Income Tax Paid
Income after Taxes
20,000 2,581.25 17,418.75
200,000 51,116.75 148,883.25
This example shows that the tax code redistributes income from high-income to low-income households. What is more, the redistribution does not necessarily stop here. We have not said anything about what the government does with the tax revenues it receives. If the government transfers all those revenues to low-income households, then the combined redistributive effect of taxes and transfers is even stronger. When we talk about the effects of taxes on labor supply and disposable income, keep in mind that the size of these effects is different for households at different levels of income. These varying effects matter for the politics of tax cuts because lawmakers pay close attention to which income groups are affected by tax policy.
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