There are important and growing concerns about income inequality in the United States and other high-income countries. These concerns reflect rising apprehension about the political and social consequences of inequality and worries that the advance of technology, expanding international trade and investment, and other economic developments may have significantly widened income gaps in recent decades and will continue to do so in the future. In the United States, these concerns have prompted renewed calls for political activism and vigorous searches for policy measures that might improve the relative economic positions of low- and middle-income Americans.
There are many ways in which government policies can and do influence the distribution of income, though redistributive policies can be costly from the standpoint of economic effi ciency and growth. Since as a realistic matter it is unlikely that feasible reforms to any one individual government program would fully address current income distribution concerns, it is useful to consider a range of policy options and their likely effects on the distribution of income and the performance of the economy. It is particularly valuable to identify measures that address distributional concerns efficiently.
This chapter considers the design of a tax system in an economy with significant income inequality, focusing on the impact of provisions—such as tax deductions and tax credits—that offer benefits to some but not all taxpayers. Taxation directly affects the distribution of after-tax incomes by imposing larger burdens on some than it does on others, and it indirectly affects the distribution of income through the government programs it finances. A tax program designed to address income distribution concerns is one that imposes burdens based on ability to pay and that guarantees adequate funding for appropriate government programs; consequently, tax reforms can be evaluated based on the extent to which they permit the tax system to perform these functions.