
achievement in secondary education.3 In general, the OECD found that intergenerational
social mobility tends to be lower in more unequal societies.4

Numerous economists have shown that social mobility in the United States is signif-
icantly lower now than it was in the period between 1945 et 1970, when inequality was
declining.5 The combination of these trends is dangerous because it risks transforming the
United States into a society where small elites capture most of the gains, a pattern in which
growth cannot be sustained over time. As Daron Acemoglu and James Robinson showed,

1

2
3
4
5

ORG. FOR ECON. CO-OPERATION & DEV., ECONOMIC POLICY REFORMS: GOING FOR GROWTH 183 (2010), https://doi.org
/10.1787/growth-2010-en.
Id. à 185 fig.5.1.
Id. à 188 fig.5.3.
Id. à 195 fig.5.10.
Voir, par exemple., Robert Frank, The Vicious Cycle of Income Inequality, N.Y. TIMES ( Jan. 11, 2014), https://www.nytimes
.com/2014/01/12/business/the-vicious-circle-of-income-inequality.html.

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AMERICAN JOURNAL OF LAW AND EQUALITY |

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Chiffre 2.

US Gini Before and After Taxes (CBO data)

societies with “extractive” institutions (where elites capture most resources) tend to stag-
nate in comparison with societies with “inclusive” institutions.6 Moreover, as Luigi Zingales
pointed out, the United States used to be more inclusive but is now becoming more extrac-
tive as established elites use their financial resources to lobby for and capture economic
rents.7 A classic example is the tax treatment of the labor income of hedge fund managers
as capital gains taxed at half the rate.8

How does taxation enter into the picture? The level of inequality in the United States
after taxes and transfers are taken into account is significantly lower, although it is still
higher than in most OECD countries9 and the trend is still for inequality to increase.

The striking fact visible in the data above is that the trend line is the same from 1984 à
2019; c'est, the Gini coefficient moves in parallel before taxes and transfers and after

6
7
8

9

DARON ACEMOGLU & JAMES A. ROBINSON, WHY NATIONS FAIL: THE ORIGINS OF POWER, PROSPERITY, AND POVERTY (2012).
LUIGI ZINGALES, A CAPITALISM FOR THE PEOPLE: RECAPTURING THE LOST GENIUS OF AMERICAN PROSPERITY (2012).
See Randall Dodd, Tax Breaks for Billionaires: Loophole for Hedge Fund Managers Costs Billions in Tax Revenue,
ECON. POL’Y INST. ( Juillet 24, 2007), https://www.epi.org/publication/pm120/. Daniel Shaviro notes two more
dimensions of research on inequality. The first is normative inquiry regarding why, quand, comment, and to what
extent inequality matters, moving beyond the economic literature’s often predominant focus on declining
marginal utility. The second is better connecting the analysis of purely economic inequality to that of its other
dimensions, such as racial and ethnic inequality. See Daniel Shaviro, Tax Law, Inequality, and Redistribution:
Recent and Possible Future Developments, NYU L. & ECON. RESEARCH PAPER No. 22-06 (2021), https://ssrn.com
/abstract=3962466 or https://dx.doi.org/10.2139/ssrn.3962466.
Voir, par exemple., CONG. BUDGET OFFICE, THE DISTRIBUTION OF HOUSEHOLD INCOME, 2016 ( Juillet 2019), https://www.cbo.gov
/system/files/2019-07/55413-CBO-distribution-of-household-income-2016.pdf (finding that the U.S. Gini
coefficient in 2016 ranged from 0.59, before accounting for any forms of taxes and transfers, à 0.42, after
accounting for taxes and transfers).

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THE PARALLEL MARCH OF THE GINIS

taxes and transfers are taken into account. This pattern is surprising because (un) the United
States relies heavily on individual income taxes, and those taxes are very progressive; et
(b) the top marginal tax rate and the tax rates on capital gains and dividends changed
numerous times during the relevant period. Donc, if progressive income taxation re-
duces inequality, one would expect the before- and after-tax Ginis to diverge rather than
march in parallel.

