Panel Paper: Income Inequality and Tax Policy: Evidence from US States 1980-2010

Saturday, November 4, 2017
New Orleans (Hyatt Regency Chicago)

*Names in bold indicate Presenter

Rourke L O'Brien, University of Wisconsin - Madison and Adam Travis, Harvard University

Tax policy directly shapes the distribution of disposable income in a society. Yet studies of the effect of inequality on redistributive public policy focus almost exclusively on social spending and public goods provision. In this article we analyze the effect of rising inequality on state tax policy between 1980 and 2010, a period when policymakers made substantial changes to state tax codes to meet increased revenue needs. Specifically, we analyze how within-state variation in the share of income accruing to the top 1% of earners is associated with changes in state tax policy. We find that the relationship between income concentration and state tax policy is heavily moderated by the political party in control of state government. We discuss of the implication of this study for understanding welfare state dynamics, the effect of inequality on policymaking, and the project of the New Fiscal Sociology.