The impact of taxes on income mobility

Mario Alloza

International Tax and Public Finance, 2021, vol. 28, issue 4, No 3, 794-854

Abstract: Abstract This paper investigates how taxes affect relative mobility in the income distribution in the USA. Panel data for continuously married households drawn from the PSID between 1967 and 1996 are employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in 1% point in marginal tax rates causes a decline of around 0.5% points in the probability of changing to a different income quintile. Tax reforms that reduce marginal rates by 7% points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.

Keywords: Income mobility; Inequality; Marginal tax rate; E24; E62; D31; D63; H24; H31 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: The Impact of Taxes on Income Mobility (2017)
Working Paper: The Impact of Taxes on Income Mobility (2016)
Working Paper: The impact of taxes on income mobility (2016)
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DOI: 10.1007/s10797-020-09629-y

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