Order Code RL32693
CRS Report for Congress
Received through the CRS Web
Distribution of the Tax Burden Across Individuals:
An Overview
December 13, 2004
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Maxim Shvedov
Analyst in Public Sector Economics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Distribution of the Tax Burden Across Individuals:
An Overview
Summary
Distributional issues often lie at the center of tax policy debates. Distributional
analysis may address several issues: How should the tax burden be distributed or, are
progressive (increasing as a share of income as income rises) taxes justified? What
is the estimated distribution of the current system? How does a particular proposal
change that distribution?
Unlike many analyses that study optimal behavior related to allocative issues
and economic efficiency, economic analysis cannot be used to answer the questions
of how the tax burden should be distributed. Such an answer would depend on
social preferences. Economic analysis can, however, identify trade-offs and frame
the issue analytically. For example, a number of plausible answers to this question
could justify progressive tax structures.
Methodological issues, such as the income classifier, the unit of analysis, and
assumptions regarding incidence all affect the estimates of the distribution of the
current tax burden. Yet all show a similar qualitative result: the federal tax system
is progressive throughout its range, although it tends to get much flatter at the top.
This pattern is primarily due to the individual income tax, which is quite progressive,
and actually provides subsidies at lower income levels. The other major tax is the
payroll tax, which is a larger burden than the individual income tax for more than
80% of the population. This tax is first progressive and then regressive (effective tax
rates fall with income). The corporate income and the estate taxes, while much
smaller, are also progressive, while excise taxes are regressive. This overall
progressive pattern has been in place historically, and is expected to continue in the
future, although effective tax rates are currently low compared to other periods.
Unlike the federal tax system, state and local taxes tend to be regressive. Thus,
a progressive federal tax system would be necessary to prevent overall U.S. taxes
from being regressive. The combined taxes appear slightly progressive. Looking at
taxes from a lifetime perspective would move the system more towards a
proportional tax because average lifetime incomes reduces the variability of income.
Studies have suggested that overall lifetime taxes are roughly proportional to income.
Many different measures have been used to characterize the effects of a
particular tax change on the distribution of income. One may obtain a very different
impression of tax changes depending on the measure used. One popular measure, the
percentage change in tax, can be misleading, because as taxes become very small
even a negligible absolute change in taxes leads to a very large percentage change.
For measuring the relative distribution of income, percentage change in disposable
income provides a better measures of how resources are distributed. By this measure,
the recent tax cuts made incomes less equal.
This report will not be updated.

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Contents
Is a Progressive Federal Tax Structure Justified? . . . . . . . . . . . . . . . . . . . . . . . . . 1
How Should Taxes be Levied to Pay for Government Spending? . . . . . . . . . 1
Two Alternative Principles of Burden Distribution . . . . . . . . . . . . . . . . . . . . 2
Benefit Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Ability to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Distribution as a Public Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
How Should Income in the Economy be Distributed? . . . . . . . . . . . . . . . . . . 5
Endowment, Utilitarian, and Egalitarian Approaches . . . . . . . . . . . . . . 5
What are the Implications for Tax Burden Distribution? . . . . . . . . . . . . . . . 7
The Estimated Distribution of the Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Concept of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Unit of Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Incidence assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Measures of Tax Burden Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Current Federal Effective Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Burden Distribution of Different Kinds of Federal Taxes . . . . . . . . . . 15
Distribution over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
State and Local Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Lifetime Tax Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
How to Measure Changes in Tax Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 21
An Illustrative Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Illustrations from Recent Tax Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2001 Tax Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2003 Tax Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
List of Tables
Table 1. Comparison of Tax Incidence Assumptions Used by OTA, CBO, JCT,
and TPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 2: Tax Burden Distribution Estimates for 2000 by Different
Research Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 3: Tax Burden Distribution Estimates for 2004 by Different
Research Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 4: Distribution of Taxes for 2003, Prior to the 2003 Tax Cut, JCT . . . . . . 15
Table 5. Effective Federal Tax Rates by the Type of Tax, 2000 (Treasury) . . . . 16
Table 6. Effective Federal Tax Rates by the Type of Tax, 2000 (CBO) . . . . . . . 16
Table 7. Historical Effective Federal Tax Rates, Selected Years, 1979-2004 . . . 18
Table 8. Effective Federal Tax Rates in Select Years Before and After
2001-2003 Changes in the Tax Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 9. State and Local Taxes in 2002, Shares of Family Income for
Non-Elderly Taxpayers, U.S. Averages. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 10. Alternative Measures of Distribution for a Ten Percent
Across-the-Board Rate Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 11. Distributional Effects of the 2001 Tax Cut for 2006 . . . . . . . . . . . . . . 24

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Table 12. Percentage Change in After-Tax Income by Quintiles, 2001 Tax
Changes Fully Phased in, at 2001 Income Levels . . . . . . . . . . . . . . . . . . . . 25
Table 13: Distributional Effects of the 2001 Tax Cut, Fully Phased in, at
2001 Income Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Table 14. Comparison of the Distribution of Total Individual Income Taxes,
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table 15. Percentage Change in After-Tax Income from 2003 Tax Cut,
Calendar Year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table 16. Percentage Change in After-Tax Income by Percentiles, 2003 . . . . . 28
Table 17. Average Tax Change by Income Percentile, 2003 . . . . . . . . . . . . . . . 29

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Distribution of the Tax Burden Across
Individuals: An Overview
Distributional effects are often central policy issues in debates over tax
legislation. While economic analysis can be used to estimate the distribution of the
tax system, or a tax change (a positive or descriptive analysis), it cannot be used to
provide a normative or prescriptive analysis. Descriptive analyses indicate the
expected effects of policies, but normative analyses indicate the optimal policy.
Most normative analysis in economics is focused on efficiency. Even in the case of
distribution issues, however, economic analysis can be used to facilitate the
understanding of desirable distributions, measure them correctly, and determine the
implications of different assumptions about social welfare for the optimal distribution
of the tax burden.
The first section of this report, which is normative in nature, therefore discusses
different philosophies about how the tax burden should be distributed, and what those
philosophies imply for the shape of the tax system. In particular, it addresses the
question of the justifications for a progressive tax system (one where the share of
income collected as a tax rises as income rises). This section is presented for the
interested reader, but is not a necessary preliminary to examining the analysis in the
second section, which presents estimates of the distribution of the federal and total
U.S. tax burden. The third section of the report discusses the measures that can be
used to characterize the distributional effects of tax changes.
Is a Progressive Federal Tax Structure Justified?
There are two separate, albeit related, questions about tax burden distribution.
One of them is how to pay for the goods that the government provides (such as
national defense, or highways). The second issue is whether the tax system should
be used for direct income redistribution; in that case the optimal tax burden depends
on the degree to which redistribution is deemed desirable.
How Should Taxes be Levied to Pay for Government
Spending?
Even if an economy had no redistribution, it would be necessary to provide
“public goods” (such as defense, roads, etc.) — and to determine how taxes should
be collected to pay for these goods. A public good, in its purest form, is one that
each person can enjoy without detracting from anyone else’s consumption and where
there is no way to exclude a person from enjoying it. As a result of the last effect, in
most cases such goods would not be provided by the private market or would not be
provided efficiently.

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Many goods are not pure public goods, but have aspects of public goods in that
person A benefits from person B’s expenditure — such quasi-public goods (or goods
with positive external effects) would be provided in the private economy but not in
sufficient amounts. To supply these and pure public goods it is necessary to raise
revenues through taxes and distribute the resultant taxes’ burden somehow among
the society’s members.
The distribution of the tax burden with respect to taxpayers’ incomes may be
characterized as progressive, proportional, or regressive. The behavior of the
effective tax rate — the share of income paid in taxes — determines this
classification. If the share rises with income, the distribution is called progressive,
if it stays constant, it is proportional, and if the share falls the distribution is called
regressive.
Federal taxes, taken one by one, fall into all of the three categories. For the
working population, the payroll tax is first proportional, then regressive, because its
rate falls once the ceiling of taxable wages is reached. For the population as a whole,
the payroll tax rate rises initially, and would therefore be first progressive, then
essentially proportional, and for higher income ranges, regressive. Excise and sales
taxes are generally regressive, especially those imposed on products primarily
consumed by lower income individuals, such as cigarettes. The income tax is
progressive, and even provides subsidies (negative taxes) for lower income working
individuals, often through the earned income credit. The corporate income tax is
imposed on corporate profits as a proportional tax, but its burden on individuals
depends on behavioral responses, as discussed subsequently in the Incidence
Assumptions subsection of this report.
Most people would judge that a tax-collection system is fair if it satisfies two
limited criteria: horizontal and vertical equity. The criteria state respectively that it
is desirable (i) for taxpayers with the same “capacity to pay” to face the same tax
liability in dollar terms and (ii) for liability to increase with ability to pay. The
application of both depends critically on definitions of the same “capacity to pay,”
which is difficult to determine for the families of different size and other
characteristics.
Even under a regressive tax system, a higher income taxpayer may pay higher
taxes in dollar terms than a lower-income taxpayer. What decreases is the share of
the tax paid to the income. Therefore a regressive system could still satisfy the
principles of vertical and horizontal equity.
Two Alternative Principles of Burden Distribution
Traditionally there are two theoretical notions of how tax payments should be
assigned. One is the benefit principle and another is the “ability to pay” principle.
Benefit Principle. The benefit principle simply states that taxpayers who
benefit from government services should bear the burden of the tax used to finance
the services. The benefit principle seemingly has its roots in market-inspired
solutions to paying for public goods. It is commonly associated with such taxes as
the gasoline tax, used to finance highways. While such taxes are not voluntary, as

