The distributional and labor supply effects of alternative individual income tax proposals

The objectives of recent tax legislation were to broaden the tax base and decrease the tax rates. Disagreement still exists, however, over the effects of these revisions on the distribution of the income tax burden and on whether the lowering of tax rates will have the intended economic effects. This study examines these questions and provides an estimate of the effects of the proposed reforms.;The first analysis was an examination of demographic subclassifications of the taxpaying households to determine the redistribution of the tax burden. The two proposals analyzed were the House of Representatives' Tax Reform Act of 1985 (H.R.3838) and the Senate's Tax Reform Act of 1986. A "flat tax with exemption" is used for a benchmark comparison. Each of the three systems was compared to current law. The results indicate that as income increases, so does the difference between the alternative tax liabilities calculated and the current tax liability. The difference between current tax liabilities and tax liabilities under the House and Senate version of tax reform would most significantly increase for married taxpayers who file joint returns and possess income-producing property, due primarily to the change in capital gain treatment.;The second analysis involved an investigation, using a partial equilibrium model, of the effects of changing tax rates on the supply of labor. The effect on disposable wage of the tax reform alternatives were determined, and was used in conjunction with the total wage effect from the Slutsky equation to calculate the increase or decrease in the number of hours worked for each taxpayer in the sample. Results indicate that the income effect dominates and taxpayers will decrease the number of hours of labor supplied in response to a decrease in marginal tax rates, a result that does not support supply side economic policies.;Before the analysis was attempted, a suitable database was created by statistically merging two databases containing deomgraphic and tax information. The result provided the income tax and demographic information necessary to convert the current income tax liability to alternative tax liabilities, and to measure the labor supply of the change.