|In other words, the progressive income tax has had no effect at combatting income inequality. That probably explains why the academic literature remains divided as to whether progressive income taxes have any effect on income inequality.
While the progressive income tax hasn’t had an effect on income inequality, the expert academic literature is clear that a progressive income tax is far more harmful to the economy than a flat income tax.
Because progressive income taxes have such a negative effect on the economy, they tend to make everyone worse off. Even those who may see a tax cut suffer when the progressive tax leads to fewer jobs and decreased productivity because investment shrinks. The taxes cause incomes adjusted for the cost of living to decline, leaving everyone worse off than they would be under a flat tax system that raises just as much tax revenue.
The trade-off between equity and efficiency of progressive tax systems has received considerable attention among economists and tax experts. However, progressive taxation has failed to reduce the gap between the rich and the poor, while still distorting market activity.
The last state to introduce a progressive income tax was Connecticut. More than two decades later, inequality in states with a progressive income tax is still higher than in other states. In 2017, Connecticut was the state with the second-highest income inequality as measured by the Gini coefficient.
Evidence from Connecticut suggests the state experienced significant harms by switching from a flat income tax to a progressive income tax. In the years after adopting a progressive income tax, the poverty rate in Connecticut rose 47 percent. Meanwhile the poverty rate in other states fell by 10 percent. The progressive income tax accounted for 73 percent of that increase in the poverty rate.