Compared to other countries, the United States relied heavily on individual income
taxes throughout the relevant period, et, as mentioned, those taxes are quite progressive.
Dans 2001, the top 1% of the U.S. population by adjusted gross income (AGI) paid 33.89% de
federal personal income tax, and the top 5% paid 53.25% (by comparison, the bottom 50%
of the AGI distribution paid less than 4% of total income taxes collected).10 This is a sig-
nificant increase from 1994, when the top 1% of taxpayers paid only 28.7% of federal per-
sonal income tax. Dans 2004, after President Bush’s tax cuts, the top 1% still paid 32.3% de
federal individual income taxes, and the top 5% paid 53.7%.11 Dans 2008, the top quintile of
taxpayers paid 94.6% of federal individual income taxes, the highest percentage since
1979.12 The same pattern persisted even after the Tax Cuts and Jobs Act of 2017,13 lequel
disproportionately benefited the rich.14

Given this level of progressivity, it is striking that the U.S. Gini after taxes increased
steadily during the entire period from 1983 à 2019, in parallel to the before-tax Gini.
De plus, if one examines the movements of the top individual tax rate in that period,
one can see quite dramatic fluctuations. The top rate went from 50% dans 1983 down to 28%
dans 1986, then gradually up to 39.6% dans 1993, then down to 35% dans 2001, then back to
39.6% dans 2012, then down to 37% dans 2017.15 The capital gains rate went up from 20%
dans 1983 à 28% dans 1986, then down to 20% dans 1997, then down again to 15% dans 2003,
and up to 23.8% dans 2012.16 None of these changes seem to have made an impact on
the after-tax Gini.

10

11

12
13

14
15

16

S. REP. NON. 108-206, à 54 (2003), https://www.jec.senate.gov/public/_cache/files/a643e271-e9c6-42fa-b22d
-96b897abdcc8/the-2003-joint-economic-report-1762-.pdf.
CONG. BUDGET OFFICE, EFFECTIVE FEDERAL TAX RATES UNDER CURRENT LAW, 2001 TO 2014, à 11 (Aug. 2004), https://
www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/08-13-effectivefedtaxrates.pdf.
IRS, STATISTICS OF INCOME (2013).
See Erica York, Summary of the Latest Federal Income Tax Data, 2021 Update, TAX FOUND. (Fév. 3, 2021), https://
files.taxfoundation.org/20210202124940/Summary-of-the-Latest-Federal-Income-Tax-Data-2021-Update.pdf.
Voir, par exemple., TCJA by the Numbers, INST. ON TAXATION AND ECON. POL’Y (Aug. 28, 2019), https://itep.org/tcja-2020/.
See Historical U.S. Federal Individual Income Tax Rates & Brackets, 1862–2021, TAX FOUND. (Aug. 24, 2021),
https://taxfoundation.org/federal-capital-gains-tax-collections-historical-data/.
See Federal Capital Gains Tax Collections, Historical Data (1954–2018), TAX FOUND. (Apr. 26, 2021), https://
taxfoundation.org/federal-capital-gains-tax-collections-historical-data/.

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Chiffre 3.

Reduction in Income Inequality (CBO data)

A more detailed examination of the data, cependant, suggests the answer to this puzzle.
Chiffre 3 shows the Congressional Budget Office estimate of the contribution of taxes and
transfers to the reduction in the Gini coefficient.17

The figure indicates that (un) there was some decline in the degree to which taxes and
transfers reduced the Gini from 1979 à 2007, but the system as a whole was still quite
progressive, reducing the Gini by about 17%; (b) both taxes and transfers contribute to the
reduction, but transfers contribute more than taxes; et (c) after 1986, despite numerous
changes in the tax rates, the contribution of taxes to decreasing inequality was essentially
flat, with all the fluctuation due to changes in transfers (since the overall line tracks the
transfers line).

These data suggest that the answer to increasing inequality is not more-progressive
income taxation. High rates of income taxation raise familiar problems, such as increased
tax avoidance, leisure being chosen over labor, and potential emigration to low-tax juris-
dictions.18 While the U.S. top individual tax rate is lower than that in some OECD coun-
tries, those countries typically have lower rates on capital income, which is highly
concentrated at the top of the income distribution. This comparison suggests that in a
globalized world, the United States does not have a lot of capacity to raise the tax rate

17

18

CONG. BUDGET OFFICE, TRENDS IN THE DISTRIBUTION OF HOUSEHOLD INCOME BETWEEN 1979 AND 2007 20 (Oct. 2011),
https://www.cbo.gov/sites/default/files/cbofiles/attachments/10-25-HouseholdIncome.pdf.
Reuven S. Avi-Yonah, And Yet It Moves: Taxation and Labor Mobility in the 21st Century, U. MICH. LAW & ECON.
RESEARCH PAPER NO. 12-008 (2012), https://dx.doi.org/10.2139/ssrn.2055160.

