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Measuring Tax Burden: a Historical Perspective

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This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth Volume Author/Editor: Ernst R. Berndt and Jack E. Triplett, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-04384-3 Volume URL: http://www.nber.org/books/bern91-1 Conference Date: May 12-14, 1988 Publication Date: January 1991 Chapter Title: Measuring Tax Burden: A Historical Perspective Chapter Author: B. K. Atrostic, James R. Nunns Chapter URL: http://www.nber.org/chapters/c5981 Chapter pages in book: (p. 343 - 420) 11 Measuring Tax Burden: A Historical Perspective B. K. Atrostic and James R. Nunns 11.1 Introduction 11.1.1 Overview Measures of tax burden are indicators of how well tax policy meets one of its primary goals, equitably raising the revenues needed to run government. Equity has two aspects. The first, vertical equity, concerns the way taxes are distributed among taxpayers with different abilities to pay. The second, hori- zontal equity, concerns the way taxes are distributed among taxpayers with the same ability to pay. Tax burden measures thus answer broad economic and social questions about the effect of tax policy on the distribution of income and wealth. The history of these measures incorporates the histories of economic and world affairs, major tax and economic policy legislation, intellectual and so- cial movements, and data and technological innovation in the fifty years since the first meeting of the Conference on Research in Income and Wealth. This paper reviews the effect of these measures on federal tax policy in a historical and statistical context. The variety of tax burden measures over this period reflect advances in eco- nomic and measurement theory, changing policy concerns, new data sources, B. K. Atrostic is a Financial Economist with the Office of Tax Analysis, U.S. Department of the Treasury. James R. Nunns is Director, Individual Taxation, Office of Tax Analysis, US.De- partment of the Treasury. Views expressed in this paper are solely those of the authors and in no way reflect opinions of the Department of the Treasury. All errors and omissions are the sole responsibility of the authors. The authors particularly wish to thank Margaret Acton, whose knowledge of the history and the files of the Office of Tax Analysis and its predecessor offices was invaluable. Ray McFadden provided valuable research assistance. Carolyn Greene provided valuable support in preparing the manuscript and tables. 343 344 B. K. Atrostic and James R. Nunns and external social and economic forces. Advances in the theory and measure- ment of income, wealth, and taxes generated corresponding changes in the analytical and computational methodologies used to measure tax burden. Throughout the history of empirical tax burden measurement in the United States, changing policy concerns focused attention on different distributional questions. The changing focuses provided the impetus for new analytical techniques. New data sources, together with these techniques, in their turn suggested new views of tax burden and new directions for tax reforms. The major social and economic forces of the last fifty years as well as advances in economic theory and data development influenced evaluations of tax burden measures. The timeline in table 11.1 indicates overlaps among these develop- ments. The focus throughout this paper is the interrelation among tax burden mea- sures, the development of tax policy, and the policy implications and uses of advances in data, economic theory, and measurement. Each of these topics is treated fully elsewhere. The structure of the U.S. tax system and of the gen- eral process of tax policy formulation are discussed in Blough (1952) and Pechman (1987). Summaries and syntheses of tax incidence theory are given in Mieszkowski (1969), Whalley (1984), Musgrave (1985), and Kotlikoff and Summers (1987). Shoup (1972) assesses the state of quantitative work on tax incidence and tax burden in light of fifty years of effort by the National Bureau of Economic Research to improve quantitative research in economics. Re- views and assessments of some tax burden measures are given in Musgrave and Thin (1948), Atkinson (1980), Devarajan, Fullerton, and Musgrave (1980), Auerbach and Rosen (1980), and Kiefer (1984). 