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free-market purchases are, they are directly related to the value individuals receive
from public goods.
The benefit principle has a much broader reach, if one allows individuals to pay
variable prices reflecting their willingness to pay, rather than each individual paying
the same amount.1 Higher income individuals have a greater willingness to pay for
social goods because they have more income. They also might find some goods,
such as defense and police protection, more valuable because they have more
property to protect.
Under this principle, the distribution may be regressive, proportional, or
progressive, depending on whether the taxpayers’ income elasticity is greater than,
equal to, or less than the price elasticity.2 Unfortunately, it is difficult to estimate
these elasticities, particularly for national level expenditures where there is no cross-
sectional variation. Some studies of municipal spending or spending on local
education generally indicate that income elasticity exceeds the price elasticity,
providing some support for progressive taxes using the benefit principle.3 There is
also some international evidence that tax shares rise as income rises: according to the
World Bank4, high income countries have taxes as a share of output that are over
twice as high as low income countries, and expenditure shares that are almost twice
as large.
Ability to Pay. The “ability to pay” principle suggests that people with higher
incomes should pay more than those with lower incomes. Yet the standard does not
answer the question of how much more. Its policy implications are based on a
diminishing marginal benefit of a dollar assumption — the widely-accepted belief
that the value of an additional dollar of income falls, as income rises, i.e. a rich man
values an additional dollar less than a poor.
1 In theory, one can use a model to determine both the quantity of a public good and the
share paid for by each individual, which is called a Lindahl equilibrium. See E. Lindahl,
“Just Taxation — A Positive Solution,” in Classics in the Theory of Public Finance,
Richard Musgrave and A.T. Peacock, eds. (New York, St. Martin’s Press), 1958.
2 This follows from the fact that the income elasticity is the percentage change in quantity
demanded divided by the percentage change in income, and the price elasticity is the
percentage change in quantity demanded divided by the percentage change in price; hence
the percentage change in price divided by the percentage change in income is the ratio of the
income elasticity to the price elasticity.
3 Theodore C. Bergstrom and Robert P. Goodman, “Private Demand for Public Goods,”
American Economic Review, vol. 63, June 1973, pp. 280-296; Theodore C. Bergstrom,
Daniel L. Rubinfield, and Perry Shapiro, “Micro-Based Estimates of Demand functions for
Local School Expenditures,” Econometrica, vol. 50, Sept. 1982, pp. 1183-1205; Edward M.
Gramlich and Daniel L. Rubinfield, “Micro Estimates of Public Spending Demand
Functions and Tests of the Tiebout and Median-Voter Hypotheses,” Journal of Political
Economy, vol. 90, June, 1982, pp. 536-560.
4 This information can be found on the World Bank website, at
[http://devdata.worldbank.org/external/dgsector.asp?W=0&RMDK=110&SMDK=473892].

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Notions of ability to pay have generally appealed to some measure of equal
sacrifice. Potential measures of “equal sacrifice” include equal absolute sacrifice
(each person’s welfare declines by the same amount), equal proportional sacrifice
(each person’s welfare declines by the same proportion), and equal marginal sacrifice
(each person’s “displeasure” from taking away an additional dollar is the same).
Equal absolute sacrifice would suggest proportional taxation if the marginal
benefits of a dollar of income fell proportionally with income. That is, following this
principle, if person A with five times as much income as person B values a dollar
approximately a fifth as much as B, then for every dollar one collects from B, one
collects $5 from A. In this example, the principle implied a proportional tax system.
If the marginal benefit of a dollar diminishes, but at a fairly slow rate, a regressive
tax system could also be consistent with the principle, while if it diminishes at a
faster rate, a progressive tax would be appropriate.
An alternative measure of sacrifice is equal proportional sacrifice. This method
is much more likely to justify a progressive tax system, but it too depends on how
fast the value of an additional dollar declines with income. There are many
reasonable functional forms that do not support progressivity.5
The equal marginal sacrifice principle suggests steeply progressive taxes that
will collect the least valued dollars in the economy. The result also uses the
assumption that the value of a dollar falls as income rises. Under this principle, in
contrast with the previous two cases, the progressivity does not depend on the rate
with which the value declines.
Thus, without further information on the nature of welfare and the exact
standard to be used, the ability to pay criterion does not necessarily justify regressive,
proportional, or progressive taxes. The equal marginal sacrifice principle suggests
an extreme degree of progression.
Distribution as a Public Good
Before discussing general principles of a “just” income distribution we discuss
direct redistribution itself as a public good.
There is normally a natural conflict between equity and efficiency objectives
when the equity criterion suggests redistribution or progressive tax rates. That
conflict occurs because taxes distort behavior and reduce economic efficiency. It
means that the “size of the pie” becomes smaller. There are, however, circumstances
in which redistribution can enhance rather than reduce efficiency — when
redistribution itself is a public good. Recall that a pure public good can be
5 For example, a utility function of the form u = ya, where u is utility (an index of
individual’s welfare or “happiness”), y is income and a is a constant greater than zero and
less than one, would suggest a regressive tax structure if equal absolute sacrifice were used,
a proportional tax structure if equal proportional sacrifice were used, and a progressive tax
structure if equal marginal sacrifice were used.

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characterized as a good where one person can benefit from the good without
detracting from another’s benefit.
Redistribution can, in fact, be characterized as a public good.6 Suppose that
higher and middle income individuals care about the poor and their welfare — that
is, they benefit from knowing that the poor have more income. In this case,
redistribution is a public good because A’s contribution to the poor benefits B. Such
redistribution is under-supplied in an open economy, and so there is justification for
redistributing to the poor — based not on a concern about the welfare of the poor, but
rather about the welfare of the rich.
The non-poor may also benefit in other ways from providing income to the poor,
such as a reduction in crime.
Secondly, some redistribution that occurs in the economy may be justified as
insurance in circumstances where private insurance markets do not work well. A
social safety net may be regarded as insurance against falling, for whatever reason,
on hard times. Certain features of our social safety net, such as unemployment
compensation, need-based transfers (such as food stamps and Medicaid), and
retirement benefits (Social Security and Medicare) may be justified in part as an
attempt to deal with failure of private insurance markets.
How Should Income in the Economy be Distributed?
It is possible to go beyond the issue of the provision of public goods (including
redistribution) and ask a more general question: should income in society be
redistributed to achieve a more equitable society — that is, a “just income
distribution.”
There are three basic philosophical approaches to the question of a just income
distribution: the endowment approach, the utilitarian approach, and the egalitarian
approach. There are also permutations of each approach.7
Endowment, Utilitarian, and Egalitarian Approaches. The endowment
approach says that people should get what they earn. In its simplest form, it would
imply no redistribution at all. Variations include allowing people to get what they
earn in a competitive economy, so that excess profits arising from market power
should be redistributed; to keep their labor earnings, so that assets and earnings from
assets should be redistributed; or to keep what they would earn if they started equally
in terms of wealth and family status. The last would, in theory, permit differences
in income based on effort and willingness to take risk and innate earning ability, in
6 This argument was made in a famous economics article: Harold M. Hochman and James
D. Rogers, “Pareto Optimal Redistribution,” American Economic Review, vol. 59, Sept.
1969, PP. 542-557.
7 The discussion in this section can be found in public finance textbooks. See, for example,
Richard and Peggy Musgrave, Public Finance in Theory and Practice, 5th ed. (New York:
McGraw-Hill), 1989 and Harvey Rosen, Public Finance, 6th ed. (New York, McGraw-Hill
Irwin), 2002.

