This paper develops a framework to study the effects of tax expenditures on intergenerational mobility using spatial variation in tax expenditures across the United States. We measure intergenerational mobility at the local (census commuting zone) level based on the correlation between parents’ and children’s earnings. We show that the level of local tax expenditures (as a percentage of AGI) is positively correlated with intergenerational mobility and that this correlation is robust to introducing controls for local area characteristics. To understand the mechanisms driving this correlation, we analyze the largest tax expenditures in greater detail. We find that the level and the progressivity of state income taxes are positively correlated with intergenerational mobility. Mortgage interest deductions are also positively related to intergenerational mobility. Finally, we find significant positive correlations between state EITC policy and intergenerational mobility. We conclude by discussing other applications of this methodology to evaluate the net benefits of tax expenditures.
In his story on the study, David Leonhardt notes that one out of three 30-year-olds who grew up in the top 1% was already making at least $100,000 in family income. The figure is only 1/25 for those who grew up in the bottom half of the income distribution.
And mobility varies considerably across space: