It’s no secret that inequality in much of the rich world rose in the 1980s and 1990s and has remained relatively high ever since. The top 1% of Americans controlled 9% of pre-tax income in 1980, rising to 16% by 2022. Europe’s top 1% increased their share from 8% to 12% over the same period. Indeed, the rise in income inequality and its consequent, stagnating middle-class incomes are so noticeable and so widespread that it is often held up as a possible explanation for the rise of populism around the world.
The Cayman Islands, a British overseas territory, is a popular tax haven. (unsplash)Yet a much less noticed, countervailing trend: As pre-tax incomes have become more unequal, tax codes have become more progressive. The effect has outstripped the rise in inequality in much of the rich world and is keeping pace even in America. Today’s taxman, it turns out, is less like the Sheriff of Nottingham and more like Robin Hood. He stopped the rich from getting richer and the poor from getting poorer. But redistribution on such a scale is an inefficient process, causing enormous economic and political conflict. And the longer it goes on, the more likely it is that happy taxpayers will run out of stagecoaches to rob the rich.
Tariff leveling
A simple measure of progressivity involves comparing the distribution of income before and after taxes. By this measure America redistributes nearly twice as much as it did in the 1960s (see Chart 1). Germany and Japan, the next largest wealthiest economies, redistribute much more than they used to. So are Britain and Canada. In fact, according to our estimates, seven out of ten countries have more progressive tax-and-benefit systems than they did in 1990. Those that have been less progressive range from ineffective (Belarus, Eritrea, Haiti) or exceptionally redistributive (Norway, Sweden).
Much of the increase in inequality between rich countries relative to the late 20th century occurred in the 1980s. Since then, governments have become much more interested in eliminating inequality. The average Gini coefficient of pre-tax income in the G7, a measure of inequality, increased by an average of four percentage points from 1990 to 2023. Nevertheless, thanks to further redistribution, the average Gini coefficient of after-tax income across the G7 has fallen slightly.
The strength of the Robin Hood kingdom varies from country to country. Further redistribution in America only offset rising pre-tax inequality. According to the Congressional Budget Office, for example, 2022—the most recent year for which detailed data is available—was the fourth-most unequal year on record, as measured by the Gini coefficient of taxable income, behind only 2021, 2020 and 2012. But inequality after taxes and transfers was lower than in 2007-2005 2012, 2014, and 2017-18 and 2021. This was only a shade higher than in 1986. Even as the share of America’s taxable income goes to the top 1% of earners, their share of after-tax income has increased slightly (see Chart 2).
Elsewhere at the G7, Robin Hood is more upbeat. In Britain, France and Japan the top 1% have seen little growth in after-tax income since the 2000s, even as the bottom 50% have benefited from fat gains. After-tax inequality in Britain, as measured by the Gini coefficient, has fallen by three percentage points since 1990. In France it fell by four points. The 1% in Canada has done terribly in recent years. In Italy both plutocrats and average Joes have done pretty badly. Only in Germany have the rich clearly moved away.
It is difficult to reconcile these trends with the popular history of tax policy. It says the rise of “neoliberalism” has destroyed the post-war settlement, in which marginal tax rates on the very rich were exceptionally high. The story is true. For years Britain’s top income tax rate was 83%, and 98% on “unearned income” such as dividends. From 1951 to 1963 America’s top income tax rate was at least 91%. In Sweden in the 1970s the marginal rate effectively exceeded 100% for some people. And throughout the rich world, inheritance and estate taxes were high. That sounds more Robin Hoodish than anything that exists today.
Fraudulent impost
In those days, rich people found ways not to pay. For example, many personal expenses, such as food and transportation, are billed to their company, reducing their taxable income. That’s why the protagonists of “Mad Men,” a television show about advertising executives in America in the 1960s, spent lavishly on company cards. The effective federal income tax rate for the top 1% of taxpayers (meaning the rate they actually paid) was about 20% in the “progressive” 1950s, and dropped to as low as 13.8% in the 1960s.
Today, tax avoidance is much more difficult. The effective tax rate on high earners has increased significantly. In Britain, for the top 1%, it is now around 40%, up from 34% in the 2000s. At the tail-end of a Conservative government in 2024, the British think-tank Institute for Fiscal Studies (IFS) wrote, “Whisper it quietly, but this Tory government has taken a serious chunk out of the income of the top 1%”. The trend is similar in Canada, where the top 1% now have an effective income tax rate (Q including indigenous) 39%. Over the past 20 years in Spain, the effective income tax rate imposed on the top 1% has risen from 30% to 34%. Italy and Japan impose higher average effective tax rates on high earners (defined as earning 250% of their country’s average wage) than they did a decade ago.