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contrast to the first approach that would also permit differences in income based on
inherited wealth. While the endowment philosophy does not support direct
redistribution to yield a just society, the benefit principle is philosophically consistent
with endowment notions of income redistribution and may support progressive
taxation.
The endowment approach suggests there should be little or perhaps no
redistribution, which is difficult to argue as a case of distributive justice. For
example, it suggests that people with mental and physical disabilities that prevent
them from working at a normal wage and who have no family to rely upon, should
have little or no income. Given that people do have different innate physical
endowments, many would argue that there is nothing especially fair about a system
that allows individuals to have varied earnings based on inherited characteristics. At
the same time, it seems unfair to penalize higher income people who have those
incomes because they worked harder or undertook more risk. On the whole, there
may be a lot of support in our culture for allowing people to keep most of the fruits
of their labor, but also a distaste for allowing individuals limited by circumstances
of birth to suffer poverty.
The absolute lack of redistribution may also be inefficient, because of the
presence of public goods in externalities in the real world, as discussed above. It
means that everyone can be made better off, or not worse off, by allowing some
redistribution.
The utilitarian approach says that society chooses to maximize welfare in the
economy — a “greatest good for the greatest number” philosophy. The simplest
utilitarian welfare measure is simply one that adds up all the welfare of the
individuals in the economy and tries to make shifts that will make that welfare sum
the greatest. Such an approach suggests that income should be shifted to those who
are able to benefit the most from it at the margin.
This sort of assumption also implies an extremely progressive tax system in
some circumstances: if we assume that all individuals are otherwise identical and that
the value of each dollar of income declines as income rises (i.e. a dollar is more
valuable to a poor man than to rich one), and ignore behavioral responses, then total
welfare is greatest when all individuals incomes are equal. This redistribution would
require a 100% tax on incomes above a certain level to be redistributed until
everyone has the same income — a super-progressive tax system, with positive taxes
at the top and negative taxes at the bottom.
While the idea of the “greatest good for the greatest number” sounds attractive,
its practical implementation is ambiguous, because there is no objective measure of
“welfare” and no objective method of describing a maximum social welfare. The
assumption of identical individuals may be a reasonable approximation for policy-
making, but in reality individuals are not identical.
The third type of approach is the egalitarian approach, which says that everyone
should be equally happy. In this case, the government would make transfers to the
poor and also transfer more money to those who enjoy it less so as to raise their level
of happiness. As with the case of the utilitarian measure, if one assumes all people

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are identical and that the value of an additional dollar of income falls as income rises,
an aggressive redistribution scheme should be called for to equalize everyone’s
income. Both utilitarian and egalitarian welfare functions are consistent with the
ability-to-pay principle.
A variation of the egalitarian approach which takes into account behavioral
responses is called the “maximin” or “Rawlsian” criteria. With this approach, society
redistributes so as to maximize the welfare of the poorest individual. With no
behavioral responses, and identical enjoyments of income, society would again
equate income by taxing away all income above the average and giving it to those
below the average, but with behavioral response, a 100% marginal tax on the rich
would not work because it would cause individuals to reduce their work effort. In
the Rawlesian system one would raise the tax just high enough so that the revenue
to be distributed was greatest. It has been argued that this approach would reflect the
choices risk-averse individuals would make as a social contract if they had to decide
on the distribution of income before they knew which position they would fill in
society.
One of the problems with using a welfare function, such as the utilitarian
function, which might be persuasive to people as a practical guide to dealing with
income distribution, is that it does not take account of the possibility that income
varies because people differ in their work effort and risk taking. While many people
might feel it is appropriate to redistribute income to lower income individuals
because they do not have the capabilities to earn a higher income, they are less likely
to favor redistribution to people who earn less because they work less or because they
do not work as hard as the average person.
Similarly, even if everyone were identical in wealth, and innate ability and work
effort, incomes would vary if some people took more risks than others. Taxing away
the returns to risky projects and providing a guaranteed cushion against any risk
would make risk-taking irrelevant to economic decisions. As a result, individuals
might be willing to take more or less risk than appropriate, and an optimal level of
risk-taking is important to the efficient operation of an economy. Since differences
in income that arise from innate capabilities or inherited wealth (whether financial
and physical wealth, or human wealth provided by one’s family) cannot easily be
separated from those that arise from work effort and risk-taking, it is more difficult
to assess the appropriate level of redistribution. Nevertheless, it is clear that appeals
to a social welfare function do suggest that income redistribution may be appropriate.
The U.S. tax system including all government layers actually engages in very little
means-based redistribution, however.
What are the Implications for Tax Burden Distribution?
Unfortunately, these guidelines about redistribution and about rules for paying
for government expenditures do not provide a concrete answer as to how the tax
burden should be distributed. What is perhaps most interesting about the analysis is
that certain social welfare philosophies that might seem compelling do potentially
support progressive taxation, as does the benefit principle of charging for public
goods. The ability to pay criteria for charging for public goods, while often invoked
to support progressive taxes, however, provides little guidance without more

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information on individuals’ preferences, unless the marginal equal sacrifice form is
assumed.
It is also important to keep in mind that even if the federal tax is progressive,
such progressivity may be needed to offset state and local taxes that tend to be
regressive, in order to avoid an overall regressive U.S. tax system.
The Estimated Distribution of the Tax Burden
Several public and private organizations have produced distributional tables.
The governmental entities include the Treasury Department, the Congressional
Budget Office (CBO), and Joint Committee on Taxation (JCT). Some of the private
researchers involved in this work include the Urban Institute and Brookings
Institution Tax Policy Center (TPC), and the Institute on Taxation and Economic
Policy (ITEP) of Citizens for Tax Justice (CTJ).
Their analyses vary in several ways, including how they define income, the
definition and ordering of tax units, and the taxes included. The following several
sections discuss the rationale behind certain methodological choices and report the
results of distributional analyses for different organizations, for different time
periods, and for different kinds of taxes.
We present these measures as effective tax rates, which makes comparison
meaningful despite the methodological differences. The effective rates are simply
the ratio of taxes paid to the income measure. They are different from the statutory
marginal rates that apply to an extra dollar of taxable income only. When effective
tax rates rise with income a tax system is progressive, it is proportional when
effective tax rates are relatively constant, or regressive, if effective tax rates fall as
income increases.
The Concept of Income
The theoretical discussion of the previous sections operated with a concept of
“income,” but what is the practical meaning of this word? There are several
“incomes” mentioned in instructions to a single tax form — gross, adjusted gross,
and taxable — to mention just three of them. Most states have state-specific income
measures, such as “Wisconsin Income,” usually different from the federal analogs.
Other, non-tax, entities may use their own definitions of income better suited to their
objectives.
Economic income encompassing all sources regardless of their taxability would
be the best descriptor of the taxpayer’s access to economic resources, but,
unfortunately, none of the accounting or tax concepts of income exactly matches it.
The discrepancy may happen for many reasons; one of them is statutory exclusions
of certain items from income. For example, employees may have an option of
purchasing their medical insurance through their employers with “pre-tax” dollars.
“Pre-tax dollars” clearly represent income in the economic sense of this word,
because employees can use them to consume, in this case — medical coverage. Yet

