Office of Tax Analysis

Technical Paper 8

May 2022

U.S. Treasury Distributional Analysis Methodology

Julie-Anne Cronin

OTA Technical Papers is an occasional series of reports on the research, models and datasets 

developed to inform and improve Treasury’s tax policy analysis. The papers are works in progress 

and subject to revision. Views and opinions expressed are those of the authors and do not 

necessarily represent official Treasury positions or policy. OTA Technical Papers are distributed 

in order to document OTA analytic methods and data and invite discussion and suggestions for 

revision and improvement. Comments are welcome and should be directed to the authors. OTA 

Papers may be quoted without additional permission.
U.S. Treasury Distributional Analysis Methodology

Julie-Anne Cronin*

U.S. Department of the Treasury

May 2022

This paper provides a detailed description of Treasury’s distribution methodology. 

In some ways our methodology is unchanged from the 1999 version of this paper 

but there have been updates to our methodology to reflect more recent research and 

the greater availability of micro data. The Office of Tax Analysis has improved its 

modeling of health, retirement, and business decisions. Our income measure now 

includes the insurance value of both employer and government provided health 

insurance. Our ranking measure adjusts ability to pay according to family size. Our 

micro-simulation model is based on a sample of 338,000 individual income tax 

returns, more than double the size of our sample in 1999. 

* Julie-Anne.Cronin@treasury.gov
Introduction

The Treasury Department’s Office of Tax Analysis (OTA) prepares various analyses to inform 

the development of the Administration’s tax policy and assess major Congressional tax 

proposals. In addition to analyzing the merits and deficiencies of current and proposed tax laws 

in terms of efficiency, simplicity and administrability, OTA is responsible for estimating Federal 

receipts, estimating revenue changes for actual and proposed tax legislation, and estimating the 

distribution of tax burdens for current law and for enacted and proposed legislation. OTA’s 

distributional analyses show the current distribution of pre-tax and after-tax income across 

families and how proposed changes in tax law would affect the distribution of after-tax income. 

They provide policy makers with guidance on the fairness of proposed changes in tax law. 

Distributional analysis must decide how to sort individuals into units that share resources, how to 

measure ability to pay, how to measure tax burden and on whom that tax burden falls. There is 

not universal agreement among economists on these theoretical issues involved in distributional 

analysis. Theoretical differences, combined with differences in practical implementation of 

theory, including data and measurement issues, may lead to somewhat different rankings of 

ability to pay and measures of fairness. 

Because distributional analysis frequently plays a significant role in the deliberation over tax 

proposals, it is important that the methodology for producing them be well-developed and wellunderstood. This paper provides an updated description of Treasury’s Distribution Model (DM) 

and offers some insight into why Treasury’s distributional results sometimes differ from those of 

other government organizations, such as those produced by the Joint Committee on Taxation 

(JCT) and the Congressional Budget Office (CBO), and policy groups such as the UrbanBrookings Tax Policy Center (TPC).1 While the primary purpose of this paper is to inform the 

users of Treasury’s distributional analyses, we also hope to further the discussion of 

distributional issues and elicit suggestions for further improvements to Treasury’s methodology. 

Distributional analysis has several components. The component choices affect the quantitative 

results of the analysis and, in some instances, the qualitative results as well. The major 

components of distributional analysis are the taxes included, the covered population, the unit of 

analysis, the time period of analysis the income measure, the equivalency measure, and the 

incidence assumptions. Section 1 provides an overview of Treasury’s component choices. 

Detailed descriptions of the income measure, equivalency measure, and incidence assumptions 

are given in Sections 2, 3, and 4. Section 5 discusses the mechanics of creating Treasury’s 

distribution model including the data, imputations and calculators used in our model. Section 6 

presents and discusses a standard Treasury distribution table for an illustrative proposal.

1 For JCT methodology see JCT (1993), Kleinbard (2008), and JCT (2013). For CBO methodology, see the Appendix 

of CBO (2016). For TPC methodology see TPC (2015).
2 

1. Overview of Treasury’s Distribution Methodology 

Taxes Included: All federal taxes are included in Treasury analyses: individual and corporate 

income taxes, payroll taxes (Social Security tax, Medicare tax, and unemployment tax), excises 

and customs duties, and estate and gift taxes. Treasury analyses do not include state or local 

taxes. At 2021 income levels and law,2 the individual income tax represents the largest share of 

the total federal tax burden (49 percent), followed by payroll taxes (38 percent), the corporate 

income tax (9 percent), excises and customs duties (4 percent), and estate and gift taxes (1 

percent). 

All individual taxes, including refundable credits, are included as taxes in Treasury distribution 

tables. Refundable tax credits may reduce tax liabilities below zero. Treasury includes refundable 

tax credits as part of the tax system (as negative taxes) even to the extent that they are scored as 

outlays (exceed liabilities). The premium tax credit (PTC), both the advanced portion as well as 

the reconciliation portion are included in Treasury analyses.3

Covered Population: The target population is those individuals who are part of a tax filing unit 

that would have an obligation to file a U.S. individual income tax return if the unit met the 

individual income tax filing thresholds. We estimate this population by including all residents of 

the United States and any non-residents who file U.S. individual income tax returns. Of note, 

under this definition, Treasury includes undocumented and institutionalized residents of the 

United States as part of the covered population as well as residents who are part of a tax filing 

unit that does not actually file an income tax return (non-filers).4 

Of the 183 million filing units represented in Treasury’s 2021 Distribution Model (DM), 32 

million (18 percent) do not file individual income tax returns. Many of these families pay 

payroll, excise and corporate income taxes. 

