What accelerates upward economic mobility in USA?

Marketplace (American Public Radio) presented findings from Harvard and Berkeley economists that studied the relationships between what people are taxed in each USA county, what services they get back, and whether children end up wealthier than their parents (inter-generational prosperity).

Where you are born has a big effect on whether you will prosper more than your parents.

Intergenerational mobility (DARKER counties have LOWER mobility)

fig3-economic-mobility-USA — Darker counties have lower intergenerational economic mobility.

Why do the South and the Midwest have such lower mobility, meaning that if you were born into a poor family, you are much more likely to remain poor, than the rest of the country?

The authors present a pretty compelling case that two things matter:

(1) more progressive your tax rates lead to higher economic mobility…

progressive-tax-rate-slope-USA-by-county — Darker counties have a steeper progressive tax rate scale (higher slope)

Recall that a progressive tax is where rich people pay a higher rate than poor people. Therefore, poor people pay a smaller share but receive a larger share of economic stimulus in the form of good schools, parks, police, roads, and a healthy environment.

(2) The other factor is a ratio of how much service government delivers to a citizen compared to what he or she pays in tax — (they call it “% tax expenditures / adjusted gross income (AGI)”)

tax-rate-ratio-to-adjusted-gross-income-services-delivered-USA — Darker counties deliver more publicly funded social services per tax dollar collected locally.

Bigger, smaller, or more efficient government?

The United States is a system whereby every state and county chooses their local balance to this ratio. Those in favor of “big government” expect to pay higher taxes and receive more public support. Those who want limited government pay less tax and receive less support. One thing that is clear is that whenever a community implements a progressive tax system, where the rich pay more back into the system to support public services that generally benefit the poor, young people have a much higher chance of becoming richer than in counties where the tax system is flat.

The authors did not examine whether areas with higher mobility had “more efficient” government (i.e. more services and less tax revenue), but they did show that a child born into an area with low economic mobility remained stuck in poverty if he/she moved at age 22, but not at age 13 – so moving to a good school was a major factor.

If you support the “American Dream” – meaning the ability of any citizen to prosper through hard work and seizing opportunity, then you support progressive taxes. McDonalds has recently published a budgeting guide for its full time employees that illustrates how unlikely a poor hard-working person is to make it out of poverty without any social services: