Reducing Income Inequality through 

Progressive Tax Policy:

The Effects of Recent Tax Changes on 

Inequality

U.S. Department of the Treasury

September 26, 2016
To what extent have the Administration’s progressive tax policies mitigated the effects of rising 

income inequality? Since 2009, average tax burdens decreased by several hundred dollars for the 

lower half of the income distribution and increased substantially among families in the top 

1 percent and top 0.1 percent. As a result, after-tax income increased for lower-income families

and declined among the highest-income households, causing inequality in after-tax income to 

fall. The reduction in income inequality is large in historical context, offsetting 8 to 29 percent of 

the increase in inequality since the late 1970s depending on how inequality is measured. While 

substantial income inequality remains, the recent experience illustrates the powerful effect that 

progressive tax policy can have on inequality, and indicates that additional progressive changes 

in tax policy could continue to play an important role in promoting shared economic growth. 

Comparison of Pre-Obama Administration Law to Current Policy

The analysis presented in Table 1 compares the tax system under current policy as of 2017 

(Current Policy)1 to a counterfactual tax law that would have prevailed in the absence of the 

Administration’s tax policies. We assume that under pre-Obama Administration law the tax cuts 

enacted in 2001 and 2003 are permanently extended. Tax burdens shown in the Table are 

computed based on the income levels currently projected for 2017.2 Comparing distributions of 

tax burdens based on fixed pre-tax incomes isolates the effects of tax policy changes from other 

income and economic changes.

The Obama Administration tax policy changes include the increased tobacco tax in the 

Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009; the American 

Opportunity Tax Credit (AOTC), increased child tax credit (CTC) and increased earned income 

tax credit (EITC) enacted in the American Recovery and Reinvestment Act (ARRA) of 2009; tax 

provisions in the Patient Protection and Affordable Care Act (ACA); the individual income tax 

increases for high-income families and estate tax changes in the American Taxpayer Relief Act 

(ATRA) of 2012; and the permanent extension of many expiring provisions in the Protecting 

Americans from Tax Hikes Act (PATH) of 2015. Loosely speaking, the ATRA changes repealed 

much of the 2001 and 2003 tax cuts for high-income families.

The analysis excludes changes in spending associated with these pieces of legislation. For 

instance, the analysis does not include expanded Medicaid eligibility resulting from the ACA, 

which is estimated by the Congressional Budget Office to provide coverage for about 11 million 

low-income individuals at a cost of $67 billion in 2017.3 Similarly, it does not include the 

reauthorization of the Children’s Health Insurance Program in 2009, which was financed by the 

tobacco tax increase. Including these provisions would make the net effect of policy changes 

enacted during the Obama Administration even more progressive. 

 1 Current Policy includes current law and a number of temporary provisions that are scheduled to expire at the end 

of 2016 but are routinely extended by Congress. 2 Using 2017 as the comparison point means that some tax provisions are not completely phased-in, e.g., the excise 

tax on high-cost (“Cadillac”) health plans, enacted as part of the ACA, and carryover basis for assets transferred by 

high-wealth decedents, which is a feature of pre-Obama Administration law. Allowing more complete phase-in of 

these provisions would not materially change the conclusions of this analysis.

3 An analysis that includes all of the ACA coverage provisions is shown in the Appendix. A discussion of these 

policy changes is also provided in the Council of Economic Advisers report: “The Economic Record of the Obama 

Administration: Progress Reducing Inequality.”
Policies enacted during the Obama Administration increased the overall federal tax burden in 

2017 by about $107 billion.4 This measure of federal tax burden includes the effects of the 

individual income tax, payroll taxes, excise taxes, and an individual’s allocated share of the 

burden of corporate income taxes and the estate and gift tax.

The enacted policies made the tax system much more progressive than it was under pre-existing 

law. The increase in tax burden is highly concentrated at the very top of the income distribution. 

The average effective federal tax rate for the top 0.1 percent of families increased by 

6.7 percentage points (from 31.0 to 37.7 percent), and after-tax income was therefore reduced by 

9.7 percent. This is equivalent to an average tax burden increase of nearly $550,000 per family.

The rest of the top 1 percent of families experienced an average effective tax rate increase of 

about 3.6 percentage points (from 29.0 percent to 32.6 percent) and a decrease in after-tax 

income of 5.0 percent, or about $32,000 in additional federal tax burden.

By contrast, lower-income families experienced proportionately large reductions in tax burden, 

and middle-income families had relatively small changes in tax burden. For example, families in 

the lowest 10 percent of the income distribution saw their average effective tax rate fall by 

9.7 percentage points (from -0.6 to -10.3 percent) and experienced a reduction in their annual tax 

burden of almost $850—equal to an increase in disposable after-tax income of 9.7 percent. 

