The Inherent Conflict Between Progressive Tax Rates and Income Inequality: Lessons from COVID-19 Restrictions

Abstract

We examine the relation between progressive tax rates, income inequality, and state income tax collections. We provide evidence that states with more progressive tax rate structures have higher tax collections. We then show an enhanced relation for states that enacted more stringent COVID-19 restrictions, which increased income inequality. Finally, we find that restrictions were more severe in states with more progressive tax rates. Our evidence sheds light on the inherent conflict between progressive tax structures and income inequality – income inequality increasing policies result in higher tax collections with a progressive tax system even though the latter aims to address income inequality.