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Can Redistributive State Taxes Reduce Inequality?

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Author Info
Andrew Leigh

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Abstract

Do income taxes levied at a state or regional level affect the after-tax distribution of income? Or do workers merely move between regions, causing pre-tax wages to adjust? This question is relevant both in across states in the United States, and across countries within the European Union. Using the full income tax parameters for all US states from 1977-2002, I create a “simulated tax redistribution index”, which captures the mechanical impact of the changes in tax policy on the gini coefficient, but is exogenous to any behavioral response. Analyzing the effect of this redistribution index on inequality, I find that gross wages do not adjust so as to fully offset the effect of more redistributive taxes. Exploring the adjustment process further, I create a new class of tax redistribution measures, based on the S-Gini, which differentially weight effects at the bottom and top of the distribution, and conclude that neither taxes that particularly affect the rich or the poor seem to affect the distribution of wages. Redistributive taxes do not appear to affect interstate migration or total state personal income. From a political economy perspective, I also find some evidence that more inequality leads states to implement more redistributive taxes, which may help explain why earlier studies observed a positive relationship between redistribution and inequality.

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Paper provided by Centre for Economic Policy Research, Research School of Social Sciences, Australian National University in its series CEPR Discussion Papers with number 490.

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Length: 30 pages
Date of creation: Apr 2005
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Handle: RePEc:auu:dpaper:490

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Related research
Keywords: taxation; redistribution; progressivity; inequality; income distribution; Gini index; S-Gini index; interstate migration;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Jon Bakija & Joel Slemrod, 2004. "Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns," NBER Working Papers 10645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Alesina, Alberto & Baqir, Reza & Easterly, William, 1999. "Public goods and ethnic divisions," Policy Research Working Paper Series 2108, The World Bank. [Downloadable!]
    Other versions:
  4. Feldstein, Martin & Wrobel, Marian Vaillant, 1998. "Can state taxes redistribute income?," Journal of Public Economics, Elsevier, vol. 68(3), pages 369-396, June. [Downloadable!] (restricted)
    Other versions:
  5. Donaldson, David & Weymark, John A., 1980. "A single-parameter generalization of the Gini indices of inequality," Journal of Economic Theory, Elsevier, vol. 22(1), pages 67-86, February. [Downloadable!] (restricted)
  6. Andrew Leigh, 2005. "Who Benefits from the Earned Income Tax Credit? Incidence Among Recipients, Coworkers and Firms," CEPR Discussion Papers 494, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roc Armenter & Francesc Ortega, 2007. "Credible Redistributive Policies and Migration across US States," Economics Working Papers 1022, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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