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they do not enter the calculation of “gross income” for individual income tax
purposes, because of the special treatment of these transactions by law.
Organizations providing distributional analyses use measures of income that are
expanded from tax measures, such as adjusted gross income (AGI). They estimate
a more comprehensive income using various techniques. One of them, Treasury’s
Office of Tax Analysis (OTA), used Family Economic Income (FEI) as taxpayers’
income measure in a 1999 paper.8 The starting point of the intended income measure
was the definition of income as the sum of consumption and the change in net-worth
in a given period — commonly referred to as Haig-Simons income. This measure
would include both cash and non-cash income, such as imputed rent on owner-
occupied homes — the payments homeowners would have to make if they rented
their dwellings instead of owning them.
OTA modified this definition in several ways. First, under the definition some
retirees drawing largely on their savings would appear to have no or little income,
because their consumption would be offset by a change in their net worth. At the
same time, this money may be taxable, depending on the savings vehicle used. Their
tax burden relative to their comprehensive income would appear extremely high
because for several types of retirement accounts income is taxed on withdrawal. To
correct for this mismatch, Treasury includes pension benefits in FEI. Another
departure from the definition of income is exclusion of non-cash transfers, such as
Medicare benefits, caused primarily by data limitations.
Other analyses use measures of income that may not be as broad as economic
income, but broader than AGI. In its distributional table in 2003,9 Treasury used a
slightly narrower measure than in its 1999 study, cash income. CBO measures
income as pretax cash income plus in-kind transfers.10 JCT expanded AGI by adding
tax-exempt interest, employer contributions for health plans and life insurance,
employer share of FICA tax, worker’s compensation, nontaxable social security
benefits, insurance value of Medicare benefits, alternative minimum tax preference
items, and excluded income of U.S. citizens living abroad.11 The Brookings Urban
Tax Policy Center initially used a narrower measure, but their current measures use
both economic income and cash income. The choice of the income measure is
influenced by data availability and other technical considerations as well as the types
of taxes being distributed.
8 Julie-Anne Cronin, U.S. Treasury Distributional Analysis Methodology, U.S. Department
of Treasury, Office of Tax Analysis, OTA Paper 85, Sept. 1999, p. 7.
9 This distributional table was issued as a press release on May 22, 2003 and examined the
effects of the 2003 tax cut. It did not provide data, however, for measuring the effective tax
rate, because it did not include a measure of income.
10 Congressional Budget Office, Effective Federal Tax Rates Under Current Law, 2001 to
2014, Aug. 2004, p. 2.
11 See U.S. Congress, Joint Committee on Taxation, Distribution of Certain Federal Tax
Liabilities by income Class for Calendar Year 2001, JCX-2-01, Feb. 27, 2001, for details
on methodology and pre-EGTRRA distribution tables for 2001, and CRS Report RL31907,
The 2003 Tax Cut: Proposals and Issues, by David L. Brumbaugh and Don C. Richards,
for the JCT’s 2003 and 2008 estimates.

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CRS-10
Using an expanded adjusted gross income (AGI) or cash income measure is
simpler and requires fewer assumptions, but it can mislead. For example, individuals
may be accruing huge gains in assets, such as their houses, relative to their cash
income. These problems with measuring income are reduced, however, when
distributions are reported based on population shares (such as quintiles) rather than
dollar amounts. On the other hand, dollar amounts lend a concreteness to a
distribution table.
The overall tax burden measured as a share of AGI, or expanded AGI, would
always appear higher than when measured as a share of comprehensive income.
Also, any change in the distribution would appear to be more pronounced when
measured as a percentage of AGI, because AGI would normally be lower than
comprehensive income. For example, the comparison between AGI and FEI
measures for 2000 shows that the former is smaller than the latter: $5,649 billion
versus $8,419 billion.12 This relationship between the two measures is likely to
persist across time.
Some distributions may be reported based solely on AGI, which may be a good
choice for a quick “back-of-an-envelope” analysis, but it is preferable to use more
comprehensive income measures whenever technically feasible. None of the
organizations engaged in regular distributional analysis rely solely on AGI, however.
The measure of income can also affect impressions of tax burden unless
distributional tables are presented based on population shares rather than measures
of income.
Unit of Analysis
Another question facing the researchers is how to measure the unit of analysis,
and also whether and how to account for differences in tax unit composition,
especially when ordering data by population share (such as lowest quintile, second
quintile, etc.). The unit may be the family, the household, or the taxpayer unit. In
many cases, these units would be the same, but in others they would not. For
example, an adult working child living in the parent’s home may be part of the
household, but would be a separate tax-filing unit.
In addressing unit composition, regardless of method of classification, issues
arise with respect to ordering taxpayers. It is obvious that a large family may have
more income than a single person, but still have the same ability to pay. Where is
that family to be placed in ordering units for distributional analysis — with the same
families by ability to pay or with the same by income but of different size?
Researchers differ in their answers.
The first approach, used by most organizations, is not adjusting for the size of
the unit at all. This approach can be argued to implicitly assume that income
necessary to maintain a given standard of living for one person is the same as the one
for four persons, which is certainly not realistic. Nevertheless, this approach is
12 Cronin, U.S. Treasury Distributional Analysis Methodology, p. 12.

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CRS-11
common. It is straightforward, eliminates some sources of ambiguity, and is the
easiest to implement from a technical standpoint.
If households’ positions in the income distribution are to be adjusted by family
or household size, researchers must determine how to make adjustments. One
possibility is dividing the burden by the number of persons, in other words
conducting the analysis on a per capita basis. This approach fails to recognize the
economies of scale larger tax units enjoy: buying a four-bedroom residence is usually
less than twice as expensive as buying a two-bedroom unit. A price of a bedroom in
the first case would be lower than in the second. In a way, the purchasing power of
a dollar would be higher for a large household compared to a small one.
Several adjustment methods lie between these extremes. CBO orders
households by ability to pay using this method: it divides income by the square root
of the household’s size.13 In this case a four-person family would need to have twice
as much income as a single taxpayer to be as well off.
Another methodology is to normalize income by expressing it in terms of the
applicable poverty level. For example, if the poverty level for a single person is
$9,000, and for a four-person family — $19,000, then a single taxpayer with $27,000
of income would be equated to the four-person family earning $57,000, because both
of them would be making three times the poverty level for a household of the
respective size.
These ordering procedures and unit measures probably do not make a great deal
of difference in the overall qualitative pattern of the effective tax rates.
Incidence assumptions
Another important factor in distributional analysis is the economic incidence of
taxes. It reflects the notion that a tax burden is not necessarily borne by the taxpayers
legally responsible for paying the tax. For example, imposing an excise tax may lead
to a price increase. Thus, even though the seller would be legally responsible for
paying the tax, the economic cost would be split between the sellers and the buyers
in some way, possibly with the buyers bearing all of it.
Researchers have to make reasonable assumptions about incidence, because
calculating the precise shares in every case is impossible. They depend on factors
specific to every market segment and may fluctuate across segments and in time
within every market. Table 1 lists the assumptions about tax incidence incorporated
in the models of OTA, CBO, JCT, and TPC.
13 Roberton Williams, David Weiner, and Frank Sammartino, Equivalence Scales, the
Income Distribution, and Federal Taxes, CBO Technical Paper 1999-2, Oct. 1998.

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CRS-12
Table 1. Comparison of Tax Incidence Assumptions Used by
OTA, CBO, JCT, and TPC
OTA (1999)
CBO
JCT
TPC
Individual
Payors
Payors
Payors
Payors
income tax
Employee’s
Payors
Payors
Payors
Payors
share of
payroll tax
Employer’s
Families, for
Households,
Taxpayers, for
Tax units, for
share of
whom paid
for whom paid
whom paid
whom paid
payroll tax
Families,
Households,
Households,
NA
adjusting for
based on the
based on the
Excise taxes
the relative
consumption
consumption of
on final goods
price effects,
of taxable
taxable items
but allocated to
items
income
Excise taxes
Families,
Households,
Households,
NA
on
allocated to
allocated
according to
intermediate
capital and
according to
overall
goods
labor income
overall
consumption
(business
consumption
purchases)
Families,
Households,
NA
Tax units,
allocated
allocated
allocated
Corporate
according to
according to
according to
income tax
the share of
the share of
the share of
capital income
capital income
capital
income
Estate and gift
Decedents
NA
NA
Decedents
tax
Sources: Assumptions reflect Cronin, U.S. Treasury Distributional Analysis Methodology;
Congressional Budget Office, Effective Federal Tax Rates: 1979-2001 April 2004; Thomas A.
Barthold, James R. Nunns, and Eric Toder, “A Comparison of Distributional Methodologies, in
Distributional Analysis of Tax Policy, David Bradford, ed. (Washington, D.C., The AEI Press) 1995,
pp. 96-110, and personal contacts.
Even though the variations in income, unit definition and incidence assumptions
would cause the quantitative results to be different in every case, the implications
about the tax system are actually quite similar.
The incidence of the corporate tax, in particular, has been the subject of a
considerable economic literature, with the distributional effects depending on the
responses of investors and workers and the technology of the firm.14 The incidence
of all taxes, even individual income and payroll taxes, depends, however, on
14 See CRS Report RL32517, Distributional Effects of Taxes on Corporate Profits,
Investment Income, and Estates, by Jane G. Gravelle.