The reductions in tax burdens (and increases in after-tax income) among lower-income families

are largely the result of the expanded tax credits enacted in ARRA (which boosted the Child Tax 

Credit and EITC, and created the American Opportunity Tax Credit) and financial assistance for 

purchasing health insurance enacted in the ACA. The increases in effective tax rates among 

high-income taxpayers are primarily driven by increases in income tax rates on ordinary income 

and capital gains and dividends. The major changes include: ATRA’s repeal of the 2001 and 

2003 individual income tax rate cuts for high-income families, increases in tax rates on dividends 

and long-term capital gains, reinstatement of the personal exemption phaseout and itemized 

deduction limitation, reinstatement of the estate tax, and the ACA’s increase in Medicare payroll 

taxes and imposition of a new net investment income tax.5

How Changes in the Tax System Affected Inequality in After-Tax Income

The federal tax system is highly progressive, and changes enacted during this Administration 

have made it more progressive. Nevertheless, because the pre-tax distribution of income is 

highly skewed, the after-tax distribution remains quite unequal. For example, families in the 

bottom half of the income distribution are expected to receive only 14.6 percent of pre-tax 

income in 2017, and would receive about 17.1 percent of after-tax income under pre-Obama 

Administration law and 17.7 percent under Current Policy. By contrast, families in the top 1 

percent of the income distribution are expected to receive 18.8 percent of pre-tax income in 

 4 This $107 billion is not a revenue estimate because it does not incorporate behavioral responses that generally 

reduce realized income, and thus the actual revenue raised, by these tax changes. 5 The restoration of the estate tax represents roughly 10 percent of the change in burden among high-income 

taxpayers.
2017, and would receive 16.5 percent of after-tax income under pre-Obama Administration law, 

and 15.4 percent under Current Policy. 

That said, recent tax-induced changes are large in historical context and have substantially 

reduced income inequality. The top panel of Table 2 provides estimates of how inequality in 

after-tax income changed as a result of recently-enacted legislation, using several commonlyused measures of inequality. The bottom panel compares the effects of those changes to the 

historical increase in inequality estimated by the CBO starting in 1979, which is roughly when 

income inequality began rising.6 Although comparisons between Treasury and CBO estimates 

should be made cautiously because of differences in methodology, the CBO series provide the 

most comparable and comprehensive estimates of the magnitude of the historical increase in 

inequality and therefore the best available benchmark against which to assess the efficacy of 

recent and proposed legislation. 

By the yardstick of the CBO series, recently-enacted tax legislation has offset between 8 and 

29 percent of the four-decade-long increase in income inequality. The first column in Table 2 

provides estimates of the Gini coefficient of after-tax income under pre-Obama law and current 

policy, and shows that the Gini coefficient declined by about 0.009 because of enacted policy. 

This is about 8 percent of the increase in this measure of inequality between 1979 and 2007 (the 

pre-recession peak), according to the CBO, and 11 percent of the increase between 1979 and 

2013 (the most recent estimate). 

Columns 2-5 repeat these comparisons for alternative measures of inequality, starting with the 

ratio of the income of families at the 90th percentile of the income distribution to the 

20th percentile. According to this measure, enacted legislation has offset between 27 percent and 

29 percent of the increase in inequality. Similarly, recent changes in tax policy have offset 

between 15 and 18 percent of the increase in the ratio of income between the 99th percentile and 

the 20th percentile, and between 13 and 22 percent of the increase in the ratio of the average 

income of the top 1 percent to the average income of the middle 20 percent of families. The final 

column shows that enacted policy has reduced the concentration of after-tax income in the top 

1 percent by 12 to 22 percent of its historical increase. 

Among lower-income families, the increase in after-tax income is similarly striking. According 

to the CBO, the after-tax income growth of the bottom 20 percent of families averaged only 

1.14 percent per year from 1979 to 2013. Hence, the 9.7 percent increase in the after-tax income 

of the 10 percent of families with the lowest incomes caused by tax legislation enacted in the 

Obama Administration is equal to over eight additional years of average income growth for this 

group. 

