NC Budget and Tax Center

Tax plan could hinder economic mobility, undermine American Dream

The hope-filled message behind the American Dream is becoming a nightmare for many families in North Carolina. Due to the widespread income inequality in the state, economic mobility (the ability of people to improve their economic standing) is becoming more difficult for North Carolinians. This translates as well to intergenerational economic mobility, or the ability of children to achieve higher economic status than their parents. While factors such as education attainment, geography and socioeconomic status impact the ability of individuals to get ahead, a recent study by the National Bureau of Economic Research finds that more progressive tax expenditures are positively correlated with higher intergenerational mobility.

Specifically the progressivity of mortgage interest deductions and Earned Income Tax Credits (EITC) each have positive correlations with the ability of children to be more successful than their parents. In addition, the progressivity of state income taxes is also found to be significantly related to higher intergenerational mobility, thus paving the way to true achievement of the American Dream.

Findings from this study provide implications for the importance of maintaining a progressive state income tax structure, maintaining and in some cases increasing the EITC, and ensuring that overall tax expenditures are more progressive. These tax policies could pave the way for higher intergenerational mobility thus allowing more families to achieve the American Dream. Policies like the EITC reward work and most North Carolinians, if not all, can resonate with the idea of working diligently so that their children and future generations of their family will have better opportunities. Such willingness to work despite the low-wages, benefits our economy.

The concept of a flat income tax rate, as opposed to a progressive system, has many other problems in addition to potentially hindering intergenerational mobility. For example, the tax plan recently passed during this legislative session flattened the personal income tax and provides the largest cut for the wealthiest tax payers, and many middle and low income families will actually end up paying more. This challenges the notion that our tax system should be fair and also serves to deepen income inequality.

The common phrase given by North Carolina legislative members concerning the tax plan is to “put more money in the pockets of North Carolinians,” so why don’t we do just that? The American Dream doesn’t have to be a nightmare, but it is essential that North Carolina legislators stay up to date on research and acknowledge the positive effects that a progressive tax could have on the economic and intergenerational mobility of our state.

3 Comments

  1. Jack

    July 31, 2013 at 4:17 pm

    The plan of the NCGA is to starve the people of jobs and money so as to cultivate a work force that will accept any work from any business that swoops in with a promise of employment. At that point husbands and wives will accept minimum wage so at least something can go on the dinner table to feed the kids.

    We can talk about the American Dream all we want but unless public policies remains in place to support the idea and create opportunities so people can achieve the American Dream the “Dream” is dead.

    Do you believe your children or your grandchildren will know firsthand the American Dream or is the Dream already relegated to the history books?

  2. Alex

    July 31, 2013 at 10:22 pm

    I hate to tell you this, but the American Dream is disappearing right in front of our eyes,and has nothing to do with North Carolina. At least a third of our citizens are on food assistance, 12 million people are unemployed, and a large part of college graduates are either underemployed or work part-time jobs. Many of our largest cities are bankrupt, and look like something out of third world countries with most infrastructure crumbling and decaying. We are rapidly moving to a welfare nation, and the middle class is eroding each year. It’s not a pretty picture !

  3. Jim Wiseman

    August 1, 2013 at 9:24 pm

    NC has suffered long enough under Democrat rule, and this is what it has gotten us.