The second set of columns uses the measure of annualized lifetime income that I have proposed in Caspersen and Metcalf (1994). Ranking households by this measure of income makes the tax reform look slightly more progressive. The lowest income group and the highest two income groups see their taxes go up modestly while the groups in the 10th to 80th percentiles face lower taxes. Measured as a percentage of income, no group sees a change in tax liability as large as ‘/2 of one percent. The difference in Suits Indices is now positive, albeit close to zero, indicating a slight increase in progressivity with this reform. The tax shift variable shows that the top decile receives over 3 percent of the new tax revenues and that the lowest decile along with the top two deciles receive over 4 percent of revenues. Again, the degree of across decile tax shifting is not very large with this reform.
Given the criticisms of the lifetime income approach discussed above, I have also constructed a distributional table for households with married couples in which the head of household is between the ages of 40 and 50. While households in this group may still suffer from transitory income shocks (both positive and negative), we can be reasonably confident that income differences in this group do not arise from lifecycle considerations. The distributional story is essentially the same as the story when I rank households by my measure of lifetime income. The lowest income group is the only group for whom tax liabilities increase (though on a percentage basis, the increase is very small) while other groups face slightly lower taxes.
Measured as a fraction of income, the change is slightly larger for some groups. For example, households in the 20th to 30th percentiles receive a tax reduction equal to .7 percent of annual income as opposed to a reduction equal to .4 percent of annualized lifetime income20. The change in Suits Indices for this group is 0.01 indicating that this is essentially a proportional reform when considered over the entire distribution.img class=” wp-image-762 alignnone” alt=”1252228588_44″ src=”http://blog-about-finance.com/wp-content/uploads/2014/04/1252228588_44.jpg” width=”477″ height=”357″ /