U.S. Inequality and Fiscal Progressivity: An Intragenerational Accounting

Inequality is ultimately about differences in spending, not differences in wealth or income that can be offset by fiscal policy. This study measures inequality in remaining lifetime spending (RLS) by cohort. Cohort specificity controls for growth and life-cycle effects. We measure RLS and lifetime net tax rates by running the 2016 Survey of Consumer Finances data plus imputed variables through a life-cycle, consumption-smoothing program that incorporates borrowing constraints and all major federal and state tax/transfer programs. Our findings are striking. First, inequality in income and, especially, wealth dramatically overstates RLS inequality. For example, the richest 1 percent of forty year-olds own 29.1 percent of their cohort’s net wealth, but account for only 11.8 percent of its RLS. This cohort’s poorest quintile owns just 0.4 percent of the cohort’s wealth, but spends 6.6 percent of cohort RLS. Second, within-cohort inequality differs considerably from across-cohort inequality. Third, the U.S. fiscal system is highly progressive. To illustrate, for the bottom quintile of forty year-olds, the lifetime net tax rate is negative 44.4 percent. It’s 34.7 percent for the top 1 percent. Fourth, current-year net tax rates substantially understate fiscal progressivity and, as our analysis of the 2017 Tax Cuts and Jobs Act shows, can significantly misstate a fiscal reform’s fairness.