But tax cuts can also slow long-run economic growth by increasing deficits. The programs are paid for through the federal income tax, which is a progressive tax system designed in such a way that the rich pay a higher percent in income taxes than the poor. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. Government Policies to Reduce Income Inequality. Primarily through the supply side. The 2016 US Gini coefficient was .59 based on market income, but was reduced to .42 after taxes and transfers, according to Congressional Budget Office (CBO) figures. Transfers and Taxes Are Progressive, But Income Is Highly Concentrated Both Before and After Transfers and Taxes. The consequence of progressive taxation is that the inequality of disposable incomes (the incomes that actually reach people’s pockets) is much lower than the pre-tax income that is considered in the research that focusses on top incomes. US tax and transfer policies are progressive and therefore reduce effective income inequality. The opposite of a progressive tax is a regressive tax , such as a sales tax, where the poor pay a larger proportion of their income compared to the rich. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources.
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