Under Presidents Ronald Reagan, George W. Bush, and Donald Trump, America has passed tax reforms that have largely benefited the wealthy. Yet the average federal income tax rate paid by the top 1% today is 27.6%, not far from the historic high of 28.9% in 2000. The decline in corporate taxes has been much more dramatic. The benefits of such deductions are notoriously difficult to share between (wealthy) shareholders and (poorer) workers. Democrats say company owners benefit when corporate taxes go down; Republicans say it’s workers, because investment and wages rise. Wonks sided with the Democrats on this issue, meaning the corporate-tax cut served as a major counterpoint to America’s Robin Hood state.
Similarly, a 2023 study by Thomas Coleman and David Weisbach of the University of Chicago found that America’s tax system “has become more progressive and more redistributive over the past few decades, with most of that change occurring in recent years”. A study by Thomas Piketty of the Paris School of Economics and his colleagues found that “the reduction in inequality implied by redistribution was significant in France and the United States and increased throughout the 20th century”.
Even the reduction and in some cases the abolition of inheritance tax has made less difference to inequality than you might think. Economists argue about how much inequality increases or decreases—sometimes, poor people inherit more money. Furthermore, at no time in recent history have wealth transfers been large enough to affect income inequality. In 1990, the earliest year for which comparable data is available for members of the OECD, a club of mostly rich countries, they raised income taxes 100 times higher than estate, inheritance and gift taxes. We estimate that if America had kept estate taxes as high as they were in 1960 (77% rate on inheritances over $10 million), the overall tax burden on the top 1% would be 46.0% today, not 45.3%.
It is possible that the extremely rich – not the 1% or even the 0.1%, but the 0.01% – have escaped the onslaught of Robin Hood. Very wealthy people often earn a large portion of their income as capital gains, which many governments tax at a lower rate than income. Some wealthy people borrow against their assets to fund expenses. This “buy, borrow, die” whiz lowers the tax bill because the loan is not taxable as income. Others classify their earnings as profits rather than wages to take advantage of lower corporation-tax rates. And those who extend the rules to cut their taxes are particularly likely to get away with it right now in America, at least, as the current administration cracks down on the Internal Revenue Service’s enforcement division.
A paper by Arun Advani of the University of Warwick and others suggests that in 2018 the very rich Britons (those earning tens of millions of pounds a year) paid about 25% in tax when income is measured broadly, compared to about 35% for the merely very rich. In other research, Akan Balkir of the University of California, Berkeley, and his colleagues found similarly low effective tax rates for America’s wealthiest 400 or so households. Chuo University’s Shigeki Kunida looks at very wealthy Japanese people, finding that at annual salaries of around ¥100m (roughly $650,000-700,000 a year), effective tax rates decline.
Yet the literature on the tax strategies of plutocrats is small and contested. “Buy, borrow, die” is a minority pursuit in America, a recent paper found by Edward Fox of the University of Michigan and Zachary Lisko of Yale University. Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation, a nonpartisan arm of Congress, recently published a study in the Journal of Political Economy that analyzed the effective tax rates of different segments of the income distribution through a very broad lens that includes taxes on wages, capital gains, and profits. In this work and its update, they find that the wealthiest Americans pay the largest share of their income to taxpayers (see Chart 3). Someone in the top 0.01% pays about 50% of taxes overall, they conclude. Additionally, the very wealthy face higher effective tax rates today than they did in the 1960s or 1970s.
The findings jibe with another finding in Mr. Advani’s paper, which calculated the average from 2014 to 2018 instead of focusing on effective tax rates in 2018. During this long period, the British paid the same rate only to the rich, earning tens of millions of pounds a year. Their apparent setback in 2018 stemmed from the difficulty of reflecting complex tax regimes for those who sell business assets.
In other works, Mr. Splinter made several adjustments to Mr. Balkir’s method. He cited research that found that the wealth of the “top 400” earners was actually distributed among more than 2,000 adults, ie Because the very rich support several family members. Analysis that does not capture the taxes paid by these relatives and instead looks only at the main beneficiary of a family fortune yields an unrealistically low effective tax rate. Mr. Splinter finds that the rate for the 400-odd richest taxpayers in America is actually closer to 40%.