Unit of Analysis: The tax family is the unit of analysis. Treasury’s family includes the taxpayer, 

his or her spouse if filing a joint return, and dependents (if any).5 All families are included, 

whether or not any member of the family files an individual income tax return. Dependents are 

attached to their larger family unit. Single (non-dependent) individuals are considered oneperson families. The economic incomes of all members of a family are added together to 

compute the family's cash income. Treasury estimates that there are 183 million tax families in 

2021. 

2 Treasury produces baseline distribution tables as part of the forward-looking Budget exercise using Administration 

forecasts of economic and demographic variables. As a result, the 2021 numbers were forecast in 2020 and are, 

therefore, pre-pandemic. 3 In contrast, the TPC does not include the PTC as either a tax credit or a source of untaxed income in its standard 

analyses. TPC treats the PTC the same as Medicaid which is an outlay program which it also does not include in 

income. Treasury includes the insurance value of Medicaid in their income measure and the PTC as a tax credit. 

4 In general, a tax filing unit is not required to file a tax return if its income falls below a certain threshold ($12,550 in 

2021 for a single filer under age 65). Some low-income taxpayers may opt to file a return in order to claim certain 

refundable credits (credits that exceed tax liability) or receive a refund of withheld taxes. Elderly, low-income families 

and single individuals without children are more likely to be part of the nonfiling population. 

5 Dependent college students living away from home are treated as family members by Treasury. 
3 

In contrast, some analyses, such as those conducted by CBO, use households as the economic 

unit. Households usually consist of one family but may include multiple families. The incidence 

of multi-family households is more common for low-income households and rare for highincome households. As a result, all else equal, distributions based on households are more likely 

to show more equal distributions of income than distributions based on families. 

Time Period of Analysis: Treasury creates tables showing the distribution of the tax burden in 

two time periods – the short run and the long run. Both are single year snapshots of tax burdens, 

as opposed to lifetime measures of tax burdens. They are based on annual measures of income 

levels and demographic characteristics present in the first year of the 10-year Budget period (also 

referred to as the “current” year), assuming the current tax law for that year. Short-run tables 

measure tax burdens in the first year of the Budget period. Long-run tables measure tax burdens 

under “fully phased-in law,” which is generally the law as it will apply in real (inflation indexed) 

terms at the end of the Budget period. While many tax provisions are constant over time, current 

and proposed changes in tax law often include provisions whose effects vary over time: some are 

explicitly temporary, some are not indexed for inflation, and others are delayed or phased in. 

Using fully phased-in law provides a measure of tax burdens under the law as it will operate at 

the end of the Budget planning horizon, which should most fully reflect the long-run, permanent, 

distributional consequences of legislation.6 

Income Measure: Treasury uses an annual measure of pre-tax, post-transfer cash income. Cash 

Income consists of wages and salaries (excluding employee and employer contributions to 

employer-sponsored retirement accounts and individual retirement arrangements), net income 

from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized 

capital gains (including nontaxable housing gains and unrealized capital gains at death), cash and 

near-cash transfers from the government, retirement benefits (when distributed), and employerprovided health insurance and other employer benefits. Employer contributions for payroll taxes 

and the federal corporate income tax are added to place cash income on a pre-tax basis. Because 

it is a relatively broad measure of income, Cash Income more effectively captures a family’s 

relative economic well-being than a measure that, for example, excludes some components of 

income such as nontaxable transfer income or employer-sponsored health benefits. 

A more detailed description of Treasury’s Cash Income measure is provided in Section 2. 

Equivalency Measure: For the purpose of ranking families by ability to pay, Treasury adjusts 

Cash Income for family size. Larger families are assumed to require more resources to achieve 

the same level of welfare as smaller families. Without an adjustment for size, large families and 

single-person families with the same level of Cash Income would be ranked the same and the 

lowest income deciles would be predominantly singles. Treasury only uses the equivalency 

measure for the purpose of ranking families, not for calculating tax burdens or summary 

statistics.

A more detailed description of Treasury’s equivalency measure is provided in Section 3. 

6 Fully-phased in law as a concept is less meaningful if there is a general understanding that certain pieces of legislation 

are not expected to sunset (are expected to be extended).
4 

Incidence Assumptions: The individual income tax is assumed to be borne by payers. Payroll 

taxes (employer and employee shares) are assumed to be borne by labor (wages and selfemployment income). The share of the corporate income tax that represents a tax on supernormal 

returns is assumed to be borne by shareholders. The share of the corporate income tax that 

represents collections from a cash flow tax is assumed to have no burden in the long run, and the 

remainder of the corporate income tax, the share imposed on the normal return to investing, is 

assumed to be borne equally by labor and positive normal capital income. Excise taxes are 

assumed to be borne by labor and capital income. In addition, excise taxes are assumed to raise 

the price of taxed goods relative to other goods, thereby increasing tax burdens for consumers of 

taxed goods and lowering tax burdens for consumers of untaxed goods. The estate and gift taxes 

are assumed to borne by decedents.

A more detailed description of the Treasury’s incidence assumptions is provided in Section 4. 

2. Cash Income 

Central to the measurement of the distribution of tax burdens is the measurement of a family’s 

relative ability-to-pay. An income measure, along with a family equivalency measure discussed 

below, allows Treasury to rank families from the least well-off to the most well-off, and to use 

this ranking to group families into deciles of ability-to-pay. Treasury uses a cash income concept. 

