This week, the topic of income distribution made news. Several news outlets highlighted a report from the IRS on the 400 highest-income taxpayers.

annual samples of individual income tax returns for Tax Years 1992 through 2000 were sorted by AGI, and the 400 returns with the highest AGI in each year identified.

Using 1990 dollars, the income found in the top 400 returns rose from a total of $17.4 billion in 1992 to $52.8 billion in 2000. Capital gains income accounted for much of this rise, going from $6.3 billion in 1992 to $37.9 billion in 2000.

‘Jane Galt’ pointed to an NBER working paper on the distribution of consumption. This description says,

By one measure, inequality of after tax labor income has increased by 25 percent in the 1972-98 period. Yet consumption inequality has risen less than 2 percent. What’s happened, the authors explain, is that higher-income Americans have been saving more of their income.

For Discussion. Consider two households, each with $40,000 in labor income. The households are headed by young adults, age 25. The first household saves nothing. The second household saves 20 percent of its income each year. This difference in saving will affect income and wealth over the next fifty years, and it will result in differences in taxes paid over that span. What tax policy would you consider “fair” between these two households, and how do you think our actual tax policy would compare with this fair policy?