Paying their responsibilities
Whether the rich pay reasonable rates or not, today’s combination of high pre-eminence and high tax rates on top earners has made governments incredibly dependent on the rich for their revenue. Britain’s top 1% accounts for about 27% of income tax, up from 22% in 2000. In Australia the top 1% accounts for 17-20% of income tax, up from 16% in the early 2010s. A recent government report in South Korea caused a stir when it revealed that the top 1% of taxpayers pay 40% of income tax, a slight increase in recent years. In America too, the top 1% paid 40% of income tax in 2022, up from 33% in 2001.
The government is using the wealth of the rich to do many things. One is to lower taxes on everyone else. In 2024 Britain’s then Chancellor (Minister of Exchequer) Jeremy Hunt boasted, “The average earner in the UK now has the lowest effective personal tax rate since 1975.” The trend is similar elsewhere. The tax burden on America’s bottom, second, third and fourth quintiles — 80% of the population — is much lower today than it was in the 1960s or 1970s. In particular, the expansion of the earned-income tax credit for low earners in the 1990s made the system more progressive.
At the same time, benefit payments to lower-middle-income earners have increased. Social transfers across the rich world are now about 22% of GDP, up from 17% of GDP in the mid-1990s (see Chart 4). Most of these are pensions. State support is more generous than it was for the elderly, even the number of elderly people has increased. In the EU, for example, the median state pension is now worth 60% of a 50-something’s earnings, up from 55% in 2010 (when the data began).
Payments have also increased for people of working age. More than half of working-age people in Britain now receive more in public spending (defined to include benefits such as healthcare from the National Health Service) than they pay in taxes, up from a third in the 1990s, according to the Office for Official Statistics. In America, subsidies for health insurance were expanded during reforms under Presidents Clinton, Obama and Biden. Subsidies provided by the Affordable Care Act were greatly expanded during the pandemic. Although that extension, always intended to be temporary, has lapsed, Democrats forced a government shutdown last year in a failed attempt to extend it. They can try again, as Milton Friedman said, “Nothing is as permanent as a temporary government program.” Today an American in the lowest income quintile receives means-tested benefits worth 100% of their earned income, up from 50% in the late 1970s.
Is the tax system too progressive now? As the pre-tax income of the wealthy increased, they were always going to pay a higher share of overall taxes. Keeping after-tax inequality constant—assuming this is a legitimate goal—generally also requires governments to raise effective tax rates on the wages of the rich.
Many politicians are campaigning to raise taxes on the wealthy. Zohran Mamdani, the new mayor of New York, wants an additional tax of 2% on those who earn more than $1ma a year. Rhode Island and Washington state are considering similar taxes. Britain recently changed the rules for wealthy foreigners, meaning many now have to pay British tax on their worldwide income. A proposed wealth tax sparked heated debate in France last year. And Californians may soon vote to introduce a “single” 5% tax on the wealth of billionaires living in the state. Squillionaires like Sergey Brin and Peter Thiel have moved businesses out of the Golden State in protest. On September 7th protesters held a “March for Billionaires” in San Francisco to oppose the tax. “Insulting billionaires is popular. Losing them is expensive,” organizers said.
The big question is that, in pursuit of equality, governments are raising taxes so high on the rich that they are backfiring. At some point dangling tariffs will start to discourage work and hurt the economy. Some see the exodus of billionaires from California as evidence that it has gone too far. Others make the same argument that a small number of wealthy foreigners have left Britain in response to its tax changes.
Yet high earners are showing few signs of relaxation in many places, even as effective tax rates rise. Working hours for high-earning professionals have increased, not shrunk, in recent decades. Even with an effective tax rate of 50% or more, millionaires and centmillionaires in California seem to be working harder than ever. Some rich people from Mark Cuban (an American businessman) and JK Rowling (a British author) even take extreme pleasure in how much tax they pay.
Some economists therefore argue that Rich countries should tax the rich more. In a world where pre-tax inequality has grown, perhaps as AI takes over the jobs of humble workers, the rich will shoulder an even greater share of the burden. A paper by Mr. Piketty, Emmanuel Saez of the University of California, Berkeley, and Stephanie Stancheva of Harvard University concluded that the optimal tax rate on the rich could be higher than 80%. Is Mr. Piketty and his merry band of men right? Current trends, the world may soon find out.
