U.S. Tax Progressivity and Redistribution
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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.
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
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….”
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)….”