JCT, CBO and TPC use similarly broad income concepts in their distribution tables.7

Cash Income consists of wages and salaries (net of employer and employee contribution to 

retirement accounts), employer contributions for health insurance, life insurance, child care, and 

education expenses, other net income from a business or farm, taxable and tax-exempt interest, 

dividends, rental income, realized capital gains (including all realized housing gains and 

unrealized capital gains at death), cash transfers from the government (including food stamps and 

the insurance value of Medicare and Medicaid), and retirement distributions. Employer 

contributions for payroll taxes and the federal corporate income tax burden are added to place 

Cash Income on a pre-tax basis. Cash Income is shown on a family basis. 

Cash Income can be described by comparison to adjusted gross income (AGI) reported on an 

income tax return, which is a narrower but well documented income concept used in the 

determination of taxable income. Cash Income’s relationship to AGI gives us an understanding 

of what might be missing when we distribute tax burdens by a narrow, tax-dependent concept 

which is computationally less demanding but incomplete when determining a family’s ability to 

pay. 

Cash Income can also be described by income source: labor, capital, or transfer income (detail 

below). The sources of cash income gives us a better understanding of the types of income that 

accrue to families with differing abilities to pay. The income source is often a determining factor 

in the distribution of tax burden incidence as explained in Section 4 on tax incidence. 

7 See Kleinbard (2008), CBO (2016) and TPC (2015).
5 

Cash Income as Derived from AGI

At projected 2021 income levels,8 Cash Income is $18.3 trillion compared to AGI of $13.9 

trillion. The major differences between Cash Income and AGI can be categorized into three 

types: (i) income items excluded from the definition of gross income under the tax code but 

included in Cash Income; (ii) adjustments for costs of earning income and income earned in 

previous years; and (iii) the addition of the corporate income tax burden. 

Income excluded from AGI. Cash Income includes a number of items which clearly represent 

income to the recipient but are not included in AGI. With respect to labor earnings, these items 

include: the foreign earned income exclusion, the self-employed health deduction, the basis of 

nontaxable IRA and pensions distributions, and employer-provided fringe benefits (including 

employer contributions for health insurance, life insurance, child care, and education benefits, 

military allowances, the health insurance component of worker’s compensation, and the 

employer share of payroll taxes). With respect to capital income, these items include: excludable 

realized housing gains and unrealized capital gains at death,9

 nontaxable IRA and pension 

distributions (excluding basis), and tax-exempt interest. With respect to transfer income, these 

items include: nontaxable Social Security benefits, the insurance value of Medicare and 

Medicaid, Supplemental Security Income (SSI), Temporary Assistance for Needy Families 

(TANF), Supplemental Nutrition Assistance Program (SNAP) benefits, Low Income Housing 

Energy Assistance (LIHEA), wage replacement under workers compensation, and veterans' 

benefits.

 

Other adjustments. We make certain other adjustments to AGI to arrive at cash income. Cash 

Income excludes all costs of earning income, such as the above-the-line deduction for educator 

expenses. However, above-the-line deductions that are not costs of earning income in the current 

year, such as the student loan interest deduction and the tuition and fees deduction, are added 

back to income. Cash Income also excludes state and local tax refunds since the refunds reflect 

repayments of deductions from income earned in a previous year (and those itemized deductions 

are not subtracted in the computation of cash income). 

Corporate income tax burden. The corporate income tax burden is added to Cash Income to place 

it on a pre-tax basis. Because we assume that laborers and capital owners bear the burden of the 

corporate income tax, we add to labor and capital income the burden of those taxes remitted by 

other entities on their behalf. In other words, our assumptions about corporate tax incidence 

8

Projected income is income based on the Administration’s economic assumptions. The figures and tables in this 

document are for 2021 but were produced pre-pandemic. As a result, the income levels and tax burdens in all tables 

should be considered illustrative of what would have occurred for 2021 if the pandemic had not disrupted the economy. 

In general, distributional analysis is a planning tool for evaluating policies on a forward-looking basis. As such, 

distributional analyses are estimates of income levels and tax burdens in the first year of the budget period which is 

usually the year following the year in which they are produced.

9

Death is a realization event in the Treasury distribution model. Under the current tax code, only capital gains that are 

realized are subject to tax; accrued but unrealized capital gains are not taxed and upon death ownership is transferred 

to heirs with a step-up in basis. As a result, capital gains accrued but not realized by the decedent are never taxed even 

though they are income to the decedent. Treasury’s distribution model aims to include all income (all sources of ability 

to pay) whether taxed or not. Because Treasury’s model is realization based, we have elected to include accrued but 

unrealized gains during the decedent’s lifetime in the year of the decedent’s death. Alternately, in a Haig-Simons 

framework (Haig 1921), accrued but unrealized gains would be included on an annual basis. 
6 

imply that pre-tax labor and capital income would be higher by the amount of the tax if the tax 

did not exist. 

The relationship between Cash Income and AGI at 2021 income levels, as described above, is 

shown in Table 1. The largest additions to AGI are for employer fringe benefits, part of labor 

income, and transfer income such as excluded social security benefits. These types of income 

accrue to families with particular characteristics, such as those employed in jobs that provide 

fringe benefits and the elderly. These additions are necessary to fully capture the ability to pay 

for these families and to appropriately calculate their tax burdens relative to their income. 

Table 1: AGI and Cash Income in 2021

($B)

AGI $ 13,864 

plus

Income not included in AGI

labor income $ 2,102 

capital income $ 675 

transfer income $ 1,375 

Other Adjustments $ 6 

Corporate income tax $ 300 

Equals Cash Income $ 18,323 

Cash Income by Source

Cash Income can also be described by source: labor income, capital income, transfer income and 

the corporate income tax. Table 2 shows Cash Income by source. A version of this table is 

available for each model year on Treasury’s Office of Tax Analysis webpages.10 There are two 

distributions shown in Table 2. The first bank shows the distribution for each source of income 

across deciles. In this bank, we see that Cash Income is skewed toward the highest income 

families; 45 percent of Cash Income accrues to the top decile of the income distribution and 9 

percent to the top 0.1 percent of the income distribution. The second bank shows the distribution 

of each type of income within a decile. In the second bank, we see that labor income is the major 

source of income in general comprising 71 percent of all Cash Income. The composition of 

labor, capital and transfer income in Treasury’s model is described below. 

