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.
Links:
Forces Catalog: driving forces
on income distribution.
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.