How Much Does the U.S. Fiscal System Redistribute?

In recent decades, income inequality in the United States has become a very contentious policy debate. Critics argue that tax cuts for the wealthy, especially those enacted in the 1980s and sustained over time, have worsened the income gap between the haves and have-nots.  Many believe that the U.S. tax system has grown less progressive.

However, a new working paper, co-written by Senior Lecturer Thomas Coleman, entitled "How Much Does the U.S. Fiscal System Redistribute?," challenges this widely accepted narrative, revealing that the U.S. fiscal system has, in fact, become more redistributive in recent decades. 

“Our research counters the prevailing view that tax cuts for the wealthy have undermined our tax system’s progressivity,” Coleman, who coauthored the paper with David A. Weisbach, the Walter J. Blum Professor of Law at UChicago Law, said. “While some aspects of taxation in the United States certainly are regressive, it does appear that our overall fiscal policy has become more progressive over the last several decades, not less.”

The paper questions popular assumptions by looking carefully at how income data are measured and analyzed and by reviewing three significant data sources—the Congressional Budget Office (2022), Auten and Splinter (2024), and Piketty, Saez, and Zucman (2018). This approach enabled them to examine not only data on the top 1% or 0.1% of income earners but on all earners to provide a more holistic snapshot of US incomes over time. The authors explore how these three different methodologies, definitions, and units of measurements lead to some broadly consistent conclusions. 

A crucial component that the authors stress is the importance of considering transfers in addition to taxation when assessing income levels. Net transfer rates to lower-income households have increased substantially, Coleman and Weisbach find, far outweighing the effects of any changes at the top of the income distribution. This growing redistribution, they argue, has contributed to a more progressive US tax and transfer system since the 1960s.

By reviewing studies published since 2012, the authors provide a comprehensive look at the issue, confirming that the tax system’s redistributive impact has grown over previous decades. This insight is essential for policymakers who may be considering changes to the tax structure.

“While some argue for more drastic redistributive reforms, and as President Donald Trump and a Republican-led Congress consider an overhaul of the tax code, they would be wise to understand that recent trends show a more nuanced picture of fiscal redistribution than many have assumed,” Coleman concluded.