Wealth inequality dropped in 2019 in the U.S. for the first time in almost three decades, but proposed tax legislation is threatening to reverse the progress, according to an expert at Rice’s Baker Institute for Public Policy.
Jorge Barro, fellow in public finance at the Baker Institute, published a brief on how reforms in the Trump-era 2017 Tax Cuts and Jobs Act (TCJA) contributed to the reduction in wealth inequality.
The Survey of Consumer Finances (SCF) had shown a persistent rise in wealth inequality between 1992 and 2016. But data from the 2019 survey — the first since the TCJA took effect — showed a “small but striking reversal” of this trend.
The TCJA instituted several changes to the tax code. It nearly doubled the standard deduction — from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married couples — and reduced the number of households itemizing their deductions. The act also capped deductions from taxes paid to state and local governments at $10,000, which previously had no limit.
“The combination of these reforms — expanding the standard deduction, capping the state and local tax (SALT) deduction and reducing the mortgage interest cap — reduced subsidies related to home ownership and home valuation in a way that disproportionately raised the effective costs of home ownership for higher-income households,” Barro wrote. “Consequently, because housing comprises a large share of wealth for many U.S. households, the effect of the tax changes on relative home values may have tipped the scale of wealth inequality.”
Yet certain elements of the TCJA could be undone by Congress. Democrats in both the Senate and the House, as well as some Biden administration officials, have indicated they want to reform the tax code.
“Treasury Secretary Janet Yellen specifically expressed a commitment to easing the SALT deduction cap, citing geographical inequities resulting from the reform. Recent estimates from the Tax Policy Center, however, show that the current SALT cap resolved more inequities than it created,” Barro wrote. “In particular, if the SALT cap were removed, almost 96% of the gains would accrue to the top 20% of income earners, with 57% of the gains accruing to the top 1%.
“Such a move could also reverse the decline in wealth inequality by reinstating regressive housing subsidies corresponding to the deductibility of property and real estate taxes,” he continued. “In contrast, fully eliminating the deduction, as well as the mortgage interest deduction, could further reduce economic inequality.”
Wealth inequality is frequently attributed to factors such as globalization or market concentration levels, but Barro argues that if the U.S. wants to truly understand the causes, researchers and Congress must dedicate far more effort to understanding the impact of tax policy.