Income redistribution aims to improve low-income citizens’ livelihood and narrow the gap between the rich and poor. Certain redistributive methods such as taxation, welfare programs, public services, and monetary policies attempt to achieve utilitarian social equality and enable economic success for all.

     The main redistribution strategies in the United States include progressive taxation, minimum wage, social security programs, and earned income tax credits. Taxes are vital in funding government programs such as public schools, transportation, and healthcare, etc. According to the Tax Foundation (2023), the U.S. ranks 22 out of all 38 Organization for Economic Cooperation and Development (OECD) countries in the tax competitiveness index. The government can improve its efficiency by increasing consumption-based taxes and energy taxes and enlarging the coverage of third-party information in tax reporting. Revenue from new taxes can compensate for lower income taxes, which boosts economic growth and shrinks tax evasion.

Effect of Wealth Tax

     A wealth tax is levied on citizens with a net worth above a given threshold. Since a billionaire’s realized income is much smaller compared to their wealth, taxing their income has miniscule impacts on their net worth (York and Watson, 2021). In these cases, a wealth tax is considered more effective as it is less burdensome to the taxpayer.

     A wealth tax can raise more revenue. In 2018, the top 0.1% of U.S. citizens own almost 20% of the nation’s wealth (Saez and Zucman, 2019). As two Democratic candidates Elizabeth Warren and Bernie Sanders have suggested before, wealth based taxes would increase the GDP by 1.34% to 1.56% (Scheur and Slemrod, 2021). Collected wealth taxes can fund government expenditures in social welfare and the military. To calculate potential government earnings, it is important to know the tax base. Saez and Zucman (2019) estimate the top 0.1% of wealthy households own 14% of aggregate wealth, which was 13 trillion in 2019. Even if the tax evasion rate was 20%, a 1% wealth tax rate on top 0.1% households could still collect a whooping 112 billion dollars.

     Additionally, wealth taxes discourage and reduce risky business ventures. Scheuer and Slemrod (2021) find that a wealth tax may push investors toward companies that can generate profits immediately. Entrepreneurs would also need to sell their stocks of companies or estates to afford the wealth tax, where especially in areas where investments cannot be maximized. In the labor market, the depreciation of capital accumulation will possibly cause lowered wages where company owners spread their burden to workers. Since the demand curve has a low elasticity, the tax burden would mainly affect workers.

Furthermore, implementing a wealth tax may spur more tax evasion. Taxpayers may report a wealth below tax threshold to avoid incurring a wealth tax. In Switzerland, a 1% increase in wealth tax reduces reported wealth by 23-34% (Saez and Zucman, 2019). Besides, asset exemptions in wealth tax procedures creates loopholes. In Spain, exempted stocks reported by the top 0.01% of wealth holders soared from 15% in to 77% of total held stocks (Scheur and Slemrod, 2021). In addition, offshore wealth and tax havens hinders the success of wealth tax. Alstadæster, Johannessen, and Zucman (2019) found that 80-95% of HSBC Private Bank Switzerland’s U.S. holders in 2007 did not report their full income in the account. A wealth tax may exacerbate tax evasion because the higher the income, the more they evade. Therefore, the government must impose sanctions on tax evaders and enact laws to enhance a comprehensive audit.

Effect of Universal Basic Income (UBI)

     Another redistribution method is universal basic income (UBI). UBI would guarantee every citizen an amount of money regularly regardless of age, income, wealth, job status, or need. The need for UBI becomes more pressing as new AI technologies replace routine jobs. According to an advanced statistical analysis by Carl Frey and Michael Osborne (2013), over 47% of the current workplace has jobs at risk of being taken by AI in several decades. Thus, a UBI will alleviate poverty but create burdens to revenues.

     UBI can reduce poverty and increase individual’s freedom by “decoupling one’s livelihood from work” (Knowles, 2021). Based on the US Census Bureau’s threshold (Fleischer and Hemel, 2020), $500 USD per month can eliminate deep poverty up to 18 million people. For those who are above poverty threshold or have jobs, UBI allows them to choose desired job and learn more skills. UBI also provides additional insurance. Four in ten Americans cannot cover $400 USD emergency expenses independently (Fleischer and Hemel, 2020).

    The biggest limitation of UBI is cost and efficacy. Giving all 333 million U.S. citizens $500 USD each month costing a total of 1.998 trillion dollars, which is 7.85% percent of GDP (United States Census Bureau, 2024; World Bank, 2023). To account for this difference, the government needs to raise more money via taxations. In addition, a universal basic income is not necessary for all U.S. citizens. Since marginal utility is decreasing, giving $500 USD each month to a poor household has much larger impact than giving to Jeff Bezos.

What strategies should U.S. adopt from other countries?

     Consumption-based taxes count capital expensing instead of personal or corporate income and net worth. Canada uses consumption-based tax to raise 22.9% of revenues and alleviate burdens of income tax. The United States should learn to lower income and corporate taxes and compensate with consumption-based taxes instead. According to the U.S Department of the Treasury Office of Tax Analysis, the total tax expenditure was about 1.56 trillion dollars, or around 35% of total tax revenue in 2023. A broad consumption-based tax can improve the efficacy and avoid loopholes through simpler rules (Edwards, 2023).

     Consumption-based taxes bypass double taxations on saving and investment. Personal savings and business investments will be taxed immediately on expensing instead of depreciations. Less taxes paid means more money will be available to invest or save in one’s future, which raises worker productivity and income (Edwards, 2023).

