Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
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  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
Upside of Inequality Oxford Unintended Consequences

AI Summary. The U.S. tax code has become more progressive, with average federal tax rates for the bottom fifth of households falling from 9.3% to 1.7% while the top fifth fell from 27.1% to 26.5%, largely due to expanded tax credits for low-income individuals.

David Splinter National Tax Law Journal
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The US tax code has become more progressive since 1979, largely driven by tax credits for low-income individuals. Progressivity has more than doubled since 1986, according to @DavidSplinter in the National Tax Law Journal.

Has the U.S. tax code become more progressive over time?

Core argument: Average federal tax rates for the bottom quintile fell 7.6 percentage points between 1979 and 2016, from 9.3% to 1.7%, while the top quintile's rate fell 0.6 percentage points, from 27.1% to 26.5%.

Since 1979, the U.S. tax code has become significantly more progressive, with progressivity more than doubling since 1986, primarily due to increased tax credits for low-income individuals. Between 1979 and 2016, average federal tax rates decreased by 7.6 percentage points for the bottom quintile, from 9.3% to 1.7%, while the top quintile saw a modest decrease of 0.6 percentage points, from 27.1% to 26.5%. The gap between tax rates of the top and bottom quintiles increased by 39% over this period and by 110% since 1986. The RS index of tax-and-transfer redistribution rose by 59%, indicating enhanced redistribution efforts. Despite lower marginal rates, the effective tax rate for the top 1% remained largely unchanged due to reduced use of tax shelters. These changes have offset a significant portion of market income inequality and reduced the number of individuals below real poverty thresholds.

Takeaways by Macro Roundup® AI

  1. Average federal tax rates for the bottom quintile fell 7.6 percentage points between 1979 and 2016, from 9.3% to 1.7%, while the top quintile's rate fell 0.6 percentage points, from 27.1% to 26.5%.
  2. U.S. tax progressivity has more than doubled since 1986, primarily due to increased tax credits for low-income individuals, with the gap between top and bottom quintile tax rates rising 110% since 1986 and 39% since 1979.
  3. The RS index of tax-and-transfer redistribution rose 59%, and the effective tax rate for the top 1% remained largely unchanged despite lower marginal rates, attributed to reduced use of tax shelters.

New Splinter using CBO data looks finds (as he has previously) that the progressivity of our tax code has increased significantly since 1979 and has more than doubled since 1986. This has been primarily driven by large tax credits for persons at the bottom, at the same time the average tax burdens of top earners have been relatively unchanged because lower marginal rates were offset by decreased use of tax shelters

The tax code has become more progressive“…Figure 2 presents average federal tax rates for the top, middle, and bottom quintiles. Between 1979 and 2016, tax rates decreased across the income distribution: for the top quintile by 0.6 percentage points (27.1 to 26.5 percent), for the middle quintile by 5.2 percentage points (19.1 to 13.9 percent), and for the bottom quintile by 7.6 percentage points (9.3 to 1.7 percent). The larger decline for those with lower incomes implies an increase in tax progressivity. Although a crude measure of progressivity, the gap between tax rates of the top and bottom quintiles increased by 39 percent over this period and since 1986 increased by 110 percent, suggesting a substantial increase in tax progressivity. Decreases in individual income taxes drove the overall decline in bottom- and middle quintile tax rates. The bottom-quintile decrease of 7.6 percentage points resulted from average income tax rates decreasing from zero to -11 percent and corporate tax rates decreasing about half a percentage point, with offsetting payroll and excise tax rate increases (Figure A1). The middle-quintile decrease of 5.2 percentage points resulted from average income tax rates decreasing 4 percentage points and corporate tax rates decreasing about 1 percentage point. The temporary middle-quintile decrease between 2008 and 2012 resulted from policies in response to the Great Recession: recovery rebates in 2008, making work pay credits in 2009 and 2010, and a payroll tax holiday in 2011 and 2012…. Figure 8 shows that between 1979 and 2016, the RS index of tax-and-transfer redistribution increased 59 percent (from 0.13 to 0.21). Since 1986, it increased 66 percent…

David Splinter, "U.S. Tax Progressivity and Redistribution,"National Tax Law Journal, December 2020, http://www.davidsplinter.com/Splinter-TaxProgressivity-NTJ.pdf

U.S. Tax Progressivity and Redistribution: Extended Excerpt Image 1


Core findings, “…This paper presents new estimates of both tax progressivity and redistribution between 1979 and 2016. Compared to other studies, these estimates are more recent, account for all federal taxes and the entire income distribution, and rely on mainstream tax incidence and income allocation assumptions. Federal tax progressivity increased 46 percent with the Kakwani index and 110 percent with the tax elasticity. Considering the effects of federal taxes and all transfers, the RS index of redistribution increased 59 percent.Tax progressivity fell sharply in the early 1980s, meaning it increased more dramatically since 1986, with the Kakwani index doubling and the tax elasticity tripling. More generous refundable tax credits in this period were a primary cause of increasing tax progressivity. Over the longer run, studies showing earlier progressivity decreases suggest a U-shaped tax progressivity curve since WWII, with the minimum occurring in 1986. For recent decades, these findings are consistent with other estimates showing that taxes and transfers have offset a significant portion of the increase in market income inequality, as shown by OECD (2011), Auten and Splinter (2019a), Elwell, Corinth, and Burkhauser (2020), and the Congressional Budget Office. In addition, changes in taxes and transfers dramatically reduced the number of individuals below real poverty thresholds (Burkhauser et al., 2019) and subject to individual income taxes (Heim, Lurie, and Pearce, 2017; Splinter, 2019a). These long-term patterns of redistribution moved independently from the decrease in top individual income tax rates because a small share of tax returns has been subject to top rates. Moreover, high top rates in earlier decades accompanied significant income sheltering — but this sheltering declined as the gap between corporate and individual tax rates narrowed, such that corrected average top tax rates have been relatively flat since 1960….”

U.S. Tax Progressivity and Redistribution: Extended Excerpt Image 2


The Top 1%’ effective tax rate has been largely unchanged despite lower marginal tax rates, “…But Figure 5 shows that top 1 percent average income tax rates did not fall with the top rate — instead, they increased or at least remained flat. This disconnect between top statutory rates and average rates follows from two effects: a small share of taxpayers being subject to the top rate and reduced use of corporate tax shelters.Both the number of taxpayers and the share of income subject to the top rate was insubstantial in the early 1960s, meaning it had an irrelevant impact on overall progressivity. In the early 1960s, the top rate was paid by only 0.001 percent of tax units, or fewer than 500 tax returns. Except for a few years with two rate brackets, the share paying the top rate remained small: 0.06 percent in 1979 (top rate of 70 percent), 0.31 percent in 1985 (top rate of 50 percent), and 0.60 percent in 2016 (top rate of 39.6 percent)….”

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