distributional analysis of tax policy: theory and practice
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Distributional Analysis of Tax Policy: Theory and Practice
Joseph RosenbergUrban-Brookings Tax Policy Center
February 20, 2014
Distributional Analysis of Tax Policy
Measuring the impact of tax laws and tax policy changes on individuals.
- Motivation?
- Concerns?
Distributional analysis at the federal level is routinely produced by:
Congressional Budget Office (CBO),
Joint Committee on Taxation (JCT),
U.S. Treasury’s Department of Tax Analysis (OTA),
Urban-Brookings Tax Policy Center (TPC)
Distributional Analysis: Overview
• Unit of analysis Tax unit; Family; Household
• Time periodSingle year; Multiyear; Lifetime
• Ranking individualsIncome; Consumption
Definition of income
Adjustments for size of unit
• Measuring tax burdenTaxes paid; Burden
• Incidence assumptionsHow should we assign tax burdens back to individuals
Distributional Analysis: Comparison
JCT OTA CBO TPC
Unit of Analysis
Tax unit Family Household Tax unit
Time Period Single year Single year (fully phased-in law)
Single year Single year*
Income Measure
Expanded Income
Cash Income
Before-tax Income
Expanded Cash Income
Size adjusted No Yes No Both
Taxes Included
Income Payroll
Corporate* Excise
Income Payroll
CorporateExcise
Estate & Gift
IncomePayroll
Corporate Excise
IncomePayroll
Corporate
Estate & Gift
Measure of burden
Taxes paid Burden Burden Burden
Common Incidence Assumptions
• Individual Income Tax: Borne by individual taxpayer
• Payroll Tax: Employer & employee portions borne by employee
• Estate Tax: Borne by decedent
• Corporate Income Tax: It’s complicated
CBO & JCT*: 75% Capital, 25% Labor
OTA: 63% Shareholders, 18% Capital, 18% Labor
TPC: 60% Shareholders, 20% Capital, 20% Labor
• Consumption/Excise Tax: It’s really complicated
e.g., Toder, Nunns, Rosenberg (2011)
JCT Distribution Table, 2012
TPC Distribution Table, 2013
Lowest Quintile 43,453 26.8 13,607 328 13,279 2.4 4.7 5.5 0.6Second Quintile 36,220 22.4 33,863 2,454 31,409 7.3 9.7 10.9 4.0Middle Quintile 31,791 19.6 59,141 7,309 51,832 12.4 14.8 15.8 10.3Fourth Quintile 25,914 16.0 99,185 15,630 83,555 15.8 20.3 20.8 18.0
Top Quintile 22,833 14.1 280,129 65,893 214,236 23.5 50.5 47.0 66.9All 161,868 100.0 78,255 13,905 64,350 17.8 100.0 100.0 100.0
Addendum80-90 11,458 7.1 151,406 27,375 124,031 18.1 13.7 13.6 13.990-95 5,652 3.5 210,456 41,802 168,654 19.9 9.4 9.2 10.595-99 4,566 2.8 336,973 75,952 261,020 22.5 12.2 11.4 15.4
Top 1 Percent 1,157 0.7 1,670,664 525,231 1,145,433 31.4 15.3 12.7 27.0Top 0.1 Percent 118 0.1 7,744,239 2,616,751 5,127,488 33.8 7.2 5.8 13.8
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-1).
Baseline Distribution of Income and Federal Taxesby Expanded Cash Income Percentile, 2013 ¹
Expanded Cash Income
Percentile2,3
Tax Units4 Average Income
(Dollars)
Average Federal Tax
Burden (Dollars)
Average After-Tax
Income5
(Dollars)
Average Federal
Tax Rate6
Share of Pre-Tax Income
Share of Post-Tax Income
Share of Federal
TaxesNumber
(thousands)Percent of Total
Percent of Total
Percent of Total
Percent of Total
Number of AMT Taxpayers (mill ions). Baseline: 3.9
TPC Distribution Table, 2013
Lowest Quintile 43,453 -4.8 6.5 0.7 * 2.4Second Quintile 36,220 -1.3 7.6 0.9 * 7.2Middle Quintile 31,791 3.1 8.2 1.1 * 12.4Fourth Quintile 25,914 5.8 8.6 1.4 * 15.8
Top Quintile 22,833 14.3 6.3 2.7 0.2 23.5All 161,868 8.5 7.2 1.9 0.1 17.8
Addendum80-90 11,458 7.5 9.0 1.6 * 18.190-95 5,652 9.4 8.3 2.1 * 19.995-99 4,566 13.5 6.4 2.5 0.2 22.5
Top 1 Percent 1,157 24.1 2.6 4.2 0.5 31.4Top 0.1 Percent 118 26.4 1.7 5.1 0.7 33.8
Source : Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-1).* Less than 0.05.
