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In the past decade, the Congress has enacted a series of significant changes in federal tax laws. Over the same period, the level and distribution of incomes have also changed. This report examines how changes in tax laws and changes in income have affected the distribution of federal tax liabilities. This study was prepared at the request of Senator George J. Mitchell of the Committee on Finance, United States Senate. In accordance with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, the report offers no recommendations.

Richard Kasten and Frank Sammartino of the Tax Analysis Division prepared the report under the direction of Rosemary Marcuss and Eric Toder. A number of people inside and outside CBO reviewed drafts and provided valuable criticism and suggestions. They include Marilyn Flowers, Robert Hartman, George Iden, Donald Kiefer, Stephen Long, Thomas Neubig, Joseph Pechman, John Sturrock, and Roberton Williams. Assistance in preparing the tables and figures was provided by Jeffrey Miller. Francis Pierce edited the manuscript. Linda Brockman set the paper up for publication. Kathryn Quattrone prepared the final draft for publication.
 

Edward M. Gramlich
Acting Director
October 1987
 
 

SUMMARY

I - INTRODUCTION

• Topics Not Covered

II - OVERVIEW OF FEDERAL REVENUES AND FEDERAL TAX LEGISLATION, 1975-1990

• The Level and Composition of Federal Revenues
• The Individual Income Tax
• Social Insurance Taxes
• The Corporate Income Tax
• Excise Taxes

III - WHO PAYS THE TAXES?

• Tax Incidence
• Incidence Assumptions Used in This Study

IV - MEASURING FAMILY INCOME

• Defining Family Income
• The Distribution of Family Income in 1977,1984, and 1988

V - THE DISTRIBUTION OF FEDERAL TAXES IN 1977, 1984, AND 1988

• Comparisons of Federal Taxes Over Years

VI - THE EFFECT OF TAX LAW CHANGES ON THE DISTRIBUTION OF FEDERAL TAXES

• Constant 1984 Income Comparisons
• Constant 1988 Income Comparisons

APPENDIXES

A - Additional Detail on the Distribution of Income
B - Additional Detail on the Distribution of Federal Taxes
C - Gini Coefficients and Suits Indexes
 

TABLES
1.	Exemptions, Standard Deductions, and Credits for the Individual Income Tax, 1975-1990
2.	Social Security Contribution Rates and Maximum Taxable Earnings, 1975-1990
3.	Corporate Income and Taxes, 1975-1990
4.	Derivation of Family Income for 1977 and 1984
5.	Distribution of Total Family Income by Population Decile
6.	Average Family Income in Each Population Decile, by Year and Treatment of Corporate Tax
7.	Effective Federal Tax Rates, by Population Decile: Corporate Income Tax Allocated to Capital Income
8.	Effective Federal Tax Rates, by Population Decile: Corporate Income Tax Allocated to Labor Income
9.	Effective Federal Tax Rates, by Population Decile, With Constant 1984 Incomes: Corporate Income Tax Allocated to Capital Income
10.	Effective Federal Tax Rates, by Population Decile, With Constant 1984 Incomes: Corporate Income Tax Allocated to Labor Income
11.	Effective Federal Tax Rates, by Population Decile, With Constant 1988 Incomes: Corporate Income Tax Allocated to Capital Income
12.	Effective Federal Tax Rates, by Population Decile, With Constant 1988 Incomes: Corporate Income Tax Allocated to Labor Income
A-1.	Minimum Income Level in Each Population Decile, by Year and Treatment of Corporate Tax
A-2.	Distribution of Family Income from Each Source of Income, by Population Decile, With Corporate Income Tax Allocated to Capital Income
A-3.	Distribution of Family Income from Each Source of Income, by Population Decile, With Corporate Income Tax Allocated to Labor Income
A-4.	Distribution of Family Income by Source of Income for Each Population Decile, With Corporate Income Tax Allocated to Capital Income
A-5.	Distribution of Family Income by Source of Income for Each Population Decile, With Corporate Income Tax Allocated to Labor Income
B-1.	Distribution of Family Income and of Federal Tax Payments by Population Decile, With Corporate Income Tax Allocated to Capital Income
B-2.	Distribution of Family Income and of Federal Tax Payments by Population Decile, With Corporate Income Tax Allocated to Labor Income
B-3.	Distribution of Total Federal Taxes Paid, by Type of Tax, for Each Population Decile, With Corporate Income Tax Allocated to Capital Income
B-4.	Distribution of Total Federal Taxes Paid, by Type of Tax, for Each Population Decile, With Corporate Income Tax Allocated to Labor Income
C-1.	Gini Coefficients and Suits Indexes
FIGURES
S-1.	Effective Federal Tax Rates by Population Decile
S-2.	Share of Total Federal Revenues by Source, 1975-1990
S-3.	Effective Tax Rates by Population Decile: Individual Income Tax and Social Insurance Taxes
S-4.	Effective Tax Rates by Population Decile: Corporate Income Tax and Excise Taxes
S-5.	Effective Federal Tax Rates by Population Decile, 1988, Under Tax Laws Adjusted to 1988 Incomes
1.	Revenues by Source as Shares of GNP, 1975-1990
2.	Ratio of Income Tax Threshold to Poverty Level, 1975-1990
3.	Individual Income Tax as a Percent of Taxable Income
4.	Federal Excise Tax Rates, 1975-1990
5.	Effective Federal Tax Rates by Population Decile
6.	Effective Federal Tax Rates by Population Decile: Individual Income Tax and Social Insurance Taxes
7.	Effective Federal Tax Rates by Population Decile, Corporate Income Tax and Excise Taxes
8.	Effective Federal Tax Rates by Population Decile, 1984, Under Tax Laws Adjusted to 1984 Incomes
9.	Effective Federal Tax Rates by Population Decile, 1988, Under Tax Laws Adjusted to 1988 Incomes
10.	Effective Federal Tax Rates by Population Decile, 1988, Under Tax Laws Adjusted to 1988 Incomes: Individual Income Tax and Social Insurance Taxes
11.	Effective Federal Tax Rates by Population Decile, 1988, Under Tax Laws Adjusted to 1988 Incomes: Corporate Income Tax and Excise Taxes
C-1.	Lorenz Curve
C-2.	Tax Concentration Curve

 

This study measures changes in the distribution of combined federal tax liabilities by family income classes for three representative years during the 1975-1990 period. The years chosen for analysis were 1977, 1984, and 1988. The two historical years were years of relatively high growth in gross national product, declining unemployment rates, and rising but relatively modest rates of inflation. The years chosen are separated by important changes in federal tax laws. In 1977, the Tax Reform Act of 1978 and the Economic Recovery Tax Act of 1981 had not yet been enacted. By 1984, those changes were in place, but payroll tax increases enacted in 1983 and the Tax Reform Act of 1986 were yet to come. By 1988, most changes from the 1986 act will be in place.

Between 1977 and 1984, the distribution of total federal taxes became less progressive. This change primarily reflected a shift in the tax burden at both extremes of the income distribution. Effective tax rates (the ratio of taxes to family income) rose for the 10 percent of families at the lowest end of the distribution and fell for the 10 percent of families at the highest. Between 1984 and 1988, the distribution of taxes is expected to become more progressive but to remain less progressive than in 1977.

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