     For example, the U.S. government should adopt federal value-added tax (VAT), a tax on sales of goods and services. Canada minimizes administration costs and distortions by VAT, and its practice endorses coexistence between state sales tax and federal VAT. The Canadian government releases their VAT rate to “create awareness of tax burden and public resistances to rate increases” (Graetz, 2014). Repealing tax expenditures and increasing federal VAT rate in the U.S. could eliminate 120 million income tax returns. In 2021, raising the proportion of consumption tax to 14% of GDP by 17.5 VAT rate would raise in additional $2.8 trillion dollars (OECD, 2021). Consequently, people are taxed on a same base, so tax evasion and economic inequality will be largely improved.

     Carbon tax tackles carbon emissions. Collecting the carbon tax can not only improve the efficiency of tax systems and reduce burdens of taxpayers, but also bring positive externalities by reducing carbon emissions. The effects of environmental fiscal reform (EFR) are prominent in Nordic countries. In 2018, the revenue per capita from environmental taxes in Nordic countries are all at least as double as that of OECD average. Norway also levies taxes on vehicle purchases, where the rate varies depending on different carbon emission. Vehicle registration tax alone raises 3.2% of GDP. In addition to economic effects, GHG emission per USD of GDP in Nordic countries falls significantly lower than the OECD average (Laan at el., 2021).

    Adopting a carbon tax in the United States can lower carbon emissions and capital tax and raise employments and wages, achieving the dual goal of reducing carbon emissions and expanding economy (McKibbin et al., 2015). In 25 years, a $15 USD tax on one ton of carbon emissions was estimated to reduce 1.4 billion metric tons annually. Even though carbon tax may slow down GDP growth slightly, it creates the smallest disturbances to economic activities among labor tax and capital tax.

    Because levying wealth tax may aggravate tax evasion, the U.S. government can also increase the coverage of third-party information in tax reports. Third-party information requires employers to report taxable incomes on behalf of their employees, which prevents any tax evasion. The study by Kleven et al. (2014) showed that Danish evasion rate is extremely low, which is 2.2%, because 95% of income is subject to third-party information. Conversely, if all income is self-reported, the evasion rate is over 50%.

Conclusion

     No redistributive methods are perfect; nonetheless, an effective taxation can reduce inequality and fund more social programs. A consumption-based tax is the best choice out of all available options to make taxation more effective and fairer.

    Despite these economic considerations, U.S. tax policies are also influenced by politics. In the past 30 years, Republican presidents have reduced income tax, in comparison to Democratic presidents who have increased income tax. Inconsistent tax rates impact the efficacy of their policies. To avoid loopholes and boost economic growth, tax policies require the cooperation between the federal and state governments. Ultimately, tax rate and laws must be harmonious to be effective.

References

Alstadsæter, A., Johannesen, N., & Zucman, G. (2019). Tax Evasion and Inequality. The American Economic Review, 109(6), 2073–2103. https://www.jstor.org/stable/26737882

Bunn, D., & Weigel, C. P. (2023, February 23). Sources of government revenue in the OECD, 2023. Tax Foundation. Retrieved December 22, 2023, from https://taxfoundation.org/location/canada/

Edwards, C. (2023). Tax Expenditures and Tax Reform. Cato Institute. http://www.jstor.org/stable/resrep52194

Fleischer, M. P., & Hemel, D. (2020). The Architecture of a Basic Income. The University of Chicago Law Review, 87(3), 625–710. https://www.jstor.org/stable/26910602

Graetz, M. J. (2014). The Tax Reform Road Not Taken — Yet. National Tax Journal, 67(2), 419–439. http://www.jstor.org/stable/24370426

Internal Revenue Service. (2023, October 12). IRS updates tax gap projections for 2020, 2021; Projected annual gap rises to $688 billion. Retrieved January 5, 2024, from https://www.irs.gov/newsroom/irs-updates-tax-gap-projections-for-2020-2021-projected-annual-gap-rises-to-688-billion

Kleven, H. J. (2014). How Can Scandinavians Tax So Much? The Journal of Economic Perspectives, 28(4), 77–98. http://www.jstor.org/stable/23973559

Knowles, A. J. (2021). Universal Basic Income, Social Justice, and Marginality: A Critical Evaluation. Social Justice, 48(4), 1–32. https://www.jstor.org/stable/27221469

Laan, T., Roth, J., & Beedell, E. (2021). Nordic Environmental Fiscal Reform: Case studies and application for post-pandemic economic recovery. International Institute for Sustainable Development (IISD). http://www.jstor.org/stable/resrep30872

Mankiw, N. G., Weinzierl, M., & Yagan, D. (2009). Optimal Taxation in Theory and Practice. The Journal of Economic Perspectives, 23(4), 147–174. http://www.jstor.org/stable/27740559

McKibbin, W. J., Morris, A. C., Wilcoxen, P. J., & Cai, Y. (2015). Carbon Taxes and U.S. Fiscal Reform. National Tax Journal, 68(1), 139–155. http://www.jstor.org/stable/24369997

Mengden, A. (2023, October 18). International tax competitiveness index 2023. Retrieved January 5, 2024, from https://taxfoundation.org/research/all/global/2023-international-tax-competitiveness-index/

Revenue statistics 2023. (2023). OECD. https://doi.org/10.1787/9d0453d5-en

Saez, E., & Zucman, G. (2019). Progressive Wealth Taxation. Brookings Papers on Economic Activity, 437–511. https://www.jstor.org/stable/26996616

Scheuer, F., & Slemrod, J. (2021). Taxing Our Wealth. The Journal of Economic Perspectives, 35(1), 207–230. https://www.jstor.org/stable/27008021

United States Census Bureau. (2024, January 5). U.S. and world population clock. Retrieved January 5, 2024, from https://www.census.gov/popclock/

The World Bank. (n.d.). GDP (current US$) - United States. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US

York, E., & Watson, G. (2021, June 8). Taxing consumption progressively is a better way to tax the wealthy. https://taxfoundation.org/blog/taxing-consumption-progressively-tax-the-wealthy/