A simulation, regression analysis and Delphi survey to search for material inequities resulting from the repeal of income averaging under the Tax Reform Act of 1986

The Tax Reform Act of 1986 (TRA 86) repealed income averaging under the assumption that the lower and wider tax brackets of the new law would prevent taxpayers with volatile incomes from suffering tax inequities. This study objectively tests this assumption. Simulations are conducted, with the use of IRS panel data tapes, to measure the magnitude of the tax inequities at ten different Adjusted Gross Income (AGI) levels under the TRA 86. Regression analysis and descriptive statistics are used to determine factors associated with tax inequities from fluctuating incomes. A Delphi survey is undertaken using nationally recognized tax policy experts, to determine if the inequities found in the simulations justify the costs of reintroducing income averaging. The tax policy experts use a macro perspective, not an individual taxpayer perspective, to determine a point at which inequities from volatile incomes are large enough to warrant the reintroduction of income averaging. The simulation discovered that in every AGI level at least 25 percent of the population suffers inequities. Classifying the taxpayers by AGI, then ranking the taxpayers from the smallest to the largest inequity, the median annual inequity for the top 10 percent of each AGI ranges from $270 to \$4,830. Stating the inequity as a percent of the AGI, the median annual inequity for the top 10 percent of each AGI ranges from.7% to 5.7%. The greatest dollar inequities are paid by the highest AGI levels; the greatest percent inequities are paid by the lowest ($0--\$5,000) and highest (Greater than $95,000) AGI levels. The regression analysis and descriptive statistics found that taxpayers with farm, capital gain and self-employment incomes experience above average tax inequities. Taxpayers filing head of household status have below average inequities. Weighing the costs and benefits to all taxpayers, the Delphi survey established that inequities from fluctuating incomes become material when 10 percent of the population experiences inequilities which exceed the greater of $400 or 3 percent of the taxpayer\u27s annual AGI. Combining the results of the simulations and Delphi survey it was concluded that from a macro perspective, the inequities from volatile incomes which exist under the TRA 86 are NOT material and do NOT justify the reintroduction of income averaging