IRS on Effects of Tax Code

IRS:

The IRS states that the tax code changes in the late 80's had significant impact on the redistributive effect, reducing it from the period earlier.

The tax laws of the 1980’s and 1990’s made significant changes to both the tax rates and definitions of taxable income. The tax reforms of 1981 and 1986 significantly lowered individual income tax rates, and the latter also substantially broadened the income tax base. The tax law changes effective for 1991 and 1993 initiated rising individual income tax rates and further modifications to the definition of taxable income.

 

The net effect is that there was a large change in what was reported as income.  This cannot be overlooked in assessing the income distribution numbers.

 

 IRS on Effects of the Tax Code:   Link

 

Different approaches have been used to measure the distribution of individual income over time. Survey data have been compiled with comprehensive enumeration, but underreporting of incomes, inadequate coverage at the highest income levels, and omission of a key income type jeopardize the validity of results.
 
Administrative records, such as income tax returns, may be less susceptible to underreporting of income but exclude certain nontaxable income types and can be inconsistent in periods when the tax law has been changed.  Record linkage studies have capitalized on the advantages of both approaches, but are costly and severely restricted by the laws governing interagency data sharing.
 
The tax laws of the 1980’s and 1990’s made significant changes to both the tax rates and definitions of taxable income. The tax reforms of 1981 and 1986 significantly lowered individual income tax rates, and the latter also substantially broadened the income tax base. The tax law changes effective for 1991 and 1993 initiated rising individual income tax rates and further modifications to the definition of taxable income.
 
So what does this all mean?
 
First, the high marginal tax rates prior to 1982 appear to have had a significant redistributive effect. But, beginning with the tax rate reductions for 1982, this redistributive effect began to decline up to the period immediately prior to TRA 1986.
 
Although TRA became effective for 1987, a surge in late 1986 capital gains realizations (to take advantage of the 60-percent long-term capital gains exclusion) effectively lowered the average tax rate for the highest income groups thereby lessening the redistributive effect.
 
For the post-TRA period, the redistributive effect was relatively low, and it did not begin to increase until the initiation of the 39.6-percent tax bracket for 1993. But since 1997, with continuation of the 39.6-percent rate but with a lowering of the maximum tax rate on capital gains, the redistributive effect again declined.
 
It appears that the new tax laws will continue this trend.