Do Taxes Increase Economic Inequality? A Comparative Study Based on the State Personal Income Tax

Abstract

I present new quasi-experimental evidence on the relationship between tax policies and the distribution of income. I focus on the twentieth century United States, and on the personal income tax, since its inception. I study three major policy events that, as the existing literature shows, significantly raised the revenues from the income tax: the introduction of the state personal income tax, the introduction of tax withholding together with third-party reporting, and the intergovernmental agreements between the federal and state governments to coordinate tax auditing efforts. All the three policies were introduced in a staggered fashion and increased tax revenues, but had different fiscal consequences. Despite this, I find that income inequality raised after all the tax policy events. The result is robust to different measures of economic inequality and econometric specifications.