Fiscal Policy and Economic Inequality in the U.S. States

Abstract

To what extent can state governments influence economic inequality? How do state fiscal policies of redistribution affect families in different economic situations? Using a large database of state fiscal policymaking tools (taxing and spending) between 1976 and 2006, we examine the effect of these tools on state-level inequality as well as the average incomes of families in different economic groups. We find that state taxing and spending efforts can influence these indicators of economic inequality, though these fiscal policy tools can have differential effects. Spending on unemployment compensation and cash assistance as well as revenue from taxes on corporations is found to reduce state-level inequality. We also find unemployment compensation to positively benefit the bottom 10th percentile of income earners, whereas the inheritance tax helps all income groups. Corporate tax revenue is associated with higher middle-class incomes, whereas income tax revenue benefits both middle and upper incomes. Sales tax revenue positively benefits wealthy earners. Higher property tax revenue is associated with decreased income for all groups. These results suggest that state governments can affect redistribution through fiscal policies by affecting state-level inequality as well as the economic fortunes of different income groups.

Less Bang for Your Buck? How Social Capital Constrains the Effectiveness of Social Welfare Spending

“…This finding holds within the U.S. context (Brady 2009; Rodgers and Payne 2007; Rodgers, Payne, and Chervachidze 2006; Smeeding 2005). Social spending is also valued for its contribution to income equality both in a comparative perspective and in the United States (Hayes and Vidal 2015; Kenworthy and Pontusson 2005), though the effectiveness of these expenditures depend on institutional design (e.g., Korpi and Palme 1998; Lieberman 1998, etc.). Research has underscored how social spending can manage economic outcomes such as poverty and inequality, and these impacts are a function of program generosity and the specificity of their targeting.…”

Chasing Disparity: Economic Development Incentives and Income Inequality in the U.S. States

“…Third, alternative TSCS models, such as the two-way fixed effects model (or difference in differences model), are not ideal for this application because the data are not quasi-experimental and the parallel trends assumption does not hold (Kropko and Kubinec 2018). Finally, the model is commonly used in the study of state-level income inequality and thus helps build upon previous studies on the topic (Hayes and Medina Vidal 2015; Kelly and Witko 2012; Young 2015).…”

“…Policy experimentation in the states allows scholars to test whether a given policy mitigates or exacerbates income inequality. Previous studies have examined the effect of state-level welfare spending, unemployment and disability insurance, progressive tax rates, Earned Income Tax Credits (EITCs), the minimum wage, right to work, and levels of unionization on inequality (Barrilleaux and Davis 2003; Bucci 2018; Hatch and Rigby 2015; Hayes and Medina Vidal 2015; Kelly and Witko 2012; Kogan 2017). In their excellent work on state policy and inequality, Franko and Witko (2018) identify some states as leaders in adopting policies to mitigate inequality, such as Washington, New Mexico, Oregon, Michigan, and New York, each of which adopted higher minimum wages and more generous EITCs.…”

Inequality Within the EU-15 Countries: Have Social Benefits Been Pro-poor, Pro-middle Class or Pro-rich?

“…The first gap is related with the fact that no existing work -to the knowledge of this study-investigates the impact of social benefits on the income shares of different income groups. Such a research is crucial because the Gini coefficient only provides information about the gap between the rich and the poor; it provides little or no information about the distance between vaguely defined income groups such as the working class and the middle income class (Hayes & Vidal, 2015). Additionally, the study of the income groups makes it possible to ascertain whether the benefits have been pro-poor, pro-middle class or pro-rich.…”

“…While the low income earners are represented by the 10th percentile ( and 20th percentile ( ), the middle-income earners are represented by the 40th percentile ( ) and 60th percentile and the wealthy income earners are represented by the 80th percentile ( ) and 90th percentile ( . It is necessary to consider various income percentiles because the Gini coefficient only provides information about the income gap between the rich and the poor, it does not provide any comprehensive information about the income gap between subtly defined income groups such as the working class and the middle income class (Hayes and Vidal, 2015). Additionally, the use of income percentiles makes it possible to determine whether the social benefits are pro-poor, pro-middle class or pro-rich.…”