INTRODUCTION
A Common contention in the public finance literature is that
redistribution should occur primarily at the national level (Musgrave,
1959; Oates, 1972). According to this argument, if state or local
governments attempt to impose redistributive income taxes, cross-state
mobility will lead to a compensating increase in gross wages for
high-skill workers. If full adjustment occurs, then net wages for
low-skill and high-skill workers will be unaffected by the rise in
redistributivity.
This argument suggests that more redistributive state taxes result
in efficiency losses without achieving any net redistribution. If true,
it suggests that states should focus on raising revenues in the most
efficient manner possible, rather than attempting to redistribute
between the rich and the poor. The hypothesis also has implications for
labor market mobility within the European Union. Particularly between
pairs of neighboring countries with a common language (e.g., France and
Belgium; Germany and Austria; Britain and Ireland), a rise in tax
redistribution in one country may merely lead to cross-border migration,
driving up pre-tax inequality, and leaving post-tax inequality
unchanged.
Using data from the 1983 and 1989 U.S. Current Population Survey
(CPS), Feldstein and Wrobel (1998) find that when states implement more
redistributive income tax systems, wages become more unequal (i.e.,
wages of high-skill workers rise by enough to offset the higher tax
rates). They conclude that this adjustment process is rapid: controlling
for the 1989 tax structure, tax rates in 1983 have no effect on gross
wages in 1989. This is consistent with Blanchard and Katz (1992), who
observe relatively rapid migration out of high unemployment areas in
response to adverse demand shocks, with the unemployment rate returning
to normal after a period of five to seven years.
Others, however, have found more modest effects. Focusing on the
top end of the income distribution, and using annual tabulations of
estate tax returns from 1965-1998, Bakija and Slemrod (2004) conclude
that higher state sales taxes and inheritance/estate taxes have modest
but significant negative impacts on the number of federal estate tax
returns filed in a state. The rich do flee from higher state taxes, but
the resulting deadweight loss is small relative to the revenue raised.
This is consistent with Conway and Houtenville (2001) who use migration
data from the 1990 Census to investigate the migration patterns of those
aged 65 and over. They find that although the elderly are attracted to
states with lower personal income and inheritance/estate taxes, the
magnitude of the effect is small, and the results are sensitive to the
particular specification chosen. (1)
Similarly, studies of welfare and the Earned Income Tax Credit
(EITC) have not observed substantial effects at the lower end of the
distribution. Cushing--Daniels (2004) uses the 1968-2002 Panel Study of
Income Dynamics to study the impact of welfare generosity on mobility,
and finds that benefits do not have a significant effect on cross-state
migration. Leigh (2004) uses the 1989-2002 CPS to explore the impact of
state EITCs on earnings, and concludes that only a small portion of the
observed effect could have been due to workers moving into states with
more generous EITCs.
From a theoretical standpoint, the extent to which the pre-tax wage
distribution will adjust to offset the effect of redistributive taxes
depends on the degree to which workers are willing to change location in
response to taxes. As Mirrlees (1982) has shown, the optimal amount of
redistribution by a particular jurisdiction is a declining function of
the degree of mobility in response to taxes. This is generally
interpreted to mean that there should be more redistribution at the
national level than at the state level, and more redistribution at the
state level than at the local level. But whether migration can entirely
offset the redistributive effects of taxation at any particular level is
ultimately an empirical question.
Since the sharpest empirical predictions about the effect of
redistributive taxes on inequality relate to the distribution of hourly
wages, this paper, therefore, focuses on hourly wage inequality. For
expositional simplicity, I will often refer to this just as
"inequality." (2) To assess the impact of redistributive taxes
on gross earnings, I use the National Bureau of Economic Research's
Taxsim program (Feenberg and Coutts, 1993) to create a measure of the
redistributive effect of personal income taxes across U.S. states over
the years 1977-2002. Separately calculating inequality from the March
CPS over those same years, I find that more redistributive taxes are not
offset by a rise in pre-tax inequality. Analyzing mobility, I do not
find clear evidence that more redistributive taxes affect the volume or
composition of interstate migration.
The remainder of this paper is structured as follows. The second
section analyzes the impact of redistributive taxes on inequality, using
a standard measure of the redistributive effect of taxation, and
presents a number of robustness checks on this specification. The third
section proposes a new class of tax redistributivity measures, based on
the S-Gini, and uses these measures to see whether the effect of taxes
on gross wages has a stronger effect on the top or bottom of the
distribution. The fourth section studies the effect of redistribu