The Effect of Rising Income Inequality on Taxation and Public Expenditures: Evidence from U.S. Municipalities and School Districts, 1970-2000

Abstract

The income distribution in many developed countries widened dramatically from 1970 to 2000. Scholars speculate that inequality contributes to a host of social ills by weakening the public sector. In contrast, we find that growing inequality is associated with an expansion in revenues and expenditures on a wide range of services at the municipal and school district levels in the United States. These results are robust to a number of model specifications, including instrumental variables that deal with the endogencity of local expenditures. Our results are inconsistent with models that predict heterogeneous societies provide lower levels of public goods.

Keywords: Inequality, collection action, public goods, taxing and spending patterns, local government

JEL Classification: H20