Impoverishment by Taxation

Abstract

Viewed in the aggregate, the U.S. fiscal system is progressive, reduces inequality, and cuts poverty. The system improves on market outcomes by transferring income from rich to poor. Yet this bird’s eye view rings hollow on the ground, where millions of taxpayers across the United States are made poor or poorer by paying their state and federal taxes. In truth, while the U.S. fiscal system may be broadly equalizing and poverty reducing, for many struggling households, it is impoverishing.

This Article offers a new way to measure taxation of low-income households in the United States, presenting a concept called fiscal impoverishment. Taxpayers are fiscally impoverished when they are made poor or poorer by paying state and federal taxes, after accounting for certain antipoverty public benefits they are likely to receive. Distinct from the aggregate and anonymous measures by which we typically assess our tax and transfer system, fiscal impoverishment is dynamic and individualized. It highlights individual human dignity and implicates the economic responsibilities of the state vis-à-vis low-income taxpayers.

In addition to introducing the concept, the Article illustrates how fiscal impoverishment occurs throughout the United States and recommends adopting impoverishment analysis to guide tax reform at all levels of government. Using stylized households, it presents possible net tax burdens at various income levels across all fifty states. In combination with U.S. Treasury and Census data, this work reveals that fiscal impoverishment is significant—affecting millions of households—and highly variable—based on a patchwork of federal and state tax and transfer programs. Patterns of impoverishment track familiar safety-net fault lines based on family structure, employment, immigration status, and geographic location. The Article finishes with specific reforms and a framework for rethinking taxation of poor households.

Keywords: tax, tax policy, poverty, safety net, SALT, income tax, property tax, state tax, federal tax, SNAP, food stamps, Medicaid, inequality

JEL Classification: k34, e60, e61, e62, h24, h30, h40, h41, h53, h55, h70, h71, h75, i30, i31, i32, i38,