Abstract
This paper examines the role that federal and especially state tax policies play in mitigating income inequality. The results show that the tax code reduces income inequality considerably in all states. All of this income compression is attributable to federal taxes, as state taxes, on average, widen the after-tax income distribution slightly. Nevertheless, there is very substantial cross-state variation in the impact of state tax policies. The paper further documents that the mitigating influence of taxes on income inequality has risen since the early 1980s, with the increase at the state level due mostly to changes to the tax code.
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