11.1.2 Tax Burden Defined Definitions of a tax, of ability to pay, and of the burden of taxes are neces- sary prerequisites to measuring tax burden. A tax is a compulsory payment to the government from which the taxpayer receives no direct benefit. This defi- nition distinguishes user charges and commercial receipts from government enterprises (e.g., state-owned liquor stores) from taxes. All three are govern- ment receipts, but only the tax component is included in tax burden studies. The inclusion of income, sales, and excise taxes generates little controversy. The appropriate treatment of property taxes and other taxes that are tied to benefits, such as the payroll taxes for Social Security and unemployment in- surance, are less clear-cut. In the case of payroll taxes, individuals receive direct benefits when they qualify for the insurance payments but receive these payments at a time removed from the time the taxes were paid. Most tax bur- den studies include property and benefit taxes in their measures of total taxes paid. Ability to pay is generally measured by income. The Haig-Simons income definition, a broad-based concept of net accretions to economic power (or consumption plus change in net worth), is the most common theoretical in- come concept (see Musgrave 1985). The actual income measures used in tax Table 11.1 Timeline of Major Events in the History of Tax Burden Measurement 1928 1933 1938 1943 1948 1953 19% 1963 1968 1973 1978 1983 1988 EXTERNAL EVENTS I I II I I 1929 1941 1951 1965 1966 1973 1979 Stock Market us en1ers us enters Medicare Vietnam 011 PI,CL?S 011 Shock Crash WWll Korean War PlOQram Buildup Soar <-) Introduced RPC~SSIO~ MAJOR TAX BILLS II 1 II I1 I 1934 1935 1937 I 197; '7gil 1b84 '1986 I 1943 1964 1965 1969 1976 ~wenue ERTA ' DEFRA T~~ Revenue Social Revenue 1942 Current Tax Revenue Excise Tax I Act Security Act Act Tax Reform T.3 x Act 1g80 1g82 Reform I Act Reduction Act Reform Crude TEFRA Acl I AcI Act 011 Windfall < ) Income and Sales Taxes Profit Tax Bioadlv.. AdaDted bv . Slates Act DATA DEVELOPMENTS I I I I I1 II I I I1 1; 1935 36 1940 1946 1955 1961 1963 1967 1968 1971 73 1981 1983 1984 1986 I Nailanal Income Data Employment so1 SO1 Tax SFCC SEO CPS BLS BLS SCF SlPP SCF I Reso~rces In Census Act on Tape Model File on Tape CES CES BLS CES THEORY DEVELOPMENTS II I I I1 II I 1951 1959 1961 ~ncn 1969 1477 i9ao Musgrave Debreu Dosser &"&ger ShouP iieiZkoWSki McLure (Balanced Budget ITheOw 01 ,v",),"ia,r iConsumpl8onl (~ropertyTax) (State Corporate Value1 Income Taxi VAT Tax) Income Tax) TECHNIQUE ADVANCEMENTS I I II I 1946 1953 1965-66 1967 1978 SO1 Samples Cornpulers 3rd Scarf'sScarfs File Matching Introduced Generailon COmpulatiOnal and Reduction Cornpulers Algorithms Techniques Introduced TAX BURDEN STUDIES: Representative T-7 Tax Payer 1934 1936 Shere Newcomer Aggregate Data I1 I I1 I I 1936 1938 1948 1958 1959 1965 1968 Pettengill Colm Musgrave. Tucker Michigan W~scons~n Bishop Heiriott a a MM Microdala Calculations I I I I I, 1962 1966 1971 1979 1985 1988 i Treasury kchman 011 & 011 Browning Pechman CBO I a okner &Johnson NBER General Equilibrium I I I 1972 1978 1984 Shove". Whalley Fullerton el a1 Ballard el a1 346 B. K. Atrostic and James R. Nunns burden studies usually differ from a complete Haig-Simons measure. Adjusted gross income (AGI) is widely used in tax burden studies in part because it is readily available in Statistics of Income publications. Defined by the relevant sections of the Internal Revenue Code, AGI generally omits many compo- nents of income, such as transfer payments, and allows deductions that are not costs of doing business. Other income measures used in recent tax burden studies, such as modified economic income and family economic income, ex- pand adjusted gross income to approximate more nearly Haig-Simons mea- sures that are independent of current tax laws. Definitions and measures of income and wealth are given in NBER (1937) and (1943), National Resources Committee (1938), Goldsmith et. al. (1954), and Smith ( 1975). Payment of taxes, through lower factor incomes or higher product prices, reduces a taxpayer’s real income. Tax burden measures attempt to quantify this decrease in utility and to evaluate the decrease against a measure of ability to pay. Taxes may impose an excess burden on the taxpayer beyond the amount of tax payments if they also induce distortions in the economic system by altering relative prices. Taxation also imposes administrative and compli- ance costs. With the exception of general equilibrium models, tax burden studies use taxes paid as the tax measure and attempt neither to calculate the excess burden nor to count administrative and compliance costs, 11.1.3 Approaches to Measuring Tax Burden Tax burden studies of the 1930s are the earliest U.S. studies to include measures of taxes at all levels of government. These studies commonly pre- sent results in terms of the tax liability and income of representative taxpay- ers. A typical category of representative taxpayer would be married taxpayers with no dependents whose income is under $5,000 annually. This form of tax burden measure continues to be widely used in policy debates because it can be focused on particular aspects of a tax proposal and because it is most acces- sible to nonspecialists.
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