Research on the distribution of income during the 1980s has identified a trend towards increasing inequality, which may be the continuation and acceleration of trends spanning several decades. This paper explores to what extent behavioral responses to the tax changes during the 1980s may also explain the rising inequality. The 1986 Tax Reform Act is used as a natural experiment to explore the roles played by both taxes and a variety of nontax factors. Our principal finding is that both tax rates and nontax factors appear to have had significant effects on relative income growth during the late 1980s.
While many studies have documented the long-term trend of increasing income inequality in the U.S. economy, there has been less focus on income mobility and the potential opportunity for upward mobility. Data from panels of individual income tax returns suggest that there was considerable income mobility in the U.S. economy over the 1987-1996 and 1996-2005 periods. Consistent with prior mobility studies, the data show that over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period. By contrast, those with the very highest incomes in the base year were more likely to drop to a lower income group and the median real income of these taxpayers declined in each period. Economic growth resulted in rising incomes for most taxpayers over both time periods. Initial position in the income distribution and changes in marital status were found to be associated with the largest upward or downward movements through the income distribution.
While cross-sectional data show increasing income inequality in the United States, it is also important to examine how incomes change over time. Using income tax data, this paper provides new evidence on long-term and intergenerational mobility, and persistence at the top of the income distribution. Half of those aged 35-40 in the top or bottom quintile in 1987 remain there in 2007; the others have moved up or down. While 30 percent of dependents aged 15-18 from bottom quintile households are themselves in the bottom quintile after 20 years, most have moved up. Persistence is lower in the highest income groups.
Using five-year panel data, this study examines the various dimensions of the variability of individual charitable contributions at all income levels: the variation in the generosity of individuals and the variability of the individuals' giving over a five-year period. The study finds considerable variability of both kinds. One finding is that the variability of generosity is substantially greater at the higher income levels. Another finding is that variability is substantially less pronounced by observing a five-year period of an individual's generosity than by observing annual behaviour. One consequence is that a relatively small proportion of donors account for a large proportion of total giving. The popular reputation of the wealthy for generosity is actually due to the exceptional generosity of a minority rather than widespread generosity among the wealthy. Differences in generosity and variability of giving over time are both more pronounced among high-income donors. Results of the study have implications for research on charitable giving, for predicting the effects of tax policy changes on giving, and for fund-raising.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) incorporated the main elements of the Bush Administration's tax proposals. The principal feature of this legislation was the reduction in individual income tax rates. Reducing marginal tax rates was intended to improve the economic incentives to work and invest, reduce the other economic distortions associated with high tax rates, lower overall tax burdens and improve the prospects for economic growth. The paper examines the effects of the lower marginal tax rates by estimating the response of reported taxable income to the lower rates. Using a panel of tax returns spanning the enactment of EGTRRA and JGTRRA, the paper estimates a taxable income elasticity in the base model of about 0.4, with estimates for other specifi cations and samples ranging from about 0.2 to 0.7.
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