U.S. Inequality, Fiscal Progressivity, and Work Disincentives: An Intragenerational Accounting
This study combines the 2013 Federal Reserve Survey of Consumer Finances data and the Fiscal Analyzer, a highly detailed life-cycle consumption-smoothing program, to a) measure ultimate economic inequality – inequality in lifetime spending power – within cohorts, b) assess fiscal progressivity within cohorts, c) calculate marginal remaining lifetime net tax rates, taking into account all major federal and state tax and transfer policies, d) evaluate the ability of current income to correctly classify households as rich, middle class, and poor, e) determine whether current-year average net tax rates accurately capture actual fiscal progressivity, and f) determine whether current-year marginal tax rates on labor supply accurately capture actual remaining lifetime marginal net tax rates.
We find far less inequality in spending power than in wealth or labor earnings due to the fiscal system’s high degree of progressivity. But U.S. fiscal redistribution generally comes at a price of very high work disincentives for households regardless of age and resource class. There is, however, very substantial dispersion in marginal net tax rates, which seems hard to reconcile with standard norms of optimal taxation. We also find that current income is a very poor proxy for remaining lifetime resources and that current-year net tax rates can provide a highly distorted picture of true fiscal progressivity and work disincentives.
We thank the National Center for Policy Analysis for research support from December 1, 2013 through November 1, 2014, the Searle Family Trust for their support in 2015, the Sloan Foundation, the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, and Boston University for research support. We thank Emmanuel Saez and other participants at the October 2015 Boskin Fest for very helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Laurence J. Kotlikoff
The terms under which Economic Security Planning, Inc. have provided its core software for use in this study, namely on a zero-cost basis, have been reviewed and approved by Boston University in accordance with its conflict of interest policy.Darryl R. Koehler
Darryl Koehler works for Economic Security Planning, Inc. and is also a minority share holder.