Nearly a century of state-by-state data confirms income inequality best remedied by taxing the rich

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Redistributive tax policies can help restrain the rapid income growth rate of the rich and reduce inequality. (AP Photo/Jae C. Hong)

Higher minimum wages, more spending on education and higher taxes on the rich have some of the biggest effects on income inequality in the U.S., a state-by-state analysis found.

The paper, published April 28 in Economic Modelling, looked at income-inequality convergence among states from 1917 to 2012. According to the data, inequality got worse between 1917 and 2012, and different groups of states became more similar in their levels of inequality — meaning income inequality was distinct in different parts of the country. In line with previous literature, this paper also dates an increase in inequality to the presidency of Ronald Reagan.

"Even though the U.S. is among the most developed countries in the world, the inequality level is higher than in other countries at a similar level of development, such as European countries," said Vladimir Arčabić, an assistant professor of economics at the University of Zagreb and the lead author of the paper. "Then European policymakers sometimes use American inequality as an example to justify high taxes or minimum wage policies. We wanted to further analyze this issue."

What they found, he said, demonstrates that "redistributive tax policies such as capital gains tax can help restrain the rapid income growth rate of the rich." He added that "easy access to education, such as a larger number of public schools or more provision of public schools, can help state governments reduce income inequality. Improved accessibility to education would help reduce education inequality, resulting in higher social mobility and lower income inequality, especially in future generations."

Arčabić and his co-authors used the income share of the top 10% of people in each state from 1917 to 2012, calculated by the economist Mark W. Frank based on data from the Internal Revenue Service. Over the whole period, they found weak evidence that all states were converging. But when the analysis was split into eras, patterns emerged.

From 1917 through 1931 — covering the U.S. involvement in World War I and going through the early years of the Great Depression — they found high volatility in convergence; in 1929, North Dakota's top 10% had 25% of income, while Delaware's top 10% share was 96% of income. From 1932 to 1985, which researchers say roughly corresponds with the Great Compression, patterns of inequality converged. From 1986 to 2012, volatility increased again. Reagan was in office from January 1981 to January 1989. 

The researchers were then able to sort states into different groups that followed similar patterns in inequality.

From 1986 to 2012, Connecticut and New York were in their own convergence club, as the authors termed it. Delaware, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Mississippi, Nebraska, South Dakota, Utah, Vermont, Virginia and Washington fell into another club. The District of Columbia and 31 states, including some of the most unequal states in 2012, such as Arkansas, California, Florida, Oklahoma and Texas, were in a third club. Alaska and Hawaii were omitted, because they were territories occupied by the U.S. until 1959.

When the researchers looked at the factors influencing membership in any club, they found that education and tax policy had the most significant effects on income-inequality patterns. They measured education access by calculating the number of schools per thousand people in the state; state spending on education for each pupil; and college attainment.

They also looked at the de facto minimum wage in each state — in some states, the federal minimum was higher than the state minimum, making the federal standard the de facto minimum wage. They referenced the top income tax rate as well as the capital gains tax rate, which is particularly relevant because many rich people make more money from their investments than they do from income. 

More public schools led to less inequality. Likewise, higher minimum wages led to less inequality. A higher capital gains tax was also linked to lower inequality.

"Redistributive tax policies are not the only instrument," Arčabić said. "In fact, one-size-fits-all economic policies intended for inequality reduction may be ineffective at reducing inequality across a heterogeneous cohort of states and clubs." 

Arčabić added, "We strongly believe that inequality is a serious issue that economic policy should tackle."

The paper, "Century-long dynamics and convergence of income inequality among the US states," published April 28 in Economic Modeling, was authored by Vladimir Arčabić, University of Zagreb; Kyoung Tae Kim and  Junsoo Lee, University of Alabama; and Yu You, Liaoning University. 

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