10 https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis
7 

Table 2: Distributions of Income by Source Across and Within Deciles (2021 Pre-pandemic Income Levels)

0 to 101 0.7 3.2 0.6 0.1 0.1 0.2 2.4 0.2

10 to 20 2.1 7.2 1.8 0.2 0.2 0.3 3.0 0.5

20 to 30 2.9 8.2 2.8 0.4 0.4 0.5 4.5 0.7

30 to 40 3.8 10.1 3.8 0.7 0.6 0.7 5.1 1.1

40 to 50 4.9 10.8 5.2 1.2 1.2 1.1 6.0 1.7

50 to 60 6.5 10.8 7.1 2.1 2.3 1.8 6.1 2.8

60 to 70 8.5 11.6 9.4 3.3 3.8 2.7 6.3 4.2

70 to 80 11.1 11.9 12.5 5.0 5.8 4.0 6.5 6.1

80 to 90 15.3 13.2 17.4 8.2 9.4 6.8 7.5 9.4

90 to 100 44.5 12.6 39.2 78.8 76.4 81.8 21.5 73.1

Total1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

90 to 95 11.0 6.0 12.3 8.2 9.2 6.9 4.7 8.5

95 to 99 15.0 5.2 15.3 18.6 20.8 16.0 7.2 16.6

99 to 99.9 9.7 1.3 7.7 21.1 19.9 22.7 6.0 18.9

Top .1 8.8 0.2 3.9 30.8 26.5 36.2 3.6 29.0

0 to 101 100.0 45.3 55.5 3.3 1.4 1.9 -4.6 0.4

10 to 20 100.0 35.6 64.0 2.0 0.9 1.1 -2.0 0.4

20 to 30 100.0 29.1 70.1 2.6 1.3 1.3 -2.1 0.4

30 to 40 100.0 27.3 70.9 3.2 1.7 1.5 -1.8 0.5

40 to 50 100.0 22.3 74.4 4.3 2.5 1.8 -1.6 0.6

50 to 60 100.0 17.0 77.8 5.8 3.6 2.2 -1.3 0.7

60 to 70 100.0 14.0 79.2 7.1 4.5 2.6 -1.0 0.8

70 to 80 100.0 10.9 80.7 8.2 5.3 2.9 -0.8 0.9

80 to 90 100.0 8.8 81.1 9.8 6.2 3.6 -0.7 1.0

90 to 100 100.0 2.9 62.8 32.3 17.5 14.8 -0.6 2.7

Total1 100.0 10.2 71.3 18.3 10.2 8.1 -1.3 1.6

90 to 95 100.0 5.5 80.1 13.7 8.6 5.1 -0.6 1.3

95 to 99 100.0 3.5 72.7 22.7 14.1 8.6 -0.6 1.8

99 to 99.9 100.0 1.4 56.6 39.6 20.8 18.8 -0.8 3.2

Top .1 100.0 0.2 31.3 63.7 30.6 33.1 -0.5 5.4

1

Families with negative incomes are excluded from the lowest income decile but included in the total line. Families with negative 

income have a significant share of negative capital income. 

Total 

Positive 

Capital 

Income

Normal 

Capital 

Income

Supernormal 

Capital 

Income

--- Percent Distribution of Income Across Deciles ---

--- Percent Distribution of Income Source Within Decile ---

Adjusted 

Family 

Cash 

Income 

Decile1

Family 

Cash 

Income

Transfer 

Income

Labor 

Income

Positive Capital Income

Negative 

Capital 

Income

Corporate 

Income Tax
8

Labor Income

Labor income includes wages, earnings from self-employment (including pass-through business 

income that is subject to payroll taxes), employer-provided fringe benefits, the labor share of 

retirement distributions (basis), and employer contributions for payroll taxes. 

Wages and earnings from self-employment are measured on a pre-tax basis but exclude 

deductible employee contributions for retirement (e.g., 401(k) contributions). Treasury’s income 

measure includes retirement income when distributed but not in the years of contributions and 

accrual.11 Employer-provided fringe benefits are an important source of income and tax savings 

for certain families. Tax-free fringe benefits include employer sponsored health insurance, life 

insurance, education benefits, childcare benefits, transportation and parking benefits, military 

subsistence allowances, tax-free combat pay, and worker’s compensation.12 

Retirement distributions derive from a number of sources and the treatment in Treasury’s model 

as either labor or capital income depends on the source. Distributions from defined benefit plans 

and distributions attributable to employer contributions to defined contribution plans (including 

accruals on such contributions) are treated as deferred labor income in Treasury’s model. 

Distributions from defined contribution plans attributable to employee contributions are split 

between labor and capital income. The portion of the distribution that represents the initial 

employee contribution (basis) is treated as deferred labor income and the portion of the 

distribution that represents accruals on the initial employee contribution is treated as capital 

income. This allocation of employee contributions to labor income is comparable to the 

treatment of employee contributions to a taxable account. If a taxpayer used wages to contribute 

to a taxable account, then the contribution would be labor income and accruals on the account 

would be capital income when realized. 

Both taxable and tax-free retirement distributions are included in income. However, retirement 

distributions that are rolled over from one tax-preferred account to another tax-preferred account 

are excluded from income since Cash Income only includes realized income. 

