"The Right Way to Measure Tax Changes by Income Group"

The Tax Foundation and other major tax policy groups generally focus on the percentage change in after-tax income in order to measure the impact of different proposals on the distribution of income. the tax burden. This measure is preferred because it creates an accurate representation of the change in tax burden distribution

Other methods tend to overestimate, or underestimate, the distributive effects of some policies. . The most striking example is probably the measure of "share of a total tax change". The use of this metric as an indicator of the progressiveness and regressivity of a single fiscal change may involve some strange things about politics

. Let's take an example of the economy with 100 people with a similar income distribution to that of taxpayers here in the United States (Table 1). Average income ranges from $ 7,807 in the last 20 employees to $ 1.5 million for the major income earner. The share of income by income group in inequality. The poorest 20% earn 2.2% of all incomes, the 20% earn 11.4% and the richest 1% earn 22.4% of all incomes.

In this mini-economy, the federal government collects revenues with a lump-sum tax of 20%. percent on all income, which means that each individual pays 20 percent of his income in taxes. The total tax bill represents exactly 20% of the total income of each group and the share of the total tax burden is identical to its share of income. This is what you call a "proportional" tax. It is neither progressive nor regressive

Table 1: Distribution of Tax Burden by Income Group

	Average Income	Total Income	Share of Total Income	Total Taxes	Sharing the Tax Burden
Source: Tax Foundation and Growth Model, 2018
First Twentieth	$ 7,807.70	$ 156,154.10	2%	$ 31,230.82	] 2%
Second Twenty	] $ 22,712.17	$ 454,243.43	6%	$ 90,848.69
6%
Third Twenty	$ 40,273.84	$ 805,476.81 [19659014] 11%	$ 161,095.36	11%
Fourth Twenty	$ 67,785.34	$ 1,355,706.71	19%	$ 271,141.34 [19659014] 19%
Next Ten	$ 103,339.13	$ 1,033,391.32	15%	$ 206,678.26	15
Next Five	] $ 148,445.62	$ 742,228.12 [19659014] 11%	$ 148,445.62	11
Next Four	$ 260 154.90	$ 1,040,619.59	15%	208 123.92 $	15%
First	$ 1,581,089.46	$ 1,581,089.46	22%	$ 316,217.89	22%

Now Let's say the government decides that because it has a budget surplus, it will reduce the lump sum tax rate from 20% to 19%. Before entering the numbers, it's worth thinking about what it means. The overall load distribution will remain the same even if the overall load will be slightly lower than before. In other words, we do not think the tax system will be more progressive or regressive than it was before.

Here is a table showing how two methods (percentage change in after-tax income and share of total tax change) measure a reduction of a flat tax of 20 percent on income to 19 percent. The first column shows what this tax reduction looks like in terms of percentage change in after-tax income for each group. According to this measure, each income group sees an equal increase in after-tax income of 1.25%. This means that everyone's after-tax income has increased in proportion – each group sees the same percentage of increase in their ability to consume goods and services. More importantly, this proportional increase in after-tax income reflects the fact that the distribution of the tax burden remained the same after the change in the tax rate, even though the overall burden fell. This is a useful feature of the "percentage change in after-tax income" measure. When there is a proportional variation in taxes, this clearly indicates that the changes are equal for each income group.

The measure "share of total tax change" is very different. Under this measure, the top 20 taxpayers only see 2.2% of total tax changes, while the fourth quintile sees 18.9% and the highest income only 22.1%. In contrast to the "percentage change in after-tax income", this measure implies that this tax reduction was regressive, which means that the new tax system is less progressive than it is. 39 was before. But we know, intuitively, that it's wrong: the tax rate has dropped from 20% to 19%, but it remains a flat tax on all income. On the whole, this measure only shows us the distribution of income, not the distribution of the new tax system.

Table 2: Effect of the reduction in the flat income tax from 20% to 19%

	Percentage change in after-tax income	Share of total tax change [19659067] Source: Tax Foundation and Growth Model
First Twenty	1.25%	2.2%
Second Twenty	1.25	6.3%
Third Twenty	1.25%	11.2%
Fourth Twenty	1.25%	18.9%
Following Ten	1.25%	14,4
Next five	1.25%	10.4%
Next Four	1.25%	14.5%
Top of the page One	] 1.25%	22.1%

By No, these are the only two methods to measure the impact of tax change on income groups. Other methods include measuring the average change in the tax in dollars, the percentage change in the tax burden and the percentage change in the share of the tax burden. All of these measures can tell us about the impact of a tax change on different groups of people. However, when we look at how a tax change affects the distribution of the tax burden, the "percentage change in after-tax income" is the most informative.