Tax Distribution and Economic Trends

The Washington Post. The economy's expansion last quarter, for the first time in more than a year, has prompted much speculation that the recession is over. This turning point, however, simply marks an end to the decline in activity.

Suppose that a taxpayer earns an additional dollar of income. How much tax would she owe on that dollar? A natural way to answer this question would be to look up the taxpayer’s statutory tax rate - the tax rate corresponding to her tax bracket and filing status.

The alternative minimum tax (AMT), which originally targeted high-income taxpayers, requires annual legislation to prevent it from affecting millions of middle-income individuals each year. There are two primary reasons for the AMT’s broadening impact; its parameters are not indexed for inflation and the 2001-2006 tax cuts reduced regular tax liability without changing AMT liability. In 2009, four million taxpayers will pay $33.5 billion in AMT, but without congressional action that number will rise to 27 million owing $102 billion in 2010. This paper describes the AMT and provides TPC’s latest estimates of AMT coverage, revenue, and distribution.

The Volcker task force on tax reform, part of the President's Economic Recovery Advisory Board, faces a daunting task that is made materially more difficult by ex ante constraints placed on its purview and recommendations. Broad-based reform proposals seem to be out of the question, and distributional constraints appear to eliminate many serious ideas. Nevertheless, I believe that significant tax simplification is feasible despite the task force's constraints, and I will take it as a given that simplification is desirable.

The House leadership has proposed to finance health care reform with a surtax on adjusted gross income (AGI) of high-income individuals, while the president's budget would increase the two top marginal tax rates on taxable income. Income taxed at statutory marginal rates is 58 percent of AGI for all taxpayers but only 46 percent of AGI for taxpayers with income over $1 million. While personal exemptions and deductions account for most of the difference between the two tax bases for the population as a whole, capital gains and qualified dividends make up most of the difference for very high income taxpayers.