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Research: Taxation and Income Inequality

News Story

Dyson Clinical Assistant Professor Todd Yarbrough, PhD, and Veronica Lee ’19, are looking at how state tax policies affect income inequality, and what policies could be implemented to alter the scope of income distribution.

It’s no secret that income inequality is amongst one of America’s hot-button issues. As points out, the top one percent of American earners have nearly doubled their share of national income over the past five decades, and by many measures, income inequality in the United States has risen to levels previously not seen since the Gilded Age.

Understanding this reality, Dyson Clinical Assistant Professor of Economics Todd Yarbrough, PhD, and Veronica Lee ’19, are taking a unique approach to tackling questions of income inequality. Reasoning that the issue is often discussed as a problem to be addressed by the federal government, they’ve embarked upon research that examines income inequality through tax policy not on the federal level, but rather on the state level.

“We arrived at this topic because there’s a little bit of a puzzle in America,” says Yarbrough. “We have income inequality rising in the US, where it’s actually falling globally. Because the US also happens to be a low-tax country, the economist in me says, ‘let’s see if those two things are connected.’”

Yarbrough stressed that looking at income inequality through the lens of state tax policies, as opposed to federal tax policy, could offer insights currently unaddressed in a lot of established research.

“I think there’s been a general hole in the literature looking at the state level,” says Yarbrough. “The conversation of income inequality is usually housed within a macro-economic question. In our paper we said, ‘let’s look at this from the state level.’”

While Yarbrough is providing a methodology and guidance for the research, he credits Lee with taking the initiative to initially investigate the primary subject manner. In fact, the genesis of the research stems from Yarbrough’s Economics 400 course, the class that economics majors conclude their undergraduate education with. The class requires a capstone project, in which students are tasked with writing a fully fleshed out empirical research paper. Lee’s paper, which focused on income inequality on the state level and the role that tax structure plays in income inequality, was received very positively by Yarbrough, who reasoned that the work could be expanded into what could potentially be impactful academic literature.

“To see that come out of an undergraduate paper, to have an idea that was so good that it could end up being an academic journal paper—I pitched this idea to her and said ‘let’s take your paper, refine the quantitative components, and really hone in on making the paper about this conversation between tax regressivity and income inequality and look at it over time.”

Through funding from the Office of Student Success’ Undergraduate Student-Faculty Research program, the pair was able to access data, literature, and other information that’s proven to be essential for delving further into the topic. As Yarbrough notes, one of the aspects they are looking to account for is how a tax structure implemented today would positively or negatively affect income inequality 10 years from now.

“One of the things that’s missing in the literature is this timing component. How long do you need to have a progressive tax system before you make a dent in income inequality?”

While the research is ongoing, the duo has already reached a few milestones. This spring, Lee presented at the Federal Reserve Bank of Dallas Undergraduate Research Conference. The paper was very well received, and the pair hopes to be able to present and more conferences over the next academic year. Down the road, the goal is for the paper to be published in a reputable academic journal, and ultimately, perhaps gain the attention of policymakers.

There is certainly more work to be done—in terms of both Yarbrough and Lee’s work and addressing income inequality as a whole—but in Yarbrough’s view, the research has been both impactful and rewarding, and arguably embodies some of Pace’s finest qualities.

“This sort of opportunity is in many ways unique to Pace—both in the context of how we structure our Economics 400 class, but also because I think Pace has uniquely ambitious students,” says Yarbrough. “The fact that Pace has such great undergraduate students, you have this effect that the faculty get to bring them into research. It’s been a really great opportunity.”