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CRS-13
behavioral responses. If savings and labor supply are relatively insensitive to taxes,
as much evidence suggests, these taxes will fall on the individual who pays them.15
Note that the same assumptions about incidence are used (given the tax is
distributed at all) for the different taxes except in the case of excise taxes. CBO and
JCT allocate the tax based on the consumption of the taxed items. The Treasury
allocates the tax to income, and also adjusts at the consumption level by imposing a
burden for taxed items and a benefit for non-taxed items that nets to zero.16
Measures of Tax Burden Distribution
Current Federal Effective Tax Rates. Tables 2 and 3 reproduce the
burden distribution estimates from different sources for 2000 and 2004 ordered by
population shares. Due to the methodological differences described above the data
are not precisely comparable. In addition, there is also timing discrepancy. TPC
does not have a 2000 law distribution table using 2000 incomes, so the appropriate
column uses 2004 incomes but 2000 law. OTA does not have the table for 2004.
Note that the absolute measures of effective tax rates can be affected by the income
measure and the composition of included taxes.
At the same time, all sources depict a similar qualitative picture about the
progressivity of the federal tax burden distribution. For example, in every case the
effective tax rates for the lowest quintile are estimated in the low to middle single
digits. The highest quintile in 2000 faced an effective rate of at or above 25%. The
numbers for other quintiles and the general pattern seem consistent, too. Tax rates
rise more slowly, however, at the top of the distribution.
Table 4 presents a table by the Joint Committee on Taxation, reflecting the tax
burden at 2003 levels of income, based on tax law prior to the 2003 tax cut. The
table is arrayed by income level rather than population proportion, but again presents
a very similar picture of the federal total effective tax rates.
15 Ibid., and also see CRS Report RL31949, Issues in Dynamic Revenue Estimating, by Jane
G. Gravelle, for survey of the literature.
16 The Treasury appeared to have adopted this methodology in order to keep the price level
constant (consistent with their revenue estimating assumptions) and have the tax passed
back to owners of factors of production (wages and capital) rather than forward to
consumers. But allocating the tax to income is not the same as the actual theoretical
incidence, however, — namely that the tax falls on wages and on the owners of capital
existing at the time the tax is initially imposed (through a fall in value). It is not easy to
convert this concept into an annual incidence measure, although the closest way to do so
would appear to be to allocate it to consumption rather than income, because the burden is
not realized until the asset is converted into consumption.

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CRS-14
Table 2: Tax Burden Distribution Estimates for 2000 by Different
Research Organizations
Effective
Effective Federal Tax
Effective Tax
Federal Tax
Rates (Excludes Estate
Rates, 2004 Cash
Rates
Taxes)
Income (Excludes
Excise Taxes)
Source
OTA
CBO
TPC
Lowest Quintile
5.9
6.4
3.8
Second Quintile
11.7
13.0
9.3
Middle Quintile
17.4
16.7
16.0
Fourth Quintile
20.1
20.5
20.5
Highest Quintile
24.6
28.0
27.3
All
21.5
23.1
23.0
Top 10%
25.7
29.7
28.8
Top 5%
26.6
31.1
30.2
Top 1%
29.1
33.2
32.8
Sources: U.S. Treasury, Office of Tax Analysis, Congressional Budget Office, Urban Institute and
Brookings Institution Tax Policy Center.
Table 3: Tax Burden Distribution Estimates for 2004 by Different
Research Organizations
Average Effective
Average Effective
Federal Tax Rates Under
Federal Tax Rates,
Current Tax Law, Based
Economic Income
on 2001 Incomes,
(Excludes Excise Taxes)
(Excludes Estate Tax)
CBO
TPC
Lowest Quintile
5.2
2.5
Second Quintile
11.1
7.5
Middle Quintile
14.6
13.2
Fourth Quintile
18.5
17.3
Highest Quintile
23.8
20.8
All
19.6
17.9
Top 10%
24.9
21.2
Top 5%
25.6
21.5
Top 1%
26.7
22.3
Sources: Congressional Budget Office, Urban Institute and Brookings Institution Tax Policy Center.

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CRS-15
Table 4: Distribution of Taxes for 2003, Prior to the 2003 Tax
Cut, JCT
Effective Federal Tax
Income Class (thousands
Share of Population
Rate (excludes corporate
of dollars)
and estate taxes)
Less than 10
14.1
7.2
10-20
17.1
6.0
20-30
13.9
10.2
30-40
11.4
13.8
40-50
8.4
15.8
50-75
15.2
17.5
75-100
8.9
19.9
100-200
8.7
23.5
200 +
2.3
28.3
All
100.0
19.9
Sources: Data on population share from Joint Committee on Taxation, Estimates of Federal Tax
Expenditures for Fiscal Years 2004-2008, JCS-8-03, December 22, 2003. Data on Effective Tax
Rates, from CRS Report RL31907, The 2003 Tax Cut: Proposals and Issues, by David L. Brumbaugh
and Don C. Richards.
Burden Distribution of Different Kinds of Federal Taxes. The federal
tax system contains two major types of taxes, payroll and income taxes, and two
minor ones, excise and estate taxes. Income taxes can be divided into individual
taxes which are applied to wage income, passive capital income (interest, dividends
and capital gains), and profits of unincorporated businesses, along with a separate flat
rate tax on corporate profits. Each kind of tax has a different degree of progressivity
(or regressivity) and therefore, the distribution of the burden depends on the mix of
taxes within the system. Tables 5 and 6 show the distribution of the tax burden by
type, before the 2001-2003 changes. Table 5 reports the Treasury (1999) estimates
and Table 6 reports the CBO estimates, for all but the estate tax.
The slight differences in the two distributions reflect differences in the income
measures, in the taxes covered, and in the way in which families are ordered. For
example, CBO places more larger families in the lowest quintile because they order
by ability to pay, while Treasury orders by income. Since large families are likely to
have larger benefits from the earned income credit, the tax rates of the individual tax
are larger negatives in the CBO analysis than in the Treasury analysis. This effect
also causes the lowest quintile to have higher payroll taxes because larger families
are more likely and elderly individuals less likely to be represented in the CBO
ordering.

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CRS-16
Table 5. Effective Federal Tax Rates by the Type of Tax,
2000 (Treasury)
Individual
Social
Corporate
Estate
Total
Excise
income
Insurance
Income
and Gift
Federal
Lowest
-2.4
2.3
0.9
0.7
0.0
5.9
Quintile
Second
0.8
8.7
1.4
0.8
0.0
11.7
Quintile
Middle
5.6
9.3
1.6
0.9
0.0
17.4
Quintile
Fourth
7.8
9.8
1.6
0.9
0.0
20.1
Quintile
Highest
13.7
6.7
2.8
0.9
0.0
24.6
Quintile
All
10.1
7.9
2.3
0.9
0.5
21.5
Top 10%
15.4
5.5
3.3
0.9
0.7
25.7
Top 5%
16.9
4.1
3.8
0.9
0.9
26.6
Top 1%
20.2
2.1
4.6
0.9
1.3
29.1
Sources: Treasury, Cronin, et al.
Table 6. Effective Federal Tax Rates by the Type of Tax, 2000
(CBO)
Individual
Social
Corporate
Total
Excise
Income
Insurance
Income
Federal
Lowest
-4.6
8.2
0.5
2.2
6.4
Quintile
Second
1.5
9.4
0.6
1.4
13.0
Quintile
Middle
5.0
9.6
1.0
1.2
16.7
Quintile
Fourth
8.1
10.4
1.0
0.9
20.5
Quintile
Highest
17.5
6.3
3.7
0.6
28.0
Quintile
All
11.8
7.9
2.5
0.9
23.1
Top 10%
19.7
5.0
4.5
0.5
29.7
Top 5%
21.6
3.8
5.4
0.4
31.1
Top 1%
24.2
1.9
6.8
0.3
33.2
Source: Congressional Budget Office, Effective Federal Tax Rates: 1979-2001, April 2004.

