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Title: The Role of Taxes in Mitigating Income Inequality Across the U.S. States
Citation Type: Miscellaneous
Publication Year: 2015
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Abstract: Income inequality has risen dramatically in the United States since at least 1980. This paper examines the role that tax policies play in mitigating income inequality. The analysis primarily focuses on state taxes, but also explores federal taxes. Two empirical approaches are employed. First, cross-sectional estimates compare before-tax and after-tax inequality across the 50 states and the District of Columbia. Second, inequality estimates across time are calculated to assess the evolution of the effects of tax policies. The results from the first approach indicate that the tax code reduces income inequality substantially in all states. All of this compression of the income distribution is attributable to federal taxes as state taxes, on average, widen the after-tax income distribution slightly. Nevertheless, there is substantial cross-state variation with some states tax codes meaningfully reducing income inequality and others significantly increasing inequality. We also document that state EITC programs can significantly mitigate income inequality, that sales tax exemptions for food and clothing moderately reduce income inequality, and that state-levied gasoline taxes work to increase inequality. The results of the second empirical approach indicate that the mitigating influence of taxes on income inequality has increased since the early 1980s, with two-thirds of the increase due to the federal tax code and the remaining one-third due to state taxes. The increase at the state level is due mostly to changes to the tax code. In contrast, at the federal level the majority of the increase is due to the widening of the pre-tax wage distribution interacting with the progressive structure of the tax code.
Url: http://byron.marginalq.com/cooper_lutz_palumbo_2015.pdf
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Authors: Cooper, Daniel H; Lutz, Byron F; Palumbo, Michael G
Publisher: Federal Reserve Bank of Boston
Data Collections: IPUMS CPS
Topics: Other, Poverty and Welfare
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