EFFECTIVE FEDERAL INDIVIDUAL INCOME-TAX FUNCTIONS - AN EXPLORATORY EMPIRICAL-ANALYSIS

We define and statistically estimate a nonlinear relationship between individual effective income tax rates and economic income for United S tates tax return data for tax years 1979-89. The relationship, which w e call the effective tax function, has three parameters and was theore tically derived from the theory of equal sacrifice by Young (1988, 199 0) and more generally by Berliant and Gouveia (1993). Annual graphs of the statistically estimated effective tax functions are presented and used to characterize empirically the evolution of the United States f ederal tax system with respect to four characteristics of the tax syst em: average marginal tax rates, redistributional elasticities, revenue elasticities, and horizontal equity. For each characteristic, we pres ent a preliminary assessment of the impact of the 1986 tax reform. The major empirical finding is that the effective income tax function exh ibits a trend toward less progressivity for the years studied. This ge neral conclusion is also valid for indexes that measure the redistribu tive impact Of the tax system (the elasticity of after-tax income with respect to before-tax income) and the revenue effects of the system ( the elasticity Of fiscal revenue with respect to before-tax income).