Post 2: Taxing Peter to Pay Paul: Tax Regressivity and Income Inequality Among U.S. States

My professor and I have been keeping in contact with each other, occasionally meeting face-to-face to go over the more detailed points of the research so far. We have been going through different sources of literature and other papers that have helped to provide us with a wonderful starting point. Prior literature on income inequality indicates that there is an ever-growing gap between the classes since the 1970’s. The reasons behind the growing income disparity are numerous. A major factor is the wage inequality. Income growth for the past three and a half decades in the American economy has been disproportionately distributed among the public, with the richest households receiving the overwhelming majority of the growth. (McNichol 2016). While the American economy is recovering from the Great Recession, the top one percent of families nationwide have received approximately 42 percent of all income growth. A further breakdown shows that in nine states, the top one percent received more than half of the income growth while the one percent in Connecticut and North Carolina have received all the income growth. In addition, from 1973 to 2007, twenty-five states had half or more of their aggregate state income growth go to the richest one percent households (Sommeiller and Price 2018).

We have dug through numerous U.S. government databases as well as state databases to gather our source data. So far, we have a breakdown of taxation incomes in the 48 contiguous states, their Gini coefficients, unemployment rates, their demographic breakdown by age, and their educational attainment breakdowns for the years 2006 to 2015. Based on our regression, we find that heavier state reliance on regressive forms of taxation worsen economic conditions for the less fortunate. In light of this information, we can come to the conclusion that despite the improvement of the United States economy over the past three decades, the growth is not a broadly shared experience. A majority of the gains have accrued to the households at the top of the income distribution, meanwhile middle and lower income households have stagnated in growth, and on some occasions, even experienced declines. As a nation, we must be more vigilant in ensuring that our nation’s economic growth benefits all segments of our population. Our nation highlights an increasingly prevalent difference between high-income families and the poor and middle-class. To counteract this trend, our policymakers, on both federal and state levels, must consider enacting more progressive taxation framework. Collecting data for this research has been relatively straightforward. Most of it can be found on government databases—it was the collection and cleaning of the data that was tedious and somewhat challenging.

We would like to continue further in this research by using a better measure of income inequality rather than relying solely on the Gini index. Professor Yarbrough and I have discussed this and we are currently working on compiling data that will use ratios of average income quintiles to compare the disparity between classes. After gathering such data and using some different methods of calculating a better measure of inequality, we would like to elaborate further on the effects of deeply divided income disparity.


Blog 1: Taxing Peter to Pay Paul: On the Distributional Consequences of Regressive Taxation among U.S. States

The purpose of this research is to provide an in-depth look over the effects of state tax policies on the distribution of wealth. Taxation has been an integral part of every government system. As the main source of revenue for all levels of government, taxation policy plays a vital role in ensuring that communities and public services are properly funded. As the American economy continues to grow, a troubling pattern has emerged in recent decades; Income inequality is growing at a rampant rate. Policymakers must be at the forefront of combating this as there may be dire consequences for the economy and the general wellbeing of the public. Many have proposed that taxation policy can be an effective force in helping to narrow the income gap. State level tax analysis shows that there is a widely differing regressivity score state by state based on the variation of reliance on different tax sources. Research shows that by shifting state reliance from regressive taxes to more progressive taxes, policymakers can help to equalize the burden of taxes amongst all income levels and ultimately provide equity transfers from upper-income households to the less fortunate. As of now, forty-five out of fifty states have regressive tax systems that exacerbate income inequality (Wiehe, et al. 2018).  By changing the taxation policy in these states, the government can ensure that state and local taxes (SALT) will not further deepen the income divide, and hopefully serve as a mechanism in equalizing the distribution of the state’s prosperity.

Using this research, I hope to learn the following:

·     How far-reaching the effects of tax regressivity are on a state’s residents.

·     The effects of different state tax policy compositions on inequality.

·     About the possibility of reversing the trend and using tax as a combatant against income inequality.

I would like to achieve this by using different measurements of quantifiable societal inequalities such as income inequality, wealth inequality, and educational inequality. We will be using data from the 48 contiguous states spanning over a nine-year period from 2006 to 2015. Professor Yarbrough and I will include variables such as state populations, total state personal income, aged, kids, etc. to capture effects that can be explained by other variables.