Treasury assumes that the incidence of the payroll tax, both the employer and the employee share 

is on the employee. Under this assumption, observed wages are lower than they would be 

without a payroll tax. If employers were not subject to payroll taxes, then wages would be higher 

for each worker by exactly the amount of the tax paid by the employer on behalf of the 

11Some distribution tables from other tax policy organizations include retirement contributions, accruals, and 

distributions in income in distributional analysis (see Rosenberg (2013)). In earlier versions of our model (see Cronin 

1999), Treasury also followed this tradition of double counting retirement income. The argument for doing so is that 

retirement contributions, accruals, and distributions all represent an ability to pay taxes at different stages of life. One 

counter argument is that retirement savings should not be treated differently than other forms of savings. Other savings 

vehicles include the purchase of stocks. Stocks are generally purchased with after-tax income. In Treasury’s 

methodology (as is the case with TPC, CBO and JCT), capital gains are only included in income when realized. 

Accrued capital gains are not included in income in the year of accrual, and basis is not included in income in the year 

of realization. 

12Workers compensation benefits are split between medical benefits which are converted to an insurance value that is 

attributed to all covered workers and wage replacement which is attributed to the worker receiving the benefit.
9

employee. Treasury therefore adds the employer share of payroll taxes to the employee’s wage 

income to arrive at a pre-tax value of wages.

As shown in Table 2, labor income is the largest source of income for all families in all deciles. 

Only the top 0.1 has less than 50 percent of their income from labor. For the top 0.1 percent, 64 

of their income comes from capital. 

Capital Income

Capital income includes taxable and tax-exempt interest, dividends, realized capital gains, 

income or loss from rents, royalties, the capital share of pass-through business income and 

losses,13 and the capital share of retirement distributions. Realized capital gains includes realized 

gains on the sale of a house, including the portion that is excluded from taxable income. Further, 

death is a realization event in Treasury’s model. The accrued gains on unrealized assets of a 

decedent are included in capital income as realized gains of the decedent in the year of death. 

(Mortality probabilities vary by age, gender and income and are imputed to the tax data from 

administrative data on deaths from the Social Security Administration.)

Capital income is further split between normal and supernormal returns. As discussed in Section 

4.2, this refinement is needed to distribute the corporate income tax. Normal capital income 

includes all interest income (taxable and tax-exempt), 40 percent of dividends, 40 percent of 

realized capital gains, 40 percent of the capital share of pass-through business income and 75 

percent of the capital share of retirement distributions.14 

As shown in Table 2, capital income is the most skewed income distribution. The top decile 

receives 79 percent of all positive capital income. Even within the top decile the distribution of 

capital income is skewed to the very highest income. The top 1 percent receives over half of all 

positive capital income and the top 0.1 percent over 30 percent of all positive capital income.

Transfer Income

Transfer income is a broad category of income including both taxable and nontaxable sources as 

well as both means-tested benefits and those available without regard to income. Transfer 

income includes: Social Security benefits, the insurance value of Medicare and Medicaid, 

welfare benefits from SNAP, TANF, LIHEAP, WIC and SSI, unemployment compensation, 

alimony, debt forgiveness, and cost sharing reductions. Section 5, which describes the mechanics 

of developing the distribution model, also provides a brief overview of the methods OTA uses to 

impute transfers not available in the tax data.

Social security benefits are the largest component of transfer income (60 percent of total 

transfers). The next largest component of transfer income (18 percent of total transfers) is the 

13 Treasury assigns pass through income to labor if it is subject to payroll taxes, otherwise it is considered capital 

income.

14 The percentage of corporate capital income attributable to normal returns was estimated in Cronin et. al. (2013). 

Treasury assumes that the percentage of pass-through business capital income attributable to normal returns is also 40 

percent.
10

insurance value of Medicare. Notably neither social security benefits nor Medicare are means 

tested, both being dependent on factors other than current income. As a result, the distribution of 

transfer income while flatter than the distribution of labor and capital income is still slightly 

skewed to the higher end of the income distribution. As shown in Table 2, 60 percent of total

transfer income is received by the top half of the income distribution. Yet, transfer income is 

very large as a share of total income for the lower deciles. Transfer income is 45 percent of total 

cash income for the lowest income decile. 

Including the Corporate Income Tax in Cash Income

The corporate income tax is included in Cash Income to arrive at an estimate of pre-tax income. 

The corporate income tax is remitted by corporations but, as discussed in Section 4, the burden 

of the corporate income tax is assumed to be passed through to workers and owners of capital 

income. As a result, wages and returns to capital would be higher in the absence of the corporate 

income tax. Treasury therefore includes the corporate income tax in the income of the individual 

to whom the burden is assigned. 

3. Equivalency Measure

For the purpose of ranking families by ability to pay, Treasury adjusts cash income for family 

size. Larger families are assumed to require more resources to achieve the same level of welfare 

as smaller families. Without an adjustment for size, large families and single-person families 

with the same level of cash income would be ranked the same. Prior to 2013, Treasury did not 

adjust for family size when ranking families into deciles. 

Not adjusting for size is equivalent to assuming that families benefit from perfect returns to 

scale; the addition of a family member without additional income does not affect a family’s wellbeing. 

An alternate (extreme) assumption would be to rank units on a per capita basis by dividing 

family income by family size. This is equivalent to assuming that there are no returns to scale 

from living within a family unit; that is, two people living together require twice the income of 

one person living alone in order to have the same level of well-being. 