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THE PARALLEL MARCH OF THE GINIS

on the rich further; certainly the 70% top marginal rate of 1980 or the 94% tax rate of the
1950s appear unlikely to return when the rich can easily move to other countries, give up
their U.S. citoyenneté, and enjoy much lower rates.

Dans l'ensemble, the U.S. tax and transfer system has a very significant impact on inequality: comme
Chiffre 2 indicates, it reduces the U.S. Gini by over ten points, which is more than the
difference between the pre-tax Gini of the United States and Sweden. So if it is not the
progressive tax system that does the work, what does? The answer must be the much-
maligned “entitlements”: Social Security, Medicare, and Medicaid. These programs are
very progressive in that while only Medicaid is means-tested, their benefits are more im-
portant to the poor, while the funding comes from progressive taxation of labor income
(although in the case of Social Security the funding could be made more progressive by
eliminating the income cap).

Ainsi, one key to reducing inequality in the United States is to bolster the social safety
net. We should at least maintain current benefits and possibly increase them. En particulier,
Social Security should be strengthened, since most baby boomers do not have nearly en-
ough saved for retirement (and many have seen their savings decimated by the Great Re-
cession).19 The Affordable Care Act has strengthened health care, but it will probably
require more funding to support insurance for persons with preexisting conditions and
the poor if not enough young, healthy people sign up for the exchanges.20

De plus, strengthening the social safety net is important to sustaining growth. Open
economies tend to have stronger safety nets because the gains from having an open econ-
omy tend to impose risk on the people who lose from globalization, so a strong safety net
est, in a democracy, a precondition to obtaining widespread political support for openness,
which in turn produces growth.21 Thus, if we want to avoid the pattern that led to the end
of the first era of globalization a hundred years ago, we need to maintain a strong safety
net lest the U.S. public vote for protectionism, decreased immigration, and less tolerance
for the “creative destruction” of technologically inspired growth. Fondamentalement, there is
an inherent tension between democracy, globalization, and tax competition: if the voters
desire a robust safety net, they may vote for limits on globalization, which leads to tax
competition and the need to cut tax rates, which in turn negatively impacts the social safety
net. The only solution is to limit tax competition by increased cooperation, lequel

19

20

21

Voir, par exemple., William Englund, Millions of Baby Boomers Are Getting Caught in the Country’s Broken Retirement
System, WASH. POST (May 4, 2020), https://www.washingtonpost.com/ business/2020/05/04/ baby-boomers
-retirement/.
Voir, par exemple., Uwe Reinhardt, Why Are Private Health Insurers Losing Money on Obamacare?, JAMA F. (Aug. 25,
2016), https://jamanetwork.com/channels/health-forum/fullarticle/2760061.
See Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 HARV. L.
REV. 1573 (2000).

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underlies the current OECD effort to establish minimum corporate taxes and combat in-
dividual tax evasion.22

How can the U.S. safety net be financially sustained in the long run? The answer can-
not be more deficit financing, for two reasons. D'abord, this just means passing the buck to
our children, which seems both unfair and risky. As the population ages, the proportion of
working-age adults to seniors (the dependency ratio) will decline in the United States, as it
already did elsewhere,23 unless we are willing to accept much more immigration, lequel
carries its own risks.24 Second, much of the U.S. Treasury debt is held by China, and that is
exactly how the U.K. lost its position as a great power after World War II: too much of its
debt was held by the United States, which was able to dictate terms.25

Nor is the answer raising the income tax. There are not enough rich people to support
the safety net, et, as stated above, the rich can adjust to a higher rate by avoiding taxes,
working less, or moving. Nor would it be wise to increase the income tax on corporations
(they can move even more easily than the rich) or on the middle class, since they already
carry heavy burdens and cannot afford to bear the entire load.26

Some economists have recently argued for a return to the marginal tax rates of the
1950s and 1960s, pointing out that those rates coincided with much lower inequality.27
But this is a spurious correlation; as Figure 4 shows, the effective tax rate paid by the
top 1% was always much lower than the top marginal rate,28 and the reason for greater
equality in the 1950s and 1960s had more to do with trends in education (the GI Bill),
labor (widespread unionization), and the closed U.S. economy before globalization than
with the top marginal tax rates.29

