Thursday, April 22, 2021
Nathan C. Goldman (North Carolina State; Google Scholar) & Gil Sadka (Texas; Google Scholar), Progressive Tax Rates, Income Inequality, and Tax Collections: Implications from COVID-19 Restrictions:
This paper highlights a simple fact related to progressive tax rates – all else equal, when taxes are progressive, income inequality increases tax collections. Thus, while progressive tax rates are meant to combat income inequality, they unintentionally allow inequality-increasing policies to persist longer due to higher tax collections. Restrictions enforced due to the COVID-19 pandemic are one set of inequality-increasing policies in that restrictions had a significantly greater effect on low-income versus high-income individuals. We show that states with more progressive tax rates are more likely to enact stricter COVID restrictions, thereby increasing income inequality. More importantly, we find that states are more likely to restrict economic and social activities if they have both progressive tax rates and high income inequality.
While it is unlikely the policy makers’ goal to increase inequality, this study highlights that progressive tax rates can perpetuate inequality-increasing policies through higher tax collections.