Can Progressive State Taxes Reduce Inequality

Can Progressive State Taxes Reduce Inequality? Andrew Leigh Economics Division Research School of Social Sciences Australian National University [email protected] www.andrewleigh.com October 2004 Can income taxes levied at a state or regional level affect the distribution of gross incomes? Or will workers merely move between regions, causing pre-tax wages to adjust? This question is relevant both in across US states, and across countries within the EU. Using the NBER Taxsim program, which contains the full tax parameters for all US states from 19772003, I create a simulated index of the tax progressivity in each state and year. While I find some evidence of tax-induced migration, this does not fully offset the effect of an increase in progressivity. Moving towards a more progressive taxation systems appears to make the distribution of incomes more equal, an effect which persists over subsequent years.