A Re-Examination of the Effects of Personal Deductions, Tax Credits and the Tax Rate Schedule on Income Tax Progressivity and Income Inequality

Abstract

We refine and extend Seetharaman (1994) using tax-return-level Statistics of Income data that represent the population of 1992 federal individual income tax returns. Our results indicate that while the standard deduction, exemptions and tax rate schedule continue to contribute the most to progressivity, the rate schedule plays a much greater role (and the standard deduction and exemptions a much lesser role) than previously reported. In addition, consistent with Dunbar (1996), we find that tax credits, in particular the earned income credit, have a substantial effect on overall tax progressivity. Although itemized deductions continue to reduce overall progressivity, with housing costs (mortgage interest and real estate taxes) and state and local income tax deductions being the dominant items, our results indicate that their effect on tax progressivity is smaller than indicated in the earlier study. Finally, we find that the effect of the income tax system on income inequality is more pronounced than previously reported, especially when the data are partitioned by filing status.

If We Could Choose The Way We Pay: The Impact Of Decision Complexity On Tax Scheme Preference

“…However more recently, Iyer and Seetharaman (2000) and Tideman, Akobundu, Johns and Wutthicharoen (2002) conclude that a flat tax system increases horizontal equity relative to the current system. There is a long history of tax research suggesting the existing national tax collection process is disparate to groups of taxpayers (see for example, Seetharaman, 1994 andYoung, Nutter &Wilkie, 1999).…”

Decomposition of progressivity and inequality indices: Inferences from the US federal income tax system

“…In addition, it is inadequate to rely only on summary indices when addressing vertical equity issues. 6 Several studies in both accounting and economic literature have used summary indices to document the progressivity and inequality effects of different tax systems (Seetharaman and Iyer, 1995;Young et al, 1999;Ryan, 1997). For example, Iyer et al (1996) used the Kakwani and Suits indices to document the vertical equity effects of replacing the progressive income tax with a flat tax.…”

Tax Incentive Proposals to Enhance Child Support Payment Compliance and Tax Progressivity

“…With this fact in mind, however, the authors wish to propose two alternative tax breaks that would be potentially feasible based on tax deductions and credits that currently exist in the Internal Revenue Code. The suggested tax breaks in this paper are designed to target middle-and lower-income taxpayer groups, and thus, enhance tax progressivity (Seetharaman, 1994;Seetharaman & Iyer, 1995;Dunbar, 1996;Iyer & Seetharaman, 1997;Young, Nutter, & Wilkie, 1999), so both alternatives presented contain phase-outs to accomplish this purpose.…”