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CRS-17
Tables 5 and 6 both show that the degree of progressivity is very different
among the types of federal taxes. The effective rate of the individual income tax
rises from a negative tax in the lowest quintile to 20% or so for the top 1%. As noted
earlier, the earned income credit can lead to subsidies at low levels. Payroll, or social
insurance, taxes rise slightly and then fall. This pattern occurs because the tax rate
is flat with a dollar ceiling, but only applies to workers. Tax rates are lower at the
bottom of the distribution because of the greater share of retired people, and are
lower at the top because of the dollar ceiling. So the tax is regressive at the higher
end of the distribution. Another important observation is that for the four bottom
quintiles the effective rates of payroll taxes are higher than for the income tax.
Conversely, the effective rates of the corporate income tax to the contrary,
increase with income from 0.9% to 2.8% in the Treasury analysis, and from 0.5% to
3.7% in the CBO analysis. The rates are even higher for the top10%, top 5%, and top
1%. These rates are well below the statutory rates, because a relatively small share
of taxpayers receive income from the source, and their tax payments are dispersed
among all taxpayers in the class. The progressivity of the corporate tax is due not to
the progressive tax structure, but to the allocation of capital income to higher income
individuals.
Excise taxes’ effective rates vary markedly between the two tables, reflecting
the allocation of the tax to factor incomes for the Treasury and to consumption for
CBO. The Treasury analysis depicts this tax as largely proportional, while the CBO
analysis shows it to be regressive. (The CBO approach, which is also used by JCT,
is probably the more widely used in distributional analysis). The regressivity of
consumption taxes under this incidence assumption occurs because consumption
tends to decline with income.
The estate tax is the most progressive of all, although it is small. Since most
estates are exempt or largely exempt from the estate tax, only relatively high income
people pay this tax. (The estate tax does not appear in Table 6 because CBO does
not include the estate and gift tax in its analysis.)
Distribution over Time. Another important issue is the change in the
distribution in time. This issue is particularly relevant after the recent tax law
changes of 2001-2003, but even in a more stable statutory environment the
distribution evolves continually in response to economic and demographic
developments. Table 7 shows the historic and projected effective rates for selected
years.
The years shown include the first year that CBO provided such analysis, and
years after major tax changes and economic changes (the 1981 tax cut phased in over
three years, the 1986 tax reform phased in 1987-88, the 1993 tax increase, the year
prior to the 2001 tax cuts, and the current year). Over this period the tax system
continued to be progressive, although overall taxes today are slightly lower than was
typical earlier.

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CRS-18
Table 7. Historical Effective Federal Tax Rates,
Selected Years, 1979-2004
(Effective Federal Tax Rates for All Households)
1979
1984
1988
1994
2000
2004
Lowest Quintile
8.0
10.2
8.5
6.6
6.4
5.2
Second Quintile
14.3
14.6
14.3
13.1
13.0
11.1
Middle Quintile
18.6
18.0
17.9
17.3
16.7
14.6
Fourth Quintile
21.2
20.4
20.6
20.4
20.5
18.5
Highest Quintile
27.5
24.3
25.6
27.4
28.0
23.8
All
22.2
21.0
21.8
22.3
23.1
19.6
Top 10%
29.6
25.2
26.7
29.4
29.7
24.9
Top 5%
31.8
26.1
27.8
31.3
31.1
25.6
Top 1%
37.0
28.2
26.7
35.8
33.2
26.7
Source: Congressional Budget Office, Effective Federal Tax Rates: 1979-2001, April 2004, and
Effective Federal Tax Rates Under Current Law, 2001 to 2014, Aug. 2004.
Table 8 examines the current and projected burden around the period of the
recent tax changes and into the future. Tax rate cuts are still being phased in as one
moves from 2004 to 2008, with 2008 the last year for the lower capital gains taxes
and dividend taxes. 2010 is the year that the original 2001 tax cut is fully phased in.
As currently scheduled, none of the tax cuts would be effective in 2014. Note that
effective tax rates are higher in 2014 than in 2000 because of real bracket creep —
the failure to adjust the tax system parameters to the real income growth. It affects
the lower quintiles most, while the legislative changes have benefitted the higher
income groups the most, and that effect would be more pronounced if the CBO
burden tables included the estate tax, which, according to Table 5, accounted for
1.3% of income of the top 1%.
The estimates in Table 8 reflect current federal law; the actual pattern of tax
changes will depend on whether and to what extent the 2001 and 2003 tax cuts are
made permanent and what changes might be made to the alternative minimum tax,
which, if it is not addressed, will eventually apply to a very large fraction of
taxpayers, especially those with large families.

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CRS-19
Table 8. Effective Federal Tax Rates in Select Years Before and
After 2001-2003 Changes in the Tax Law.
(Effective Federal Tax Rates for All Households)
2000
2004
2008
2010
2014
Lowest Quintile
6.4
5.2
5.8
5.8
8.3
Second Quintile
13.0
11.1
12.4
12.3
14.7
Middle Quintile
16.7
14.6
15.9
16.1
18.2
Fourth Quintile
20.5
18.5
20.1
20.5
22.4
Highest Quintile
28.0
23.8
26.4
27.1
28.8
All
23.1
19.6
21.7
22.1
24.1
Top 10%
29.7
24.9
28.0
28.5
30.3
Top 5%
31.1
25.6
29.3
29.7
31.6
Top 1%
33.2
26.7
31.2
31.2
33.6
Source: Congressional Budget Office, Effective Federal Tax Rates Under Current Law, 2001 to 2014,
Aug. 2004.
State and Local Tax Burden. Consideration of the tax burden would be
incomplete without taking into account the burden from state and local taxes. It is
very difficult to draw consistent comparisons among all states, because their public
finance systems are different. ITEP calculated U.S. average effective combined state
and local rates for non-elderly taxpayers. Table 9 presents these results.
Table 9. State and Local Taxes in 2002, Shares of Family
Income for Non-Elderly Taxpayers, U.S. Averages.
Effective Tax
Effective Tax
Rates (total taxes,
Rates (total taxes,
before federal
after federal
deduction offset)
deduction offset)
Lowest Quintile
11.4
11.4
Second Quintile
10.4
10.3
Middle Quintile
9.9
9.6
Fourth Quintile
9.4
8.8
Next 15%
8.9
7.7
Highest Quintile
Next 4%
8.1
6.5
Top 1%
7.3
5.2
Source: Institute on Taxation and Economic Policy, Citizens for Tax Justice.
Table 9 demonstrates that the overall state and local taxation system is
regressive, at least as far as non-elderly taxpayers are concerned. It is difficult to
make broad generalizations, but the main reasons for the result may be a relative

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CRS-20
“flatness” of state and local income tax schedules, high reliance on sales and use
taxes, and the relative importance of excise taxes. Both sales and excise taxes are
regressive when allocated to consumption.
States and localities are not as flexible as the federal government in their ability
to choose their tax structure, because they face competition from other states and
localities. It is relatively easy to move from one state to another, and even easier to
move across local jurisdictions. Large differences in tax rates would induce
taxpayers, especially higher income taxpayers, to move to states with lower taxes.
Thus, one can argue that it is primarily the federal government’s role to ensure that
the overall burden distribution is progressive, if progressivity is desired.
The combined total U.S. tax system appears to be progressive but not steeply so,
as regressive state and local taxes are combined with the progressive federal tax.
Lifetime Tax Burden
So far, discussion in this report has centered around the analysis of the tax
burden at a single point in time, but there is an alternative view that cumulative
lifetime tax burden is a better representation of the concept. Lifetime tax burden is
simply the sum of all taxes paid each year during the lifetime. In most cases,
individual income grows with time and then drops after retirement. That pattern
means that the lowest percentile may include a very heterogeneous taxpayer mix:
younger people still in school, retirees, and mid-career low-income earners.
From the policy perspective, each of these groups is different and bundling them
together makes little practical sense. For example, a policy redistributing the tax
burden from the higher to the lower quintiles may have different effect on a younger
taxpayer and a retiree. It is conceivable that a younger taxpayer may welcome the
policy, because of the lower tax on an anticipated higher future income. In the
meantime, a retiree would be unambiguously worse off, because he or she has a small
chance of benefitting from the lower future burden.
The issue of lifetime burden distribution is especially important in the analysis
of intergenerational fairness, and in conjunction with national debt issues. The debt
incurred today would have to be paid off in the future, meaning that the taxes of the
future generations could be lower in its absence.
At the same time, the approach does not take into account the fact that a
marginal unit of money is likely to have a higher value to the lower income
individuals than to the higher income ones. Even though a younger taxpayer in the
previous example may pay a lower aggregate lifetime tax bill, he or she might still
prefer to pay less taxes when income is low rather than when it is high. So, in order
to compensate the taxpayer for the reduction in his or her disposable income today,
the increase in the disposable income in the future should be more than today’s loss.
Each taxpayer’s rate of intertemporal substitution is different, and incorporating it
into the analysis would add another hard-to-verify assumption.
Another reason that simple addition of tax liabilities throughout lifetime is not
an ideal indicator is the time value of money principle. Under this principle, a dollar

