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Tax plan could hinder economic mobility, undermine American Dream

Posted By Jelicia Diggs On July 31, 2013 @ 3:20 pm In NC Budget and Tax Center | Comments Disabled

The hope-filled message behind the American Dream is becoming a nightmare for many families in North Carolina. Due to the widespread income inequality [1] 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 [2] 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 [3] 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 [4]. This challenges the notion that our tax system should be fair and also serves to deepen income inequality [5].

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.


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URL to article: http://pulse.ncpolicywatch.org/2013/07/31/tax/

URLs in this post:

[1] widespread income inequality: http://www.ncjustice.org/sites/default/files/BTC%20Brief%20-%20Economic%20Mobility.pdf

[2] National Bureau of Economic Research: http://obs.rc.fas.harvard.edu/chetty/tax_expenditure_soi_whitepaper.pdf

[3] Policies like the EITC reward work: http://www.ncjustice.org/?q=budget-and-tax/btc-brief-state-eitc-best-tool-reduce-increased-tax-load-low-income-taxpayers

[4] many middle and low income families will actually end up paying more: http://www.ncjustice.org/sites/default/files/Who%20Pays_Joint%20Tax%20Deal_with%20EITC_July17.png

[5] deepen income inequality: http://www.ncjustice.org/sites/default/files/BTC%20Brief%20-%20Empty%20Promises%20-%20Tax%20Cuts.pdf

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