These recent tax changes illustrate the powerful effects that progressive tax policy can have on 

the distribution of income and how further changes could further reduce income inequality. The

Administration’s FY 2017 budget includes several proposals that would substantially increase 

the progressivity of the tax system relative to current policy. While much of the increase in 

progressivity in the tax system enacted since 2009 arises from a combination of higher marginal 

rates on top income households and an expansion of tax benefits for lower-income households, 

 6 The Distribution of Household Income and Federal Taxes, 2013, Supplemental Data. 
the Administration’s budget proposals would increase progressivity largely by curtailing tax 

expenditures that benefit higher-income taxpayers and reforming existing benefits for lowerincome taxpayers. For instance, the largest progressivity-increasing proposals include the 

limitation on value of tax expenditures for high-income taxpayers, the elimination of the 

exclusion for stepped-up basis, and the broadening of the tax base for the payroll tax on selfemployed individuals and the net investment income tax base. Enacting these policies would 

further reduce inequality in after-tax income.
(millions) (%) (%) (%) ($) (%) (%) (%)

0 to 104 16.4 1.0 -0.6 -10.3 -848 9.7 1.2 1.3

10 to 20 17.2 2.1 0.7 -4.5 -923 5.2 2.6 2.7

20 to 30 17.2 2.8 4.7 1.4 -805 3.5 3.4 3.5

30 to 40 17.2 3.7 7.4 5.5 -613 2.0 4.3 4.5

40 to 50 17.2 5.0 10.0 9.2 -329 0.8 5.6 5.7

50 to 60 17.2 6.6 12.7 12.3 -226 0.4 7.2 7.3

60 to 70 17.2 8.5 14.9 14.9 -6 0.0 9.1 9.2

70 to 80 17.2 11.2 17.5 17.6 70 -0.1 11.5 11.6

80 to 90 17.2 15.5 20.7 20.8 135 -0.1 15.4 15.5

90 to 100 17.2 45.1 26.4 28.9 9,710 -3.4 41.6 40.6

Total4 172.1 100.0 20.2 20.9 624 -0.9 100.0 100.0

90 to 95 8.6 11.2 22.9 23.2 541 -0.4 10.8 10.8

95 to 99 6.9 15.2 24.6 25.4 2,706 -1.1 14.4 14.3

99 to 99.9 1.5 9.4 29.0 32.6 31,863 -5.0 8.3 8.0

Top .1 0.2 9.4 31.0 37.7 548,941 -9.7 8.2 7.4

 Office of Tax Analysis

(2017 Income Levels under 2017 Current Law)

 Department of the Treasury

Table 1: Pre-Obama Law and Current Policy1

Pre-Obama Law to 

Pre-Obama Law Current Policy Current Policy Pre-Obama Law Current Policy

Pre-Obama Law to 

Current Policy

Adjusted Cash 

Income 

Percentile2

Number of 

Families

Distribution of 

Cash Income

Average Federal Tax Rate3 Average Tax Change Change in After-Tax 

Income Distribution of After-Tax Income
Notes:

1

Both current policy and pre-Obama law include a list of individual, business and energy tax provisions that are scheduled to expire at the end of 2016 but 

were regularly extended by Congress (provisions referred to as “extenders”). Current policy is current law with the extenders. Pre-Obama law eliminates 

from current law a number of key tax provisions enacted during the Obama administration, including: the higher tax rate on tobacco enacted in CHIPRA; 

the AOTC and the expansions of the child tax credit and EITC enacted in ARRA; provisions in the Affordable Care Act; and the higher top ordinary and 

capital gains and dividend tax rates, and the reinstatement of the personal exemption phaseout (PEP) and phaseout of itemized deductions (Pease) 

enacted in ATRA. Pre-Obama law also replaces the AMT parameters enacted in ATRA with a more generous AMT “patch.” In addition, pre-Obama law 

replaces the estate tax adopted in ATRA with the carryover basis provisions provided for under EGTRRA. Finally, pre-Obama law restores the 0.2% FUTA 

surtax that expired in 2011. 

2 Cash Income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized 

capital gains, cash and near-cash transfers from the government, retirement benefits, and employer-provided health insurance (and other employer 

benefits). Employer contributions for payroll taxes and the federal corporate income tax are added to place cash on a pre-tax basis. Families are placed 

into deciles based on cash income adjusted for family size, by dividing income by the square root of family size. 

3 The taxes included are individual and corporate income, payroll (Social Security, Medicare and unemployment), excises, customs duties, and estate and 

gift taxes. Individual income taxes are assumed to be borne by payers, payroll taxes (employer and employee shares) by labor (wages and selfemployment income), excises on purchases by individuals in proportion to relative consumption of the taxed good and proportionately by labor and capital 

income, excises on purchases by businesses and customs duties proportionately by labor and capital income, and estate and gift taxes by decedents. 