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CRS-21
today is worth more than a dollar tomorrow. While the complication can be
circumvented in theoretical analysis, it may be another source of contention in the
analysis of real-life events.
Nevertheless, examining tax burdens from a lifetime perspective is likely to
reduce the progressivity of the tax system, as some of the progressivity observed in
a single cross section reflects the tendency of individuals to have lower incomes in
the early and later years of life.17
How to Measure Changes in Tax Distribution
While it is straightforward to describe what makes a tax system regressive,
proportional, or progressive, it is more difficult to characterize changes to an existing
tax system. Indeed, it is difficult even to determine the degree of progressivity or
regressivity of a system so that the old and new tax systems can be compared based
on their degree of progressivity. While a variety of progressivity indices and
measures have been proposed, none has been entirely satisfactory and they can lead
to different conclusions about relative progressivity.18 This report will instead
examine the measures that are often used to characterize tax changes.
Reports of the distributional effects of tax cuts sometimes appear to depict the
same tax change very differently. This difference in how the cut is perceived for
distributional purposes arises from the choice of distributional measure. Some of the
measures that have been presented include: (1) the share of taxpayers benefitted that
fall below an income level; (2) the percentage reduction in taxes paid: (3) the tax cut
as a percentage of income (both pre-tax and disposable); (4) the distribution of the
tax cut by income class; and (5) the average tax cut. The first of these measures is
most likely to tend to depict a tax change as favoring lower income individuals
relative to higher income ones; the second measure is next most likely, and so forth.
An Illustrative Example
To illustrate this point, consider a 10% across-the-board income tax cut (all
positive net tax liabilities reduced by 10%). Assuming that the bottom quintile of the
distribution does not have tax liability, one could describe this tax cut as one in
which three quarters of the beneficiaries have cash income below $80,000, which
might make the cut appear not to be particularly targeted to high income individuals.
Almost any tax cut that is a general one will benefit, in numbers, those outside the
high income taxpayers, because high income taxpayers are, by definition, not very
17 A lifetime study of the total tax system found a close to proportional system. See Don
Fullerton and Diane Rogers, Who Bears the Lifetime Tax Burden? (Washington, DC, The
Brookings Institution) 1993.
18 These indices and issues are summarized in Donald W. Kiefer, “Progressivity, measures
of,” in Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, eds., The Encyclopedia of
Taxation and Tax Policy, ed. (Washington, D.C., The Urban Institute), 1999. See also
Donald W. Kiefer, “Distributional Tax Progressivity Indexes,” National Tax Journal, vol.
37, Dec. 1984, pp. 497-513.

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CRS-22
numerous. But this description of the tax cut does not tell us anything about how
much of a tax cut different groups receive. Table 10 illustrates how such
quantitative measures of the types described above would look assuming everyone
in each quintile and group has the same average income (an assumption that allows
the calculation of measures in the lower brackets where some individuals have
negative tax liability because of the earned income tax credit).
Based on percentage changes reported in the second column, the tax cut as a
percentage of income tax liabilities, the tax cut may appear to be fairly equal across
income classes (except for the lowest group). But that measure does not reveal very
much about distribution, because people in the lower income categories may have
extremely small tax liabilities and a tiny change in tax could result in a very big
percentage change. Expanding the measure to a percentage reduction in all taxes
shows that a proportional cut in income taxes reduces total taxes proportionally more
for high income individuals. Even in this case, however, measuring the percentage
reduction in tax liability has not demonstrated anything about the effect on income
equality; it merely reveals that individual income taxes are more progressive than
total taxes.
In discussing these measures that do relate to effects on income inequality, it is
important to distinguish between absolute measures and relative measures. For
example, average tax reductions per unit provide information on the absolute size of
a tax benefit across the income classes, which is a straightforward measure, and is
shown in the last column of Table 10. In this example, the second quintile has a tax
cut of $21 per person and the highest quintile a cut of $2,841.
Another way of examining this same effect is to compare the distribution of the
tax benefit with the distribution of the population in the first column of Table 10.
If each taxpayer class is getting 20% (one fifth) of the benefit, then the benefits are
evenly distributed. But the 10% tax cut distributes benefits disproportionally to
higher income individuals, indicating that incomes are becoming more unequal on
an absolute basis. Both of these measures can inform us about how a tax cut is
changing income without being misleading, although it is important to remember that
existing income and tax payments are more concentrated among high income
individuals. Thus there is a tendency for absolute measures to show most across-the-
board tax cuts as favoring higher income individuals — because these individuals
have a larger proportion of the income and pay an even larger fraction of the income
tax. Moreover, unless a tax provision is refundable, it will have little benefit for the
bottom fifth of the population.

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CRS-23
Table 10. Alternative Measures of Distribution for a Ten Percent
Across-the-Board Rate Cut
%
%
%
%
Tax Cut
Change
Change
Change
Share of
Change
Per
Income
Total
After-
Tax Cut
Pre-Tax
Return
Tax
Tax
Tax
(%)
Income
($)
Liability
Liability
Income
Lowest
0.0
0.0
0.0
0.0
0.0
0
Quintile
Second
-10.0
-0.7
0.1
0.1
0.6
21
Quintile
Middle
-10.0
-3.1
0.6
0.7
7.0
259
Quintile
Fourth
-10.0
-3.7
0.8
1.0
16.3
607
Quintile
Highest
-10.0
-5.1
1.4
1.9
76.4
2,841
Quintile
All
-10.0
-4.4
1.0
1.3
100.0
738
Top10%
-10.0
-5.5
1.5
2.1
61.4
4,562
Top5%
-10.0
-5.8
1.7
2.4
49.0
7,223
Top1%
-10.0
-6.2
2.0
3.0
29.5
20,991
Source: Calculated based on data from U.S. Treasury Distributional Analysis Methodology, by Julie-
Anne Cronin, U.S. Department of Treasury, OTA Paper 85, September 1999. The term “Total Tax
Liability” refers to all federal taxes plus state and local income taxes. The top of the first four quintiles
is $17, $34, $59, and $100 thousand. Measured by cash income, the top of the first four quintiles is
$16, $30, $50, and $80 thousand.
A different type of measure is a relative one that tries to examine how the tax
benefit is changing the overall relative distribution of income in the country — that
is, is it making income shares more equal or less equal? In this case, a tax change
that does not alter distribution provides tax benefits to different income classes in
proportion to some measure of income. (Higher income individuals would still
receive high absolute tax cuts, but not higher tax cuts as a percentage of income.) In
general, the best method for measuring this type of effect on inequality is to examine
the percentage change in disposable (after-tax) income. If the percentage change is
equal, then the tax change is not making incomes shares more equal or less equal.
If the percentages are higher among higher income individuals the change is making
income shares less equal. Clearly, the across-the-board proportional tax cut is
increasing inequality measured by the relative concept: incomes in the lower brackets
are increased by considerably less than 1%, while incomes in the higher brackets are
increased by 2% or more.

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CRS-24
Illustrations from Recent Tax Legislation
These different measures have been used to report different tax cuts, sometimes
with very different depictions, which we illustrate from distributional data provided
for two recent individual tax cuts: the 2001 tax cut (originally H.R. 1836) and the
2003 tax cut (originally H.R. 2).
2001 Tax Cut. The 2001 tax cut was a multi-year phased in tax cut, which
sunsets after 2010. Tables 11, 12, and 13 provide data from the three sources we are
aware of that provided distributional data for the 2001 tax cut. The first table
presents data from the Joint Tax Committee for the latest year provided, 2006, when
most provisions would be fully phased in. The percentage change in federal tax
liability was reported directly. The percentage change in after-tax, or disposable,
income, the measure suggested above as conceptually the best measure of changes
in distribution, was derived from data in the JCT table.
As suggested in the previous section, the percentage change in federal tax
liability shows the largest percentage changes at the lower income and the smaller
ones at higher levels, except for the very top level. These numbers give the
appearance of a tax cut favoring lower income individuals. The numbers showing
the percentage change in after-tax income suggest, however, that the largest benefit
was in the highest income class. Both patterns show that benefits fell, and then rose
at very high income levels, but the percentage change in tax liability suggests the
biggest benefits for the lower income class, while the percentage change in after-tax
income measure shows the biggest benefits for the top measure.
Table 11. Distributional Effects of the 2001 Tax Cut for 2006
Income Class (thousands
Percentage Change in
Percentage Change in
of dollars)
Federal Tax Liability, %
After-Tax Income, %
Less than 10
-0.9
0.1
10-20
-13.6
1.1
20-30
-11.4
1.8
30-40
-7.9
1.5
40-50
-6.5
1.4
50-75
-6.0
1.4
75-100
-5.8
1.6
100-200
-5.1
1.6
200+
-6.1
2.4
Total
-6.1
1.8
Source: Column 2 is reported directly while column 3 is derived from Joint Committee on Taxation,
Distributional Effects of the Conference Agreement for H.R. 1836, May 26, 2001, JCX-52-01. See
table 4 in the previous section for a notion of the shares of the population represented by their income
measure; for example, the under $10 thousand group is about 14% of the population, while the over
$200,000 group is about 2%. The table for 2006 did not provide the data to calculate that distribution.