Treasury’s current methodology assumes that families of different sizes require different levels 

of resources to attain the same level of well-being. We assume that families benefit from returns 

to scale; a family of two can live more cheaply than two single-person families. But we also 

assume that returns to scale are not perfect; a family of two cannot live as cheaply as a singleperson family. To put this assumption into practice, Treasury divides family income by the 

square root of family size when ranking families in distribution tables (see Cronin, Lin and 

DeFilippes (2012) for a full discussion). This adjustment reflects the returns to scale found in 

poverty thresholds and is the same adjustment used by several policy groups (CBO and the 

Organization of Economic Cooperation and Development (OECD)).15 Under this equivalency 

15 TPC uses the square root of family size to adjust family rank in some of their supplemental analyses. TPC’s standard 

distribution tables and JCT distribution tables do not adjust for family size.
11 

adjustment the rank of a family of four with $50,000 of income is equivalent to that of a family 

of one with $25,000 of income. 

Ranking families (or households) without an equivalence scale has implications for policy 

analysis. Many tax provisions are adjusted for family size, because the tax law recognizes that 

larger families have higher consumption needs (a lower ability to pay) than smaller families with 

the same income. For example, a number of dependent-related tax benefits, including child tax 

credits and the earned income tax credit, vary with family size. Tax brackets are wider for joint 

and head of household filers than for single filers. Likewise, standard deductions are larger for 

joint filers. 

Without an adjustment for family size, single-person families (no children) would make-up the 

large majority of the lowest income quintile, 71 percent at 2013 income levels16 and very few 

families with children would be considered very poor, only about a quarter of all families in the 

first quintile. With a family size adjustment, families are reranked according to size adjusted 

income. Families with more members move lower in the income distribution and families with 

fewer members move higher in the income distribution. Thus, with a family size adjustment, the 

number of families in the first quintile that are singles falls to 58 percent and the number with 

children rises to about a third. This is especially important for distributing tax provisions 

intended to benefit poor families with children. Without the size adjustment, these provisions 

would appear less targeted to low-income families.17

4. Estimating Burden and Incidence Assumptions 

4.1 Estimating Burden

Incidence assumptions include not only assumptions about who bears the burden of a particular 

tax, but also how much burden or benefit is conferred. For a proposed change in tax law, 

Treasury distributional analyses reflect the fact that the resulting change in tax burden for a given 

year is not necessarily equivalent to the expected change in tax liability for that year. This 

difference in Treasury’s distribution and revenue estimating methodologies is fully consistent 

with the different purposes served by revenue estimates and distributional analyses. Revenue 

estimates are measures of the change in government receipts due to a tax proposal. Distribution 

estimates are measures of the change in burden due to a tax proposal.

Consider the change in tax receipts due to a capital gains tax cut as illustrated in Figure 1. The 

figure shows the “demand” (DD’) for realized capital gains. If the tax rate is t0, then the amount 

of gains realized is g0. As the tax rate on realized gains falls, the amount of capital gains realized 

increases, until at a tax rate of zero, an amount of capital gains equal to g* is realized. If the 

capital gains tax rate is reduced from t0 to t1, government receipts are reduced by lower tax 

payments on the current-law level of capital gains realizations but increased by the taxes paid on 

16 See Cronin, Lin and DeFilippes (2012). 17 Adjusting for family size is also important when trying to assess horizontal equity, where families with the same 

ability to pay have equal tax burdens. As shown in Cronin, Lin and DeFilippes (2012) the variance in average tax rates 

for the middle quintiles falls dramatically when income rankings are adjusted for family size.
12 

additional realizations induced by the tax cut. The reduction in government receipts on current 

realizations is illustrated in Figure 1 by the shaded rectangle t1t0AC, and the increase in 

government receipts due to increased realizations by the shaded rectangle g0CBg1. The estimated 

net effect of these two changes in government receipts equals Treasury’s revenue estimate for a 

capital gains tax cut. 

In contrast, Treasury’s distribution estimates are intended to measure the change in tax burden 

due to a tax proposal. The burden, or benefit, of a tax proposal may not be properly measured by 

the change in tax payments; such is the case with a capital gains tax cut. In Figure 2, the total tax 

burden of a capital gains tax at rate t0 is represented by the area 0t0Ag*. The burden has two 

sources: the tax liability, represented by rectangle 0t0Ag0 and a dead weight loss, represented by 

triangle g0Ag*. If the capital gains tax rate is reduced from t0 to t1, both the amount of tax due on 

current-law realizations and the amount of dead weight loss is reduced. The total reduction in tax 

burden is equal to the shaded region t1t0AB. 

Clearly, however, the tax collected on induced realizations (g0CBg1), although part of the 

revenue estimate because it represents a change in government receipts, does not represent a 

D

t0 A

t1 C B

 D'

0 g0 g1 g*

Realized Capital gains

Tax Rate

Change in Tax Receipts due to a capital gains tax cut

Figure 1

(+)

(-)

D

t0 A

t1 (-) B

 D'

0 g0 g1 g*

Realized Capital gains

Figure 2

Change in Tax Burden due to a capital gains tax cut

Tax Rate

(-)

C (

(-)
13 

change in tax burden. Under both rates (t0 and t1) area g0CBg1 is part of the tax burden. At rate t0, 

it is part of the dead weight loss, and at rate t1 it is part of taxes collected. 

Accounting for changes in dead weight loss 

In general, Treasury’s distribution estimates assume static income and measures tax burden 

assuming no change in total income, including realized capital gains. Using a static estimate, 

however, misses an important piece of the change in tax burden; the change in deadweight loss.18

If Treasury were to assume realizations were fixed, we would underestimate the decrease in tax 

burden due to a capital gains tax cut and overestimate the increase in tax burden due to a capital 

gains tax increase.