The share of the corporate income tax that represents cash flow is assumed to have no burden in the long run; the share of the corporate income tax that 

represents a tax on supernormal returns is assumed to be borne by supernormal corporate capital income as held by shareholders; and the remainder of 

the corporate income tax, the normal return, is assumed to be borne equally by labor and positive normal capital income. 

4

 Families with negative incomes are excluded from the lowest income decile but included in the total line. 

Percentiles begin at family size-adjusted cash income of: $10,902 for 10 to 20; $16,165 for 20 to 30; $21,713 for 30 to 40; $28,753 for 40 to 50; $37,516 for 50 to 60; 

$48,381 for 60 to 70; $61,100 for 70 to 80; $80,449 for 80 to 90; $117,224 for 90 to 95; $165,373 for 95 to 99; $379,371 for 99 to 99.9 and $1,734,164 for Top .1.
Policy Scenario Gini Coefficient P90/P20 P99/P20 A(Top1)/A(Middle20) Top 1 Percent Share

Cash Income 0.571 7.25 23.47 32.36 18.80

After-Tax Income

 Pre-Obama Law 0.536 5.83 18.26 25.59 16.50

 Current Policy 0.527 5.63 17.38 23.57 15.40

Effect of Policy

 (1) Pre-Obama Law to Current Policy -0.009 -0.20 -0.89 -2.02 -1.10

Trend in Income Inequality2 CBO (2016) After-Tax 

Income3

CBO (2016) Before-Tax 

Income4

CBO (2016) Before-Tax 

Income5

CBO (2016) After-Tax 

Income6

CBO (2016) After-Tax 

Income7

 (2) Change in Index, 1979-2007 0.107 0.69 6.10 15.78 9.3

 (3) Change in Index, 1979-2013 0.084 0.75 4.94 9.17 5.0

Effect of Policy Relative to Trend

 Enacted Tax Changes: (1)/(2) -8% -29% -15% -13% -12%

 Enacted Tax Change: (1)/(3) -11% -27% -18% -22% -22%

Department of the Treasury

 Office of Tax Analysis

Notes: 

4 CBO (2016) Supplemental Table 4, Ratio of Column I to Column C "One-Person Household"

5 CBO (2016) Supplemental Table 4, Ratio of Column K to Column C "One-Person Household"

6 CBO (2016) Supplemental Table 3, Ratio of Column M to Column D "Average After-Tax-Income (2013 Dollars)"

7 CBO (2016) Supplemental Table 3, Column M "Share of After-Tax-Income (Percent)"

Table 2: Income Inequality under Pre-Obama Law and Current Policy

(2017 Income Levels under 2017 Current Law)

Index of Inequality1

1 The Gini index ranges from zero to one, with zero indicating perfect equality (i.e., each family has the same income) and one indicating perfect inequality (i.e., one family has all of the 

income). The P90/P20 index is the ratio of income at the 90th percentile of income distribution to the income at the 20th percentile of income distribution. Income are adjusted for family 

size for calculating these indexes. A(Top1)/A(Middle20) is the ratio of average income of the top 1 percent of the families to the average income of middle quintile families. Income groups 

are defined by cash income adjusted for family size. 

2 Sources: CBO (2016) "The Distribution of Household Income and Federal Taxes, 2013." 

3 CBO (2016) Supplemental Table 8, Column D 
Appendix: Distribution of Changes in Tax Policy Since 2009 and ACA Coverage Provisions

This appendix provides a more comprehensive analysis of how changes in tax policy and ACA 

Coverage Provisions affected the distribution of after-tax income. The analysis incorporates the 

effects of coverage provisions that are included in the baseline for 2017 current law income. As a

result, the distribution of after-tax income and the percentage changes in after-tax income shown 

in Table A-1 are slightly different and not directly comparable with the percentage changes in 

the paper, which are calculated with respect to 2017 current law income. This more 

comprehensive analysis of the effects of policy changes since 2008 is discussed fully in the 

Council of Economic Advisers report: “The Economic Record of the Obama Administration: 

Progress Reducing Inequality.”
(millions) (%) (%) (%) ($) (%) (%) (%)

0 to 105 16.4 1.0 -0.6 -10.3 -2,080 27.1 1.1 1.4

10 to 20 17.2 2.1 0.7 -4.5 -2,289 13.9 2.4 2.7

20 to 30 17.2 2.8 4.7 1.4 -2,079 9.4 3.2 3.5

30 to 40 17.2 3.7 7.4 5.5 -1,005 3.4 4.3 4.5

40 to 50 17.2 5.0 10.0 9.2 -410 1.1 5.7 5.7

50 to 60 17.2 6.6 12.7 12.3 -243 0.5 7.3 7.3

60 to 70 17.2 8.5 14.9 14.9 -7 0.0 9.2 9.2

70 to 80 17.2 11.2 17.5 17.6 70 -0.1 11.6 11.6

80 to 90 17.2 15.5 20.7 20.8 135 -0.1 15.5 15.5

90 to 100 17.2 45.1 26.4 28.9 9,710 -3.4 41.8 40.5

 

