Trends and issues in income tax policy

The United States imposed the first income tax during the War of After the war, the tax was repealed and then reinstated during the early 20th century.

Trends and issues in income tax policy

Download image Effects on income inequality and the distribution of gains from growth Everything else being equal, increasing top marginal tax rates would decrease after-tax income inequality by definition making the tax and transfer system more progressivebut economic research suggests such changes could also have powerful effects on pretax inequality.

As discussed above, the pretax market distribution of income has been the primary driver of inequality growth, and the federal tax and transfer system would have to be made substantially more redistributive than it was in in order to reverse the increase in post-tax, post-transfer inequality since then.

Reducing pretax inequality growth is the key to slowing post-tax, post-transfer inequality growth, although there is certainly scope to restore lost progressivity through the tax and transfer system.

Using time series regression analysis over —, Hungerford found that reductions in the top capital income tax rates and the top ordinary income tax rates were significantly correlated a 5.

To this point, Hungerford decomposed the roles of labor income wagescapital income, and tax policy in widening income inequality over the years —, a period in which taxes on investment income were cut substantially. The last two are generally referred to as the Bush-era tax cuts. The Bush-era tax cuts introduced a percent tax bracket, reduced the top income tax rate to 35 percent, reduced other marginal income tax rates particularly for high earnersreduced the long-term capital gains tax rate from 20 percent to 15 percent, and created a new 15 percent preferential tax rate for qualified dividends previously taxed as ordinary income.

Note that in relative terms, the biggest relative swings in tax rates between and were for capital income, notably a Looking at a comprehensive measure of income including capital gains, Hungerford found that the Gini index of inequality rose from 0.

The share of business income rose from 2. Overall, capital income—capital gains, dividends, business income, and interest income the share of which fell over this period —rose as a share of total income from The share of income going to federal taxes fell in absolute value from The share of payroll taxes fell in absolute value from The share of income inequality explained by the distribution of investment income rose from As wages fell as a share of total income, the portion of inequality explained by wage income moved in the opposite direction, falling from Meanwhile, the role of federal taxes in alleviating inequality was diminished, from a dampening effect of a Hungerford found that a 1 percent increase in taxes would have reduced the Gini index of inequality by 0.

This suggests substantially more scope for tax policy to push back against income inequality through a combination of increased tax progressivity and, more importantly, greater equity in the treatment of capital and labor income.

Similarly, Hungerford found that the rising share of capital income—heavily concentrated at the top of the income distribution—at the expense of labor income was the single largest driver of widening income inequality between and Tax policy changes exacerbated the trend of increased post-tax income at the top of the income distribution, and the rising share of capital income was almost certainly encouraged by tax cuts for investment income.

Peter Visclosky on Tax Reform

Again, the largest relative and absolute changes in statutory tax rates over this period were decreases in the qualified dividends rate from Are tax incentives driving trends in market-based income? For households that can reclassify compensation to minimize tax liability, the relatively large reductions in tax rates on capital income, particularly after the Tax Reform Act, which equalized tax treatment of labor and investment income, has created an incentive to shift income away from wages and salaries toward capital income.

Piketty, Saez, and Stantcheva offer a theoretical framework explaining this relationship between falling top tax rates and rising inequality: Decreasing the top tax rate increases the returns to bargaining for higher wages, whereas the higher top tax rates of the s to s reduced the returns to this bargaining.

Essentially, low marginal tax rates increase the returns to rent-seeking by upper-income households i. Time series regression analysis for the United States indicates that elasticity of taxable income ETI with respect to the net-of-marginal tax rate is relatively small, in the range of 0.

Their regression analyses suggest that the behavioral response to lower top tax rates is one that exacerbates income inequality without increasing overall economic activity. And if a portion of the ETI with respect to the net-of-marginal tax rate reflects such bargaining behavior, the revenue-maximizing total top labor income tax rate may be as high as 83 percent Piketty, Saez, and Stantchevaimplying a revenue-maximizing top marginal federal income tax rate of roughly 80 percent Fieldhouse a.

Conclusion The market-based distribution of income concentrated at the top of the income distribution, particularly the rising share of investment income at the expense of labor income, is driving the sharp growth of income inequality in the United States.

Declines in the redistributive nature of the tax and transfer system have exacerbated this trend sinceand there is substantially more scope for tax and budget policy to push back against post-tax, post-transfer inequality today than in the late s or even early s.

Trends and issues in income tax policy

But meaningfully slowing post-tax, post-transfer inequality growth will require slowing market-based income growth at the very top of the income distribution.

This issue brief was made possible by grants from the Peter G. Peterson Foundation and the Ford Foundation. The statements made and views expressed are solely the responsibility of the author. Recent research suggests that raising top marginal tax rates on both ordinary income as well as capital gains may have substantial scope to slow market-based inequality growth in addition to decreasing after-tax inequality.

Furthermore, research suggests that some of the rise in income growth at the top of the income distribution results from bargaining by executives and managers—at the expense of other workers—encouraged by reductions in top marginal tax rates.One of the most commonly discussed issues in economics is how tax rates relate to economic growth.

Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth . Topics: Tax, Taxation, Indirect tax Pages: 5 ( words) Published: March 14, A BRIEF UNDERSTANDING: The system of taxation in India is still now very much primitive. For development of any nation and for civilization imposition of tax within the framework of .

Sep 06,  · All businesses set up in India and generating revenue and income are liable to pay income tax and file their returns of income in India. A broad picture of the system, persons liable, taxation and related issues is stated herein. The pretax income of the middle class—adults between the median and the 90th percentile—has grown 40% since , faster than what tax and survey data suggest, due in particular to the rise of tax . Trends and Issues in Tax Policy and Reform in India. Trends and Issues in Tax Policy. and Reform in India. income tax. In fact, in the s and the .

Nov 01,  · A new version of the income tax form, set for release this week, omits some popular deductions and requires several worksheets for many taxpayers to complete. By JIM TANKERSLEY June 25, The IRS has issued a new Form W-4 and updated its online withholding calculator to reflect this year's revised tax rates and brackets.

HR should alert employees to check their tax withholding and. Trends and Issues in Tax Policy and Reform in India T tax policy. Trends in tax revenue are presented, and these point toward a discussions of optimal income tax, . Public policy, whether it be farm income and price support policy, credit policy, environmental policy or tax policy, affects the struc- ture of agriculture because it has a different impact on firms with.

Trends in State Tax Policy, - Tax Foundation