Do Redistributive State Taxes Reduce inequality?

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? Using the full income tax parameters for all U.S. states from 1977-2002,I create a "simulated tax redistribution index" that captures the mechanical impact of 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 undo the effect of changes in state income taxes. On aggregate, more redistributive state taxes do not substantially affect interstate migration, nor do they reduce per-capita state personal income. Show more