Tax progressivity and income inequality in the US

Abstract

Using a novel data set on US tax progressivity constructed by Borella et al. (2023), we estimate its short- to medium-term dynamic effects on US income inequality since 1970. By means of local projections, we find that an increase in tax progressivity reduces the Gini index implying a reduction in income inequality. Our estimates suggest that the effect is gradual but sizeable, statistically significant (at its peak, but not during all years evaluated), and robust to controlling for the tax rate.