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The Distributional Implications of the Tax Changes in the 1980s

  • Sourushe Zandvakili
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    This paper studies changes in the United States as a consequence of the Economic Recovery Act of 1981 (ERITA), the Tax Equality and Fiscal Responsibility Act of 1982 (TEFRA), and the Tax Reform Act of 1986 (TRA). The effects of ERITA, TEFRA, and TRA are demonstrated via measures of pre-tax and post-tax inequality based on gross household income and disposable household income. Thus, the distribution of income, and also the tax payments, consist of components that are attributed to tax changes and components that are driven by the pre-tax income. Typically, most analysts view the distribution of pre-tax and post-tax income based on GINI coefficients. However, this analysis employs the decomposable Generalized Entropy measure, which enables the distribution of the "between group" and "within group" (weighted average) effects of taxation. Moreover, this approach allows for a more accurate assessment of tax progressivity in the long run. This process provides a better framework to evaluate the policy implications of future tax changes. The results illustrate that long-run income tax progressivity has been declining over time. Concurrently, we witness a relative rise in pre-tax and post-tax income inequality over the latter portion of the accounting interval. It is further evidenced that a number of exemptions and the type of tax table used create more equalization within each group, but cross- group equalization is minimal. When decomposed by quintile, the data reveal more cross-group equalization than within-group equalization.

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    File URL: http://www.levyinstitute.org/pubs/wp70.pdf
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    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_70.

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    Date of creation: Jan 1992
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    Handle: RePEc:lev:wrkpap:wp_70
    Contact details of provider: Web page: http://www.levyinstitute.org

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    1. Charles Blackorby & David Donaldson, 1984. "Ethical Social Index Numbers and the Measurement of Effective Tax-Benefit Progressivity," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 683-94, November.
    2. Maasoumi, Esfandiar, 1986. "The Measurement and Decomposition of Multi-dimensional Inequality," Econometrica, Econometric Society, vol. 54(4), pages 991-97, July.
    3. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
    4. C. P. Khetan & S. N. Poddar, 1976. "Measurement of Income Tax Progression in a Growing Economy: The Canadian Experience," Canadian Journal of Economics, Canadian Economics Association, vol. 9(4), pages 613-29, November.
    5. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-20, July.
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