Figure 2 shows how Treasury would estimate the burden for a reduction in the capital gains tax 

rate under a static income assumption. Assuming realizations are fixed, Treasury would only 

include the reduction in tax liability on current-law realizations (t1t0AC). We would not include 

the additional reduction in dead-weight loss (CAB).19 Thus, Treasury would underestimate the 

amount of tax relief arising from a reduction in the capital gains tax rate. 

In contrast, a static realization assumption would overestimate the amount of tax burden arising 

from an increase in the capital gains tax rate. Figure 3 shows the effects of a capital gains tax 

increase. In the figure, under current law, the capital gains tax rate is t0 and the level of 

realizations is g0. If the capital gains tax rate were increased from t0 to t1 the level of realizations 

falls to g1. The change in tax burden is represented by the area t0t1AB. It is the difference 

between the smaller tax burden under tax t0 (0t0Bg*) and the larger tax burden under tax t1

(0t1Ag*). The increase in tax burden is composed of two parts. The increase in tax on the lower 

level of realizations (t0t1AC) and the increase in deadweight loss (CAB). Under the static income 

assumption, Treasury would overestimate the change in tax burden by calculating the tax 

increase on the original (static) level of realizations (t0t1EB). This overestimates the tax burden 

by an amount equal to AEB. Some taxpayers would have been willing to realize gains at tax rates 

higher than t0 but not as high as t1. For these taxpayers the deadweight loss should be estimated 

by the marginal tax rate that they were willing to pay, not t1. 

18The discussion that follows uses capital gains as an example, but this discussion can be generalized to other 

situations, such as change in tax rates on labor. 19As a separate but related issue, the baseline burden of capital gains is not complete. The existence of a tax on capital 

gains produces a lock-in effect which has an associated burden (described above as dead weight loss and, for tax rate 

t0, illustrated by triangle g0Ag* in Figure 1). Treasury does not include the burden of this lock-in effect in the baseline. 
14 

Estimating changes in deadweight loss 

In Figures 2 and 3, the absolute value of the change in deadweight loss is the same; it is triangle 

ABC (ABC is equal to AEB). If we use a static income assumption, we fail to include it as part 

of the decrease in tax burden from a capital gains tax cut and we double count it as part of the tax 

burden from a tax capital tax increase (rectangle AECB is twice the size of triangle ABC). One 

solution is to estimate ABC directly. This amount should be added to the reduction in burden 

from a static capital gains tax rate cut and subtracted from the increase in burden from a static 

capital gains tax rate increase. Treasury has adopted a variant of this methodology for significant 

changes in capital gains tax rates. To estimate the change in deadweight loss at the tax return 

level, we multiply the change in realizations for the tax return by 1⁄2 (t1-t0). This methodology is 

only an approximation. In reality the demand for realizations may not be linearly related to the 

tax rate. 

Static cash income, not static taxable income 

But for the exception described above, distribution tables generally assume static or unchanged 

income; they do not however assume static taxable income. For both revenue estimating and 

distributional purposes, Treasury assumes that taxpayers seek to optimize their income 

composition in order to minimize their tax liability. For example, if a new tax exemption for an 

employer fringe benefit were proposed, Treasury’s distributional analysis would assume that 

some taxable wages would be shifted into tax-free fringe benefits, keeping total compensation 

fixed but lowering tax burden. In such a case taxable income would fall but total cash income 

would be unchanged. 

4.2 Incidence Assumptions

Treasury assumes the individual income tax is borne by payers and payroll taxes (employer and 

employee shares) are borne by labor (wages and self-employment income included in the payroll 

tax base). Treasury assumes the share of the corporate income tax that represents a burden on 

supernormal capital income is borne by shareholders and the share of the corporate income tax 

D

t1 A E

t0 B

 D'

0 g1 g0 g*

Realized Capital gains

Figure 3

Static Change in Tax Burden due to a capital gains tax increase

Tax Rate

C

(+)
15 

that represents a burden on normal capital income is borne equally by labor and normal capital 

income. Excise taxes are assumed to be borne by labor and capital income. In addition, excise 

taxes are assumed to raise the price of taxed goods relative to other goods, thereby increasing tax 

burdens for consumers of taxed goods and lowering tax burdens for consumers of untaxed goods. 

Treasury assumes estate and gift taxes are borne by decedents. More detailed descriptions of the 

incidence assumptions for each tax are given below. 

Individual Income Tax Incidence 

The distribution of individual income taxes to families by adjusted family cash income decile is 

based on tabulations from the Individual Tax Model (ITM described in the next section). For 

many, but not all provisions, the change in tax liabilities is equivalent to the change in burden 

used for Treasury distributional analysis. Provisions for which this is not the case include capital 

gains (discussed above), tax preferred savings vehicles, and voluntary speedups of tax payments, 

such as those induced by rolling over a front-loaded individual retirement account (IRA) into a 

Roth or back-loaded IRA.20

Tax-preferred savings vehicles. For proposed changes, Treasury measures the tax benefit from 

participation in IRAs and similar tax-preferred savings vehicles as the present value of the tax 

savings from one year’s contributions.21 In general, a dollar of savings generates a stream of 

current and expected future tax liabilities on current and expected future income. If the savings 

vehicle is tax-preferred, then earnings in the account grow tax-free and the stream of tax 

liabilities is lower than the liabilities generated from savings made to a taxable vehicle. Treasury 

measures this tax benefit as the present discounted value of the total reduction in tax liabilities 

over the individual’s lifetime that results from saving the amount in a tax-preferred savings 

vehicle.22 It is assumed the contribution is kept in the account until it must be distributed, or for 

retirement accounts, is kept until age 65 and then distributed in equal amounts over the 

taxpayer’s expected remaining lifetime. Thus, Treasury’s measure represents the present value of 

the additional consumption the taxpayer can undertake as a result of the tax preference for one 

year’s contributions.