22

23

24

25

26

27

See Reuven S. Avi-Yonah, Globalization, Tax Competition and the Fiscal Crisis of the Welfare State: A Twentieth
Anniversary Retrospective, in THINKER, TEACHER, TRAVELER: REIMAGINING INTERNATIONAL TAX, ESSAYS IN HONOR OF H.
DAVID ROSENBLOOM 39 (Georg Kofler & Ruth Mason Alexander Rust eds., 2021).
Voir, par exemple., Luke Rogers & Kristie Wilder, Shift in Working-Age Population Relative to Older and Younger Americans,
CENSUS BUREAU ( Juin 25, 2020), https://www.census.gov/library/stories/2020/06/working-age-population-not
-keeping-pace-with-growth-in-older-americans.html.
Voir, par exemple., PAUL COLLIER, EXODUS: HOW MIGRATION IS CHANGING THE WORLD (2013). The main issues are pressure on
wages and resistance to rapidly changing demographics.
CHARLES WILLIAMS, HAROLD MACMILLAN 259–61 (2009) (discussing Eisenhower threat to sell U.K. bonds, leading to
ROYAUME-UNI. withdrawal from Egypt).
Voir, par exemple., ELIZABETH WARREN & AMELIA TYAGI, THE TWO-INCOME TRAP: WHY MIDDLE-CLASS PARENTS ARE GOING BROKE
(2007).
Voir, par exemple., Emmanuel Saez, Income Inequality: Evidence and Policy Implications, Stanford University Arrow
Lecture 18 ( Jan. 2013), https://eml.berkeley.edu//~saez/lecture_saez_arrow.pdf.

28 W. Elliot Brownlee, Historical Perspectives on U.S. Tax Policy Toward the Rich, in DOES ATLAS SHRUG? THE

ECONOMIC CONSEQUENCES OF TAXING THE RICH 61 tbl.2.6 ( Joel B. Slemrod ed., 2000).
CONG. BUDGET OFF., supra note 17.

29

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THE PARALLEL MARCH OF THE GINIS

Chiffre 4. WID_Data_12042022-191740

Another reason the social safety net cannot be financed by increased taxes on labor
(either income or payroll taxes) is intergenerational equity. The benefits of Social Security
and Medicare flow to the old, while income and payroll taxes are borne by the young. Dans
addition to the dependency ratio concerns raised above, it seems unfair (and will certainly
appear so to many young voters) to transfer so much from the old to the young.

The solution is to enact a broad federal consumption tax—that is, a value-added tax
(VAT). This proposal has been developed in detail elsewhere.30 For present purposes, un
VAT has an important advantage: unlike income and payroll taxes, consumption taxes do
not discourage work, and because the old as well as the young consume, they are borne in
significant part by the principal beneficiaries of the social safety net. En outre, VATs are
used in over 150 countries and have a demonstrated capacity to raise revenues even with
tax administrations far weaker than the IRS.

The VAT is regressive, and while there are ways to mitigate regressivity within the
VAT, such as exempting basic living necessities, such exemptions subsidize well-off con-
sumers and make the tax needlessly complicated. If VAT revenues are segregated and used
to fund Social Security, Medicare, and Medicaid, the inherent progressivity of those pro-
grams mitigates the regressivity of the underlying tax.

De plus, in addition to bolstering the safety net, a VAT can be used to fund oppor-
tunity programs for the next generation, such as universal pre-K, which will contribute
directly to improving social mobility. The biggest obstacle to enhancing social mobility
in the United States is that by the time children start formal schooling, many of them
lag so far behind their peers that even good public schools cannot enable them to get

30

Reuven S. Avi-Yonah, Designing a Federal VAT: Summary and Recommendations, 63 TAX L. REV. 285 (2010).

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to college, which is the essential gateway to the middle class in a technology-dominated
economy.

Finalement, the challenge in enacting a VAT is political. Rep. Ullman, who was Chair
of Ways and Means in the 1970s, supposedly was defeated after proposing one. But that
story is a myth, and good politicians, such as John Howard of Australia, have managed to
build a broad legislative coalition to enact a VAT—even after promising not to do so—and
to win reelection decisively.31 A VAT serves the right’s need for fiscal balance and the left’s
need to expand social outlays, so it represents the ultimate “grand bargain” in American
politique. It is a fair and sensible way to address the inequality that threatens our future.

31

See Shane Wright, ‘It Was Heated’: Cabinet Papers Show John Howard’s Government Grappled with How to
Introduce the GST, SYDNEY MORNING HERALD ( Jan. 1, 2021), https://www.smh.com.au/politics/federal/it-was
-heated-cabinet-papers-show-john-howard-s-government-grappled-with-how-to-introduce-the-gst-20201223
-p56pv8.html.

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