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The impact of taxes on income mobility

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  • Mario Alloza

    (Bank of Spain and CfM)

Abstract

This paper investigates how taxes affect relative mobility in the income distribution in the USA. Panel data for continuously married households drawn from the PSID between 1967 and 1996 are employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in 1% point in marginal tax rates causes a decline of around 0.5% points in the probability of changing to a different income quintile. Tax reforms that reduce marginal rates by 7% points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.

Suggested Citation

  • Mario Alloza, 2021. "The impact of taxes on income mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 794-854, August.
    • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:4:d:10.1007_s10797-020-09629-y
    DOI: 10.1007/s10797-020-09629-y
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    More about this item

    Keywords

    Income mobility; Inequality; Marginal tax rate;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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