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Why do income tax systems across the world consistently feature progressive marginal rates? The existing literature tells a political story focusing on the top of the rate schedule and the preferences of the poor and the middle class. According to this standard view, higher rates at the top result from the poor and the middle class using the political process to “soak the rich.” However, this explanation is inconsistent with research showing that public policy is generally more responsive to the preferences of the rich. Explaining marginal rate progressivity as a universal (and exceptional) triumph of the poor and the middle class rings hollow.

This Article resolves the tension in the existing literature by demonstrating how progressive marginal rates are consistent with the preferences of the rich. Marginal rate progressivity is the combination of two policies—higher rates at the top and lower rates at the bottom. This Article shifts the focus to the bottom of the rate schedule and argues that the rich and the middle class benefit from inframarginal tax cuts—rate cuts at low levels of income. The intuition is that taxpayers benefit from rate cuts if they occur at levels that are at or below their own income.

This means that rate progressivity is not entirely progressive policy. Increasing marginal rates at the top increases the progressivity of the fiscal system. But marginal rate cuts at low levels of income can have the opposite effect. They are particularly pernicious because they can be framed as “low-income” tax cuts. A cynical view of marginal rate progressivity is that it allows the rich and politicians to pay cheap lip service to progressivity, even though there are many better tools available for achieving that goal. Unfortunately, cutting inframarginal rates remains politically popular. Both House Speaker Paul Ryan and President Donald Trump’s tax plans feature such tax cuts prominently. Understanding the regressive effect of inframarginal rate cuts has never been more important.

For generations, debates over what level of government should pay for local government services—most notably school funding—have largely boiled down to a simple pair of assumptions. Having the state or federal government pay for services promotes equality across rich and poor areas, but hampers local tailoring and thereby reduces citizens’ choice sets. Economists call this an equity-efficiency trade-off—centralized funding promotes equity but undermines efficiency.

This Article argues that this presumed trade-off is not as stark as generally thought, as it ignores important and underappreciated reasons that centralization promotes choice and thus efficiency. Specifically, more centralized funding helps people live where they prefer to live, unburdened by artificially needing to pay more for services in poor jurisdictions with large numbers of impoverished households who can pay little for services themselves. This insight should not only shift the scholarly debate on the equity-efficiency trade-off, but also supply important, real-world payoffs for debates over school funding and similar programs. Put simply, centralized funding promotes equality and, by promoting choice, efficiency.

The Article does not merely make a theoretical argument; it also empirically tests the claim using natural experiments across the country in centralizing state funding for schools. The Article finds large efficiency benefits. The results also show that more centralized financing has encouraged people to move back to central cities, suggesting a second, hidden efficiency benefit to more centralized financing: It promotes the positive externalities associated with central city living. The Article could thus broaden support for more centralized funding of local services, something that could fundamentally reshape not just academic debates over fiscal federalism, but also state and local fiscal policy and urban living.

This Article considers the distributional consequences of the Supreme Court’s federalism jurisprudence over the past quarter century, focusing specifically on the anti-commandeering, anti-coercion, and state sovereign immunity doctrines. The first of these doctrines prevents Congress from compelling the states to administer federal programs; the second prevents Congress from achieving the same result through offers that for practical purposes the states cannot refuse; the third prohibits Congress from abrogating state sovereign immunity outside a limited class of cases. These doctrines vest the states with valuable entitlements and allow the states to sell those entitlements back to Congress for a price. In this respect, the doctrines have an intergovernmental distributional effect, shifting wealth from the federal government to the states.

The distributional consequences of the anti-commandeering, anti-coercion, and state sovereign immunity doctrines are not purely intergovernmental, however. The doctrines also have potential implications for the distribution of wealth across individuals and households. By forcing Congress to bear a larger share of the costs of federal programs, and by shifting some of the costs of liability-imposing statutes from the states to Congress, these doctrines allow the states to raise less revenue and compel Congress to raise more. For a number of historical as well as structural reasons, the federal tax system is dramatically more progressive than even the most progressive state tax systems, and so the reallocation of fiscal responsibility resulting from these federalism doctrines causes more revenue raising to occur via the more progressive system. The likely net effect is a shift in wealth from higher-income households (who bear a larger share of the federal tax burden) to lower- and middle-income households (who would have borne a larger share of the burden of state taxes).

This conclusion comes with a number of caveats. The distributional consequences of the Supreme Court’s federalism doctrines may be moderated—or magnified—by differences in federal and state spending priorities. Moreover, the doctrines may affect the size of government as well as the allocation of fiscal responsibility across levels of government (though the net effect on government size is ambiguous). And the doctrines may have distributional consequences that are not only interpersonal, but also intergenerational. What seems clear from the analysis in this Article is that federalism doctrines affect the distribution of income and wealth in subtle and sometimes unexpected ways, and that a comprehensive understanding of wealth inequality in the United States requires careful attention to key features of our fiscal constitution.