Effective Federal Tax Rates - All Tax Units
By Expanded Cash Income Income Percentile, 2013
Baseline: Current Law
Expanded Cash
Income Percentile1
As a Percentage of Expanded Cash Income
Individual
Income Tax2
Tax Units (Thousands) Payroll Tax3 Corporate
Income TaxEstate Tax
All Federal
Tax4
TPC: Distributional Impact of ATRA
CBO, 1979-2010
Measuring Income for Distributional Analysis
• Ranking taxpayers Standard distributional tables rank taxpayers based on annual income as a proxy for their economic status and ability to pay taxes.
• Measuring tax burdensThe overall burden of the tax system (excluding indirect economic costs) can be summarized in the effective tax rate (ETR), the amount of taxes paid measured as a percentage of income.
• Evaluating the effects of tax policy changesChanges in taxes are often shown as a percentage of pre-tax income or as a percentage change in after-tax income.
Measuring Income for Distributional Analysis (cont.)
Haig-Simons Income:
Consumption + Change in Net Wealth
Practical Difficulties:
Administrative (e.g., accrued capital gains)
Timing (e.g., retirement income)
Imputed Rent!
Relative to narrow income measures (e.g., AGI), broad income measures provide a more accurate ranking of taxpayers and better estimates of the burden of the tax system and tax policy changes.
Conceptual Issues in Measuring Income
• Transfer Payments– Cash transfers
– In-kind transfers
• Timing of Retirement Income– Defined benefit
– Defined contribution• Front-loaded
• Back-loaded
• Corporate Income Tax• Data Quality
– Administrative vs. Imputed Data
Comparison of Different Income Measures
Distribution of Sources of ECI
Distributional Analysis in Practice: Example
“Who Benefits from Tax-Exempt Bonds?: An Application of the Theory of Tax Incidence”(with Harvey Galper, Kim Rueben, and Eric Toder)
Motivation: Often claimed…•“Tax-exemption only benefits holders of tax-exempt bonds”
•“80% of the benefit accrues to state & local governments in the form of lower financing costs”
Tax Incidence: General Principles
General Principles:•Economic burdens may differ from statutory burdens
•Tax burdens ultimately borne by individuals
•Individuals are affected according to how they earn the income (“sources-side”) and how they spend their income (“uses-side”)
Sources-side: Taxes reduce after-tax incomes depending on the size and composition of an individual’s income
Uses-side: Taxes affect relative prices and can reallocate resources across goods and/or sectors of the economy
Incidence of Muni Tax Exemption: Theory
Current Method: Allocate benefit in proportion to reported tax-exempt interest
Sources-side: Creates implicit taxes and subsidies in pre-tax incomes, spread across…
•all interest income
•all capital income
•capital and labor income
Uses-side: Net transfer to S&L governments from other sectors
•lower S&L taxes (to whom?), or
•higher S&L spending (for what?)
Capital Market Effects of Tax Exemption
• In theory, the yield spread between tax-exempt debt and similar taxable debt should proxy for the value of tax exemption.
• Literature on BABs finds a range of yield spreads, but generally centered around 25%
Important Stylized Fact: Tax-exempt interest reported across a wide range of incomes and marginal tax brackets, casting doubt on pure clientele or “marginal investor” model of capital market equilibrium. We refer to the empirical yield spread as the “implied equilibrating tax rate.”
Model Simulations: Methodology
Sources-side:•Using implied yield spread, we calculate an “adjusted” measure of pre-tax income by grossing up tax-exempt interest and then adjusting down relevant income sources in order to hold aggregate pre-tax income constant.
Uses-side: Zero-sum reallocation among…•Positive reallocation to state & local governments
– Case 1: Lower taxes distributed in proportion to MAGI– Case 2: Higher spending distributed per capita
•Negative reallocation to other sectors– Distributed in proportion to private consumption by income
group3
Simulations: Main Findings
Overall, majority of the benefit from exemption accrues to top 5%. However:•Relative to conventional methodology, “sources-side” effects spread the benefit more broadly across income distribution
– Benefits spread to holders of taxable securities
– But benefit still goes disproportionately to top 5 percent
•Uses-side effects can be large for the bottom quintile – They either benefit more from increased S&L provided goods
& services or less from S&L tax cuts, than the harm to them from higher relative prices on consumption goods
Simulations: Results
Advances in Distributional Analysis
Where to go from here:•Better data sources
•Incorporating state/local taxes– Distribution of federal taxes by state
– Distribution of state income taxes
•Integrating taxes and transfer/spending programs (e.g., CBO, 2013)
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