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.
We thank the National Center for Policy Analysis, the Searle Family Trust, the Sloan Foundation, the Goodman Institute, the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, and Boston University for research support. We also thank Emmanuel Saez, other participants in the October 2015 Boskin Fest at Stanford, participants in the June, 2019 Journées Louis-André Gérard-Varet in Aix-en-Provence and the September, 2019 MaTax Conference in Mannheim, and four anonymous referees for very helpful comments on earlier drafts. 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.