Private Spending and Public Inequality

Voters across the political spectrum are concerned about income inequality, but inequality hardly ends with the paycheck. In fact, it continues each time you open your wallet.


Country-level inequality from the New York Times
Country-level inequality from the New York Times

Many studies show that income inequality is inversely related to population health, and they typically use inequality in stated income. The effects of taxes and transfers can be huge. Pre-tax income inequality is average for developed countries—it’s between that of Denmark and Sweden. But after transfers and taxes we have the highest inequality of any developed country.


But it doesn’t end there. The effects of non-transfer government spending also have a huge impact on population health, and are also inequitably distributed. Transportation services, policing, education, and even water are all supported in part by the public purse and yet the benefits are not distributed equally.


The distribution of sales tax revenue has come in for particular lamentation in California. Most sales taxes go to the State, but 0.75%-1% out of the state’s 7.5% is returned to the city where the sale occurred. Some have complained that wealthier cities have captured more than their fair share of the retail market, and are therefore in effect subsidized by poorer cities where retail is more anemic. Is there any truth to this charge?




Sales Tax return data from CA Dept of Finance
Sales Tax return data from CA Dept of Finance



While it is possible to find extreme examples of cities with small populations that reap ten times the average sales tax per resident, the actual range is much narrower, but not nothing, and is clearly correlated with a city’s average income level. Richer cities get more sales tax per resident. Before you say, “duh”, remember that the money paid in taxes is not counted in calculations of post-tax income inequality. Accordingly, to the extent that sales taxes are distributed disproportionately to richer cities, they are making an already unequal post-tax distribution of income even more unequal. Cities with median family incomes of $100,000 annually get 50% more sales tax return than cities with median family incomes of $50,000.


Sales taxes are a tremendously valuable source of revenue to cities because they are largely unencumbered. They can be used for just about any purpose, including often to transfer money to the local school district to enhance education. When someone from the moderate-income Palms neighborhood of Los Angeles buys a car in Santa Monica, they’re not just helping out the dealer: they’re also helping out the rich kids in the Santa Monica schools. Yet another reason to buy local the next time you open your wallet.

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