Progressive Tax Rates, Income Inequality, and Tax Collections : Implications from COVID-19 Restrictions

During March of 2021, a surprising narrative arose in the media – U.S. states not only did not incur decreases in tax collection during COVID-19, but many states saw substantial increases in collection. We consider this outcome from the perspective of progressive tax rates, income inequality, and the COVID-19-related restrictions put into place by states. All else equal, when taxes are progressive, income inequality increases tax collections. While progressive taxes are meant to combat income inequality, they unintentionally allow inequality-increasing policies to persist longer due to higher tax collections. Restrictions enforced due to COVID-19 are one set of inequality-increasing policies that had a significantly greater effect on low-income versus high-income individuals. We show that states with more progressive taxes enact stricter COVID restrictions, thereby increasing income inequality. More importantly, we find that states are more likely to restrict economic and social activities if they have both progressive tax rates and high income inequality