Assessing the Distributional Effects of Income Tax Revision: Some Lessons from Incidence Analysis

In recent years public attention to issues of tax equity has increased dramatically. The testimony in January 1969 of outgoing Secretary of the Treasury Joseph Barr that 154 individuals who had adjusted gross incomes of more than $200,000 in 1966 paid no federal income tax intensified public awareness and concern about the equity of the tax system. Tax reform has remained a central issue of public policy. At the same time, scholars working in the tax field have refined their methods of analyzing the impact on individuals and classes of individuals of tax laws and tax changes. Theoretical advances in two areas have been particularly important: analysis of tax incidence and shifting; and tax expenditure analysis. Curiously, however, these analytical techniques have not been combined to evaluate distributional consequences of changes in the personal income tax. Tax expenditure analysis treats income tax discrimination among various income-generating activities as the functional equivalent of a subsidy to the activity that receives relatively favorable treatment. Tax incidence analysis teaches that a tax (or a subsidy) on a particular activity will be borne, at least in part, by persons other than those engaging in the activity who are nominally subject to the tax. It would seem to follow that the impact of income tax discrimination among various types of income-producing activity would likewise extend to persons other than the nominal taxpayer. Nevertheless, estimates of the distributive effect of changes in the personal income tax law are typically based on the assumption that the person nominally affected by the change will bear its entire impact. In this article I will merge incidence and tax expenditure approaches to question this assumption