Tax Burden by Income Class, 1986-1987
The distribution of tax burdens by family income class is of major importance to the general public and policy makers, yet the information examining this distribution is quite limited due to the difficulty involved in producing such estimates. The Tax Burden By Income Class 1986-1987 study prepared by the Tax Foundation helps provide a comprehensive tax burden distribution analysis.
The current demand for increased government services, combined with the severe Federal budget deficit and budgetary problems in numerous states, creates a fiscal environment ripe for revenue enhancement. What types of taxes could be implemented to address these fiscal demands and who will bear their burden? These will be the first questions in any serious consideration of new tax initiatives.
Earlier tax burden distribution results were presented in the Tax Foundation’s 1981 study Allocating Tax Burdens and Government Benefits by Income Class, 1972-73 and 1977. To assist in understanding who pays the taxes, the Tax Foundation has expanded upon its previous body of research and employed the most recent data available in order to produce the present comprehensive analysis of the tax burden distribution by level of government as well as by type of tax. The detailed study results presented in Exhibit 7 show the tax burden borne by each family income class for 1986. Provisional 1987 results are presented in Exhibit A1 of Appendix A.
The overall total tax burden results produced by the study show a generally proportional tax structure, with the exception of families in the lowest and highest income brackets. Both bear a larger than average tax burden. Furthermore, the tax burden distribution shows great disparities by income class in absorbing the burden of a specific type of tax.
Not surprisingly, the individual income tax represents the most progressive element of the tax structure; while sales, excise, and payroll taxes prove to be regressive. The major excise taxes examined separately in the study—specifically those on motor fuel, tobacco products, and alcoholic beverages—were the most regressive.
Alternative tax incidence assumptions were analyzed in order to suggest the degree to which the tax burden estimates are affected by the study’s choice of assumptions. The alternative assumptions focus on three taxes—the corporate income tax, property taxes, and the employer’s share of social insurance taxes.
Examining the difference in effective tax rates caused by using the most progressive and most regressive set of incidence assumptions reveals that the overall tax burden distribution is not altered significantly. For the middle classes the difference is minimal, averaging less than a 2 percent variation. In the lowest income bracket, greater regressivity is seen when the tax incidence is assumed to fall more heavily on consumption. Progressivity is increased in the highest income bracket when taxes are primarily shifted to dividend and property income. For the tax burden as a whole, the differences in effective rates between the two extreme sets of assumptions were relatively small.