u.s. tax progressivity and redistribution

David Splinter

Data: davidsplinter.com

Comments: [email protected]

May 14, 2020

National Tax Association Spring Symposium

This presentation embodies work undertaken for the staff of the Joint Committee on Taxation, but as members of both parties and both houses of Congress comprise the Joint Committee on Taxation, this work should not be construed to represent the position of any member of the Committee.

U.S. Tax Progressivity and Redistribution

http://www.davidsplinter.com/

2Splinter: U.S. Tax Progressivity

Outline

1) Current U.S. federal tax system is progressive

2) Tax progressivity increased since 1979

3) Progressivity vs. Redistribution measures

4) Redistribution increased since 1979


Previous Research

Average tax rates• Expanded income: TPC, JCT, OTA, CBO (Kasten, Sammartino & Toder 1994)

• Fiscal income: Piketty & Saez (2007)

• National income: Auten & Splinter (2019), Saez & Zucman (2019)

• State: Metcalf (1994), ITEP, Feenberg et al. (2017), Sammartino & Francis (2016)

“Progressivity” measures• Lorenz curve-based: Kakwani (1977), Suits (1977), Stroup (2005)

• Long-run estimates: Mathews (2014), Feenberg et al. (2017), Splinter (2019)

• TCJA: Sammartino, Stallworth & Weiner (2018), Callen & Mathur (2019)

• Net of tax ε: Musgrave & Thin (1948), Feldstein (1969), Feenberg et al. (2017)

Recent Models: Bénabou (2002), Blundell, Pistaferri & Saporta-Eksten (2016)

Heathcote, Storsletten & Violante (2017), DeBacker, Evans, & Phillips (2019)Moore & Pecoraro (2020) review and critique use of smooth functions

• Progressivity vs. Redistribution: Kiefer (1984), Slavov & Viard (2016)

Tax/Transfer Redistribution Measures• Reynolds & Smolensky (1977), Lambert (1985), Meyer et al. (2020)


1) Current federal tax system is progressive


Average Tax Rates in 2014Federal taxes (including payroll taxes)

Notes: JCT for 2015. Piketty-Saez for 2004 and based on narrow fiscal income, Auten-Splinter on broad national income, and others on intermediate income definitions.

0

10

20

30

40

0 20 40 60 80 100

Avera

ge f

ede

ral ta

x r

ate

(%

)

Income quintile

Auten-Splinter

Piketty-Saez

CBO

Bottom 2nd 3rd 4th Top

Within top 1%

TPC

JCT


2) Tax progressivity increased since 1979(CBO data for rest of presentation)


Tax progressivity increased since 1979Quintile-level average federal tax rates

0

10

20

30

1979 1989 1999 2009 2019

Middle Quintile–5.2

Bottom Quintile

–7.6

–0.6Top Quintile

Source: Author’s calculations from CBO estimates. Notes: Income excludes means-tested transfers.


Tax progressivity measuresKakwani index


0%

25%

50%

75%

100%

0% 25% 50% 75% 100%

Cum

ula

tive

sh

are

of

inco

me o

r ta

xes

Cumulative share of individuals

Cumulativeshare of

federal taxesKakwani

Gini coefficient

Cumulativeshare of income


50

100

150

200

250

300

1979 1989 1999 2009 2019

Kakwani Index

+49%

Tax progressivity increased, 1979=100

Source: Author’s calculations from CBO estimates. Notes: Income excludes means-tested transfers. Includes 2008 recovery rebate credits, 2009-10 making work pay credits, and 2011-12 payroll tax holiday.


Tax progressivity measuresTax elasticity (weighted by #individuals)


7

9

11

13

9.5 11.0 12.5 14.0

Lo

g fed

era

l ta

xes (

$20

16

)

Log income ($2016)

1979 ε = slope - 1 = 0.47



50

100

150

200

250

300

1979 1989 1999 2009 2019

Kakwani Index

+49%

+110%

Tax Elasticity

Making Work Pay credit




50

100

150

200

250

300

1979 1989 1999 2009 2019

Kakwani Index

+49%

+110%

+70%

Tax Elasticity



Top rates are not progressivityNot enough taxpayers are subject to top income rates

Source: SOI individual reports for various years.

0%

30%

60%

90%

1960 1970 1980 1990 2000 2010 2020

%Tax units at top rate

0.6%20161970

0.01%

Top tax rate

19620.001%



0%

30%

60%

90%

1960 1970 1980 1990 2000 2010 2020

Top tax rateTop 1% avg. indiv. income tax rates

Auten-Splinter

CBO

Top rates are not progressivityTop 1% avg. income tax rates flat since 1960s



0%

3%

6%

9%

0%

30%

60%

90%

1960 1970 1980 1990 2000 2010 2020

Taxable C corp. retained earnings(%national income, right axis)

Top tax rate

Top rates are not progressivitymore sheltering in C corps with higher rates

Tax base was “full of leaks, loopholes, exemptions and

preferences” –Hellerstein (1963)


3) Progressivity vs. Redistribution measures


Progressivity vs. Redistribution%Δ Taxes measures progressivity

• independent of proportional tax changes• not sensitive to amount of total taxation

Source: Author’s example: initial A income of $10K and tax $1K, B of $100K and $30K.

7

8

9

10

9 10 11

Log t

ax

Log pre-tax income

Percent Change in Taxes (tax ε)

slope=1.48 unchanged

initial slope=1.48

double tax rates


Progressivity vs. Redistribution%Δ After-tax income measures redistribution

• not independent of proportional tax changes• sensitive to amount of total taxation

Source: Author’s example: initial A income of $10K and tax $1K, B of $100K and $30K.

9.0

9.5

10.0

10.5

9 10 11

Log a

fter-

tax incom

e

Log pre-tax income

Percent Change in After-Tax Income

slope=0.7 decreases

initial slope=0.9

double tax rates

7

8

9

10

9 10 11

Log t

ax

Log pre-tax income

Percent Change in Taxes (tax ε)

slope=1.48 unchanged

initial slope=1.48

double tax rates


Effective tax rate Tax progressivity (%Δ) Tax redistribution (%Δ)

Baseline

(2014) New rate

Kakwani

index

Tax

elasticity

Net of tax

elasticity

21.2 19.1 0.0 0.0 –12

Proportional decrease in avg. tax rates of 10 percent

Proportional increase in avg. tax rates of 10 percent

21.2 23.3 0.0 0.0 +12

Progressivity vs. RedistributionProportional changes to 2014 taxes

• Progressivity is NOT affected• Redistribution is affected



4) Redistribution increased since 1979


Average Tax RatesTax rate = taxes/income

0

10

20

30

40

0 20 40 60 80 100

Avera

ge f

edera

l ta

x r

ate

(%

)

Income quintile



Source: Author’s calculations from CBO estimates. Notes: Income is market income.

-350

-175

0

0 20 40 60 80 100

Ave

rage

fed

eral

tax

rat

e (%

)

Income quintile

Federal Taxes


Average Tax RatesTax rate = taxes/income


Tax/transfer redistribution in 2016Redistribution rate = (taxes – transfers)/income


-350

-175

0

0 20 40 60 80 100

Ave

rage

tra

nsf

er r

ate

(%)

Income quintile

Federal Taxes


Taxes less means-tested transfers

Taxes less means-tested transfers & social insurance benefits


Tax/transfer redistribution measuresReynolds-Smolensky index

Source: Author’s calculations from CBO estimates. Notes: Individuals ranked by market income.

0%

25%

50%

75%

100%

0% 25% 50% 75% 100%

Cumulative share of individuals

Cumulative share of after-tax/transfer income

Cumulative share of market income

Reynolds-Smolensky index


Tax/transf. redistribution increased since 1979

Source: Author’s calculations from CBO estimates. Notes: 1979 level set to 100.

75

100

125

150

1979 1989 1999 2009 2019

Reynolds-Smolensky Index

+61%


Tax/transf. redistribution increased since 1979

Source: Author’s calculations from CBO estimates. Notes: 1979 level set to 100.

75

100

125

150

1979 1989 1999 2009 2019

Reynolds-Smolensky Index

+61%

Mitigating factors:

Total taxes as share of income fell

Transfers increasingly to middle incomes


Conclusions

Current U.S. tax system is progressive

Redistribution is not progressivityΔAfter-tax income measure ΔRedistribution

Progressivity/Redistribution increased since 1979

Tax progressivity by Kakwani increased 49%

Redistribution by Reyn-Smol. increased 61%

Comments: [email protected]: davidsplinter.com

http://www.davidsplinter.com/


Appendix Slides


Tax progressivity increased since 1979Quintile-level federal tax rate comparisons


-15

0

15

30

1979 1989 1999 2009

Excise

Corporate

Payroll taxes

Income taxes

Top Quintile

Total

1979 1989 1999 2009

ExciseCorporate

Payroll taxes

Income taxes

Bottom Quintile

Total


Redistribution increased since 1979Quintile-level transfer rates by source


0

100

200

300

1979 1989 1999 2009

Social Security &Disability

Medicare

Medicaid–1

+28

Other transfers

+21

+49

Bottom Quintile

+96Total

0

25

50

1979 1989 1999 2009

Social Security & Disability

Medicare

Medicaid

+2

+10

Other transfers

+11

+9

Second QuintileTotal +32


Tax/transf. redistribution increased since 1979Average redistribution rates (pp changes)


-350

-175

0

1979 1989 1999 2009 2019

Middle Quintile–17

Bottom Quintile

–163

–1Top Quintile


Saez-Zucman (2019) reconciliation to CBO + state/local approach


Average Tax Rates in 2010Federal (CBO) + State/Local taxes (ITEP)

Notes: ITEP is the Institute on Taxation and Economic Policy.

0

10

20

30

40

0 20 40 60 80 100

Avera

ge t

ax r

ate

s (

%)

Income quintile

CBO + State/Local (ITEP)

CBO (federal only)


Top 1%


Average Tax Rates in 2010Saez-Zucman rates matched to CBO+State/Local

0

10

20

30

40

0 20 40 60 80 100

Income quintile

CBO+SL

Saez-Zucman


Top 1%


0

10

20

30

40

0 20 40 60 80 100

Income quintile

CBO+SL

Saez-Zucman


Top 1%


Add missing OASDI taxes &

social insurance to income



Remove imputed retirement &

underreported income

0

10

20

30

40

0 20 40 60 80 100

Income quintile

CBO+SL


Top 1%



Account for refundable

credits

0

10

20

30

40

0 20 40 60 80 100

Income quintile

CBO+SL


Top 1%


0

10

20

30

40

0 20 40 60 80 100

Income quintile

CBO+SL


Top 1%


Add back 11% of adults dropped by SZ from bottom of

income distribution, remove other

imputed income, equivalence scale, weight by #indivs.

u.s. tax progressivity and redistribution

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