| Analysis of federal tax provisions are often motivated by concerns about vertical and horizontal inequities. While the federal income tax has attracted most attention in this regard, increases in the payroll tax have gone largely unnoticed. The effect of the payroll tax is far more widespread since it is the largest tax paid by more than fifty percent of the taxpayers. Therefore, the primary objective of this study is to comprehensively evaluate the vertical and horizontal equity effects of the growth in payroll taxation between 1984 and 1993. Another purpose of the study is evaluate the impact of the payroll tax on the progressivity of the income tax structure. A third purpose of the study involved evaluating the equity effects of different assumptions regarding the incidence of payroll tax. Finally, the study also evaluates the equity effect of taxing social security benefits.; A sample of taxpayers was collected from the IRS panel of individual taxpayers for the years 1984 through 1988. Mean income distributions were generated from these years on which the payroll and income tax liabilities were simulated for the years 1989-1993. The payroll taxes were also computed based on two incidence assumptions. For the equity effects of taxation of social security benefits, the tax liabilities were computed under the pre-1984 rules, post-1983 rules, and post-1993 rules. Friedman's ANOVA and Wilcoxon's Signed Rank test were used to test the significance of the results.; Results indicated that the payroll tax was a moderately regressive tax during the period 1984 through 1993. The imposition of the payroll tax caused a significant reduction in the progressivity of the income tax distribution. The regressive effects of the payroll tax dominated the progressive effects of the income tax. With regard to horizontal equity, while the rank preservation indices indicated that imposition of payroll taxes caused an increase in the horizontal equity, the coefficient of variation index suggested the opposite. Also, taxation of social security benefits resulted in a more progressive distribution of income. However, the equity effects of the post-1983 law and the post-1993 law were not significantly different from each other. |
