More Unequal Income but Less Progressive Taxation

ChunzanWu

 

Abstract

Income tax in the U.S. has become less progressive since the late 1970s in spite of rising income inequality. Why? Modeling policy makers as a Ramsey government that may weight heterogeneous households differently, I find that economic changes can explain about 61% of the reduction in progressivity observed. Aging population and declining gender gap induce a less progressive income tax, whereas changing idiosyncratic risks and the declines of labor share and interest rate have the opposite effects. Rising skill premium is about neutral in this regard. The remaining reduction in progressivity implies a shift in the government’s weights towards high-ability households. From a utilitarian point of view, the income tax change since the late 1970s induces a welfare gain equivalent to 2.12% of lifetime consumption.

 

Keywords

Progressive Taxation, Rising Skill Premium, Declining Gender Gap, Aging Population, Idiosyncratic Risks

 

More unequal income but less progressive taxation