As an illustration, consider the case of a $1 pre-tax contribution made to a back-loaded versus a 

front-loaded IRA, as shown in Table 3. In the table, r is the rate of return and the discount rate, t 

is the marginal income tax rate (assumed to be constant over the entire period), the contribution 

is made in year 0, and the distribution is in year n. The table shows that the lifetime tax benefit of 

a $1 pre-tax contribution to a back-loaded IRA is the same as a $1 pre-tax contribution to a front20A front-loaded or traditional IRA allows for a deduction from taxable income in the year of contribution but is 

taxable in the year of distribution. A back-loaded or Roth IRA does not allow for a deduction in the year of contribution 

but the distributions are excluded from taxable income. 21 In the baseline, Treasury measures the burden of existing tax-preferred savings vehicles on a cash-flow basis, not 

on the present value of the tax savings for current year contributions. The present value approach is used only for 

estimating the tax benefits for proposed law changes. 

22 This difference does not consider amounts in the tax-preferred account that would otherwise have received taxpreferred treatment. For example, if IRAs were expanded, the additional contributions to IRAs might otherwise have 

been invested in tax-exempt bonds or other tax-preferred forms.
16 

loaded IRA. In both cases, the participating taxpayer receives tax-free earnings over the entire 

period and pays a present discounted value of tax equal to t. 

 Table 3: Cumulative Value and Annual Tax liability on a $1 Pre-tax Contribution to Alternative Savings Vehicles1

Savings Vehicle Year 0 Year 1 Year 2 Year n2

Taxable Cumulative Value 1-t (1-t)(1+r(1-t)) (1-t)(1+r(1-t))2 (1-t)(1+r(1-t))n 

Annual tax liability t (1-t)rt (1-t)(1+r(1-t))rt (1-t)(1+r(1-t))n-1rt 

Front-loaded IRA Cumulative Value 1 (1+r) (1+r)2 (1-t)(1+r)n 

Annual tax liability 0 0 0 t(1+r)n 

Back-loaded IRA Cumulative Value 1-t (1-t)(1+r) (1-t)(1+r)2 (1-t)(1+r)n 

Annual tax liability t 0 0 0 

 1In the table, r is the rate of return and the discount rate, t is the marginal income tax rate, the contribution is made in year 0, and the distribution 

is in year n.

 2

For IRAs, assumes withdrawal is made in year n with no penalty. For the taxable account and front-loaded IRAs, the cumulative value is net of 

taxes paid.

Note, however, that the timing of tax payments is not the same for the two savings vehicles. A $1 

contribution made to a back-loaded IRA is taxed in the year the contribution is made (year 0) 

whereas for a front-loaded IRA the same amount of tax, plus the earnings on the tax, is not 

collected until distribution in year n. As a result, measuring tax benefits by the change in tax 

liabilities in the year of contribution would erroneously measure one account (front-loaded IRAs) 

as conferring a greater tax benefit. 

Voluntary speedups of tax payments. Treasury does not include voluntary tax payments induced 

by changes in tax law in its measure of tax burden. If a taxpayer voluntarily initiates a taxable 

event because of a change in tax law, the taxpayer must be at least as well off taking the action 

and paying tax as would have been the case if no action had been taken. One example of 

voluntary payments not representing burdens is the Taxpayer Relief Act of 1997 rollover 

provision for Roth IRAs. The provision allowed taxpayers with front-loaded IRAs to roll them 

into back-loaded Roth IRAs. 

Because contributions to back-loaded IRAs are not deductible, a taxpayer switching to a backloaded IRA must pay tax on the amount rolled over in the year of the rollover.23 Note, however, 

that if the taxpayer’s marginal income tax rate were the same in the current year as in the 

expected year of distribution, and if his or her discount rate were equal to the rate of return on the 

IRA, then the discounted present value of the tax liability on the front-loaded IRA would be 

equivalent to the current year tax liability owed due to the rollover. Therefore, if a taxpayer 

chooses to rollover from a front-loaded into a back-loaded IRA, the tax liability incurred from 

the rollover must be lower than (or at most equal to) the present discounted value of the tax 

liability the taxpayer would have owed if he or she had maintained the front-loaded IRA. This 

would occur if the taxpayer expected to be in a higher marginal tax bracket in later years, or if he 

or she had a discount rate that was lower than the rate of return.

23 TRA97 allowed taxpayers who made such rollovers by December 31, 1998 to spread the income tax payments on 

the rollover over four years.
17

Corporate Income Tax Incidence

In 2008, Treasury revised its incidence assumption for the corporate income tax.24 Prior to 2008, 

Treasury assumed the corporate income tax was borne by all (positive) capital income.25

Currently, Treasury assumes the share of the corporate income tax that represents a burden on 

supernormal returns is borne by supernormal capital income as held by shareholders and the 

share of the corporate income tax that represents a burden on the normal return, is borne equally 

by labor and normal capital income. Treasury estimates that 63 percent of the corporate income 

tax burden is borne by supernormal corporate capital and the remaining 37 percent is borne 

equally by labor and normal capital income. 

Cronin, Lin, Power and Cooper (2013) discuss in detail Treasury’s revised methodology for 

distributing the corporate income tax. The change in distribution methodology was motivated by 

the desire to incorporate some of the more recent findings in the literature and to give Treasury 

the ability to more accurately capture the distributional effