Paul L. Caron

Tuesday, August 3, 2021

Joint Committee On Taxation: Income Inequality Has Changed Little In 50 Years

Patrick Driessen, National Income, Transfers, and the JCT’s Tax Rates, 172 Tax Notes Fed. 249 (July 12, 2021):

Tax Notes Federal (2020)In a recent pamphlet framing a congressional hearing on high-income and high-wealth taxpayers [Present Law and Background on the Taxation of High Income and High Wealth Taxpayers], the staff of the Joint Committee on Taxation offered what I believe is its first-ever official judgment about trends in historical income inequality. In focusing primarily on the federal level, the JCT staff concluded that after-tax, after-government-outlay, after-government-deficit (three mouthfuls collectively referred to here as post-government) income inequality has changed little in 50 years.

The JCT further employed this historical approach to confirm prior results found with its standard distributional model (which doesn’t extensively attempt to distribute federal outlays or deficits and hasn’t specifically been applied in a historical context) that the federal tax system is progressive throughout the income spectrum (although the analysis didn’t reach the granular level of the 40 or 400 highest income or wealth units). The JCT reached these tax rate and post-government income conclusions by adopting much of the method and data from research by two Treasury Department and JCT staffers Gerald Auten and David Splinter, respectively [Income Inequality in the United States: Using Tax Data to Measure Long-Term Trend].

Joint Committee on Taxation, Present Law and Background on the Taxation of High Income and High Wealth Taxpayers (JCX-24-21 May 10, 2021):

The following figures present information about pre-tax/pre-transfer (as with Tables 2 and 3), pre-tax/after-transfer (as with Table 1), and after-tax/after-transfer national income. After-tax/after-transfer income is income after all taxes (Federal, State, and, local) are paid and includes government transfers. After-tax/after-transfer income represents the annual amount a tax unit has available to allocate between current consumption and savings. Figure 1 shows the pre-tax/pre-transfer, pre-tax/after-transfer, and after-tax/after-transfer income share trends from 1960 to 2018 for the following income groups: bottom 50 percent (Figure 1a), the 50-90 percentile (Figure 1b), the 90-99 percentile (Figure 1c), and top one percent (Figure 1d). Pre-tax/pre-transfer income and pre-tax/after-transfer income are as described above.

The shares of the bottom 50 percent increase after transfers and taxes are taken into account. This is the result of the concentration of transfers in the bottom half of the income distribution as well as the effects of refundable tax credits and the lower tax rates imposed on lower-income individuals. In Figure 1b, the tax and transfer system has, on average, little effect on the shares of incomes for the 50-90 percentile. This suggests that the tax and transfer system in the aggregate has little effect on the relative share of income of individuals in the 50-90 percentile relative to its effect on individuals in the bottom 50 percent and top ten percent. Finally, in Figures 1c and 1d, the shares of income for the 90-99 percentile and the top one percent fall when accounting for transfers and taxes. This is the opposite pattern to that seen for the bottom 50 percent and occurs because this higher-income group receives fewer transfers and pays tax at relatively higher rates than lower income groups.

Trends over time are also apparent. In Figure 1a, all three share of income measures for the bottom 50 percent, after rising in the 1960s, have been declining since the 1970s. In Figure 1b, all three share of income measures for the 50-90 percentile have been relatively flat since 1960. In Figure 1c, all three of income measures for the 90-99 percentile have also been relatively flat. In Figure 1d, all three share of income measures for the top one percent declined in the late 1960s, rose between the early 1990s and late 2000s, and have been relatively stable in recent years. When accounting for taxes and transfers, however, the increase between the early 1990s and late 2000s is less pronounced.

Joint Tax 1

Joint Tax 2

Patrick Driessen, National Income, Transfers, and the JCT’s Tax Rates, 172 Tax Notes Fed. 249 (July 12, 2021):

It’s a little surprising that the JCT staff as an institution chose to take an official position on historical income inequality, a topic that hasn’t been a routine or even occasional JCT task. Of course, it’s possible that the JCT staff was asked to look into historical income inequality by the House Ways and Means Committee for the hearing. And it’s possible that the JCT staff firmly believe the research of Auten and Splinter and saw this as the time and method to publicly affirm that, and also perhaps believed that the JCT’s standard distributional approach is buttressed by the historical modeling in the pamphlet.

In any case, the JCT could have neutrally surveyed the issues and the literature (including Auten and Splinter) without essentially adopting the methods and results of Auten and Splinter’s historical income research, but chose not to. Now that the JCT has taken a view on historical income inequality that has been linked by the JCT itself to its standard distribution for policy proposals, both of these methods can be looked at on their own and in relation to each other. 

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