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CRS-25
The next table, Table 12, shows the percentage increase in after-tax income,
based on data from the Congressional Budget Office. CBO provided effective tax
rates and distributional shares, but did not present any direct comparisons of the
effects of tax changes; our distributional measures could be derived from their data,
however. We have approximated the effect of the 2001 tax cut by comparing 2010
and 2011, since the provisions of the 2002 and 2003 tax cuts that add to the 2001 cuts
would be phased out before 2010. The analysis indicates that the largest percentage
changes in after tax income were received by the highest income classes.
Table 12. Percentage Change in After-Tax Income by Quintiles,
2001 Tax Changes Fully Phased in, at 2001 Income Levels
Percentage Change in After-
AGI Class
Tax Income
Lowest Quintile
2.1%
Second Quintile
2.2%
Middle Quintile
1.8%
Fourth Quintile
1.6%
Highest Quintile
1.9%
All
1.9%
Top 10%
2.2%
Top 5%
2.6%
Top 1%
3.8%
Source: CRS calculations derived from data in Congressional Budget Office, Effective Federal Tax
Rates Under Current Law, 2001, August 2004. The calculations compare 2010 and 2011.
Table 13 shows a distribution of the tax cut measure provided directly and a
percentage of income that was derived from the Citizens for Tax Justice (CTJ) data.
The CTJ measures are a percentage of pre-tax income rather than disposable income,
which tends to make all percentages slightly smaller. In contrast with the JCT table,
the CTJ data show fully phased-in taxes. Unlike both the JCT and the CBO data, it
also included the effect of the cut in estate taxes, which was a significant part of the
2001 tax cut. The distribution of the tax cut shows, as one might expect, a very large
share of the cut going to high income individuals — almost 40% went to the top 1%
of individuals. The tax cut as a percentage of income, a measure similar to the last
column of table 11, shows the lowest decile with the smallest amount, the broad
middle receiving slightly less than average, and higher benefits in the top decline,
particularly the top 1% — clearly showing a cut skewed to the rich. The larger effect
for the top 1% as compared to table 12 probably reflects the estate tax.

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CRS-26
Table 13: Distributional Effects of the 2001 Tax Cut, Fully
Phased in, at 2001 Income Levels
Income Class
Share of Cut, %
Percent of Income, %
Lowest Quintile
0.9
0.71
Second Quintile
5.3
1.82
Third Quintile
8.5
1.74
Fourth Quintile
14.5
1.82
Next 15%
23.7
2.29
Highest
Next 4%
9.5
1.59
Quintile
Top 1%
37.6
4.76
Total
100
2.43
Sources: Citizens for Tax Justice and CRS calculations based on their data, as reported in CRS Report
RL30973, 2001 Tax Cut: Description, Analysis, and Background, by David L. Brumbaugh, Jane G.
Gravelle, Bob Lyke, Steven Maguire, and Louis Alan Talley.
2003 Tax Cut. For the 2003 tax cut, the JCT did not produce a distributional
table, but the Treasury Department did. CBO’s effective tax rate tables cannot be
used because they mix phase-ins from 2001 in the data. For the Treasury data, the
only measure of distributional change presented (and no other could be derived from
their data) was the percentage change in individual income taxes. Like the JCT, they
present a percentage change in taxes, but unlike the JCT the change is confined to
income taxes. Note that, unlike the analysis presented in their 1999 study, the
income measure is cash income, rather than economic income.
The Treasury analysis, shown in Table 14, confronted a problem that illustrates
the difficulty of reporting distributional effects through percentage change when the
base can approach zero or become negative, as in the case with percentage change in
income tax liability. The lower part of the income distribution actually had negative
taxes, when refundable items such as the child credit and earned income credit were
taken into account. Therefore, what Treasury actually reports for that class is a
percentage increase in negative taxes; technically speaking (as a mathematical issue)
the percentage increase should have been positive change, because negative taxes
became larger. There is really no way to compare this number with the other
changes; moreover, the class of under $30,000 probably accounts for almost half
(about 40%) of the population. So it is difficult to know what to make of this
analysis. For the remaining classes, however, the measure appears to favor the lower
income individuals.

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CRS-27
Table 14. Comparison of the Distribution of Total Individual
Income Taxes, 2003
Cash Income
Distribution of Total
Percent Change in
Class
Individual Income Taxes
Individual Income
Taxes
Prior Law
Law with 2003
Tax Cut
less than $30,000
-2.0%
-2.6%
-15.5%
30,000 to 40,000
2.1%
1.9%
-19.3%
40,000 to 50,000
3.7%
3.6%
-14.0%
50,000 to 75,000
11.6%
11.7%
-11.1%
75,000 to 100,000
12.1%
12.0%
-12.7%
100,000 to 200,000
27.6%
27.9%
-11.0%
more than 200,000
44.8%
45.4%
-10.8%
Total
100.0%
100.0%
-11.9%
Source: Excerpt from a table prepared by the Department of the Treasury, released May 22, 2003.
A very different picture is presented with the distributional effect measured as
a change in after tax income based on analysis by the Brookings-Urban Tax Policy
Center (TPC), using the measure they favor, percentage change in after tax income.
The next two Tables 15 and 16 present this data for income classes and population
shares. At that point, the TPC was using adjusted gross income as their income
measure, although they later developed expanded income measures.

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CRS-28
Table 15. Percentage Change in After-Tax Income from 2003
Tax Cut, Calendar Year 2003
Adjusted Gross Income (AGI)
Percentage Change in After-Tax Income
Less than $10,000
Less than 0.05%
10,000 to 20,000
0.3%
20,000 to 30,000
0.8%
30,000 to 40,000
1.0%
40,000 to 50,000
1.1%
50,000 to 75,000
1.2%
75,000 to 100,000
2.1%
100,000 to 200,000
2.2%
200,000 to 500,000
2.2%
500,000 to 1,000,000
3.5%
More than 1,000,000
4.4%
All
1.8%
Source: Urban-Brookings Tax Policy Center
Table 16. Percentage Change in After-Tax Income by
Percentiles, 2003
Percentage
Change in
AGI Class
After-Tax
Income
less than
Lowest Quintile
0.05%
Second Quintile
0.3%
Middle Quintile
0.8%
Fourth Quintile
1.1%
Next 10%
1.8%
Next 5%
2.3%
Highest Quintile
Next 4%
2.2%
Top 1%
3.6%
All
1.8%
Source: Urban-Brookings Tax Policy Center.
Among a variety of statistics released by the Urban-Brookings Tax Policy
Center, one statistic presented is the average tax change among income quintiles.
Their discussion cautions the reader in using this measure (as would the authors of
this report), but it is included here for comparison purposes and to lend some
concreteness to understanding the problem with percentage change in tax liability.
As Table 17 demonstrates, the average tax change in the lowest quintile, a group

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CRS-29
accounting for about half of the under $30,000 cash income group in the Treasury
table, is only a dollar. Clearly, this group gained essentially nothing from the tax
change. The entire under $30,000 group probably gained an average of about $20 —
again, a very negligible amount. Thus, while the Treasury table seems to suggest that
this group benefitted more than average (“15%” as compared to an overall benefit of
11%), many people would not characterize the relative benefits in this way. The
percentage change in after tax income, by contrast, suggests that these lower income
groups gained very little. It is particularly in these lower income classes where
average tax liabilities are small or negative, that percentage changes in tax liability
can be highly misleading.
Table 17. Average Tax Change by Income Percentile, 2003
AGI Class
Average Tax Change
Lowest Quintile
-$1
Second Quintile
-$38
Middle Quintile
-$217
Fourth Quintile
-$482
Next 10%
-$1,270
Next 5%
-$2,125
Highest Quintile
Next 4%
-$3,145
Top 1%
-$20,786
All
-$715
Source: Urban-Brookings Tax Policy Center.

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