Total5 172.1 100.0 20.2 20.9 189 -0.3 100.0 100.0

90 to 95 8.6 11.2 22.9 23.2 541 -0.4 10.8 10.8

95 to 99 6.9 15.2 24.6 25.4 2,706 -1.1 14.4 14.3

99 to 99.9 1.5 9.4 29.0 32.6 31,863 -5.0 8.4 8.0

Top .1 0.2 9.4 31.0 37.7 548,941 -9.7 8.2 7.4

 Office of Tax Analysis

 Department of the Treasury 

Current Policy

Average Federal Tax Rate3

Table A-1: Pre-Obama Law and Current Policy1

Adjusted Cash 

Income Percentile2

Number of Families Distribution of Cash 

Income

(2017 Income Levels)

Pre-Obama Law Pre-Obama Law

Distribution of After-Tax Income

Current Policy

Average Transfer and 

Tax Change from PreObama Law to Current 

Policy4

Change in After-Tax 

Income from PreObama Law to 

Current Policy4

Notes:

4

 Transfers (e.g., expanded Medicaid) are treated as negative taxes for calculating total transfer and tax changes. Pre-ACA, after-tax income under pre-Obama law is the 

denominator used for calculating the percentage changes in after-tax income due to the transfer and tax changes. 

Percentiles begin at family size-adjusted cash income of: $10,902 for 10 to 20; $16,165 for 20 to 30; $21,713 for 30 to 40; $28,753 for 40 to 50; $37,516 for 50 to 60; $48,381 for 60 to 70; 

$61,100 for 70 to 80; $80,449 for 80 to 90; $117,224 for 90 to 95; $165,373 for 95 to 99; $379,371 for 99 to 99.9 and $1,734,164 for Top .1.

5 Families with negative incomes are excluded from the lowest income decile but included in the total line. 

1

Both current policy and pre-Obama law include a list of individual, business and energy tax provisions that are scheduled to expire at the end of 2016 but were regularly 

extended by Congress (provisions referred to as “extenders”). Current policy is current law with the extenders. Pre-Obama law eliminates from current law a number of key 

tax provisions enacted during the Obama administration, including: the higher tax rate on tobacco enacted in CHIPRA; the AOTC and the expansions of the child tax credit and 

EITC enacted in ARRA; provisions in the Affordable Care Act (including expanded Medicaid eligibility); and the higher top ordinary and capital gains and dividend tax rates, and 

the reinstatement of the personal exemption phaseout (PEP) and phaseout of itemized deductions (Pease) enacted in ATRA. Pre-Obama law also replaces the AMT 

parameters enacted in ATRA with a more generous AMT “patch.” In addition, pre-Obama law replaces the estate tax adopted in ATRA with the carryover basis provisions 

provided for under EGTRRA. Finally, pre-Obama law restores the 0.2% FUTA surtax that expired in 2011. Pre-Obama law is referred to as 2008 policy in the Council of 

Economic Advisers report: “The Economic Record of the Obama Administration: Progress Reducing Inequality."

2 Cash Income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized capital gains, cash 

and near-cash transfers from the government, retirement benefits, and employer-provided health insurance (and other employer benefits). Employer contributions for payroll 

taxes and the federal corporate income tax are added to place cash on a pre-tax basis. Families are placed into deciles based on cash income adjusted for family size, by 

dividing income by the square root of family size. 

3 The taxes included are individual and corporate income, payroll (Social Security, Medicare and unemployment), excises, customs duties, and estate and gift taxes. Individual 

income taxes are assumed to be borne by payers, payroll taxes (employer and employee shares) by labor (wages and self-employment income), excises on purchases by 

individuals in proportion to relative consumption of the taxed good and proportionately by labor and capital income, excises on purchases by businesses and customs duties 

proportionately by labor and capital income, and estate and gift taxes by decedents. The share of the corporate income tax that represents cash flow is assumed to have no 

burden in the long run; the share of the corporate income tax that represents a tax on supernormal returns is assumed to be borne by supernormal corporate capital income 

as held by shareholders; and the remainder of the corporate income tax, the normal return, is assumed to be borne equally by labor and positive normal capital income. The 

denominator for the tax rates is cash income under 2017 current law, including ACA expanded Medicaid eligibility.