Monday, January 05, 2015

Increasing Income Inequality: No Diploma, Births to Unmarried Women, and Higher Taxes Boost Inequality

Over the past two decades, U.S. income inequality, as measured by the Gini Coefficient (GC), has risen dramatically. This has resulted in a parade of politicians calling for taxing high income workers more heavily as a remedy.

However, data from the states undermine this simplistic strategy. In 2011, states with the least income inequality were: Utah with the least, followed by Alaska, Wyoming, New Hampshire, and Iowa. The five states, including DC, with the greatest income inequality were: District of Columbia with the highest followed, by New York, Connecticut, Massachusetts and Louisiana. Importantly, three of the states with the least income inequality, Alaska, Wyoming and New Hampshire had no income tax.

Furthermore, the latest tax rankings (1=highest taxes) from the National Tax Foundation show that the states with the least inequality with (tax rankings) were: Utah (28), Alaska (49), Wyoming (50), and Iowa (29). The states with the greatest degree of income inequality had rankings of: DC (20), New York (1), Connecticut (3), Massachusetts (11) and Louisiana (46). Thus, all of the states with greatest inequality, except for Louisiana, had state and local tax burdens in the top half of all states. Additionally, all of the states with the least income inequality ranked in the bottom half of states in terms of state and local tax burdens.

In order to sort out the factors that contribute to income inequality, Gini Coefficients are statistically modeled against other state population characteristics. It was found that statistically speaking, only the percent of the state population without a high school diploma and percent of births to unmarried women contributed to income inequality. Higher state and local tax burdens did boost income inequality, but the impact was not statistically significant.

Ernie Goss

Dependent = Gini Coefficient
Regression Statistics
Multiple R 0.680028052
R Square 0.462438152
Adjusted R Square 0.415693644
Standard Error 0.015968877
Observations 51

df SS MS F Significance F
Regression 4 0.010090945 0.002522736 9.892887243 7.3394E-06
Residual 46 0.011730232 0.000255005
Total 50 0.021821176

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.3731 0.0202 18.5149 0.0000 0.3325 0.4136
No diploma 0.1822 0.0888 2.0521 0.0459 0.0035 0.3609
Non-English speaker 0.0451 0.0248 1.8164 0.0758 -0.0049 0.0951
% unmarried mothers 0.1133 0.0422 2.6885 0.0100 0.0285 0.1982
Taxes as % GDP 0.0558 0.1910 0.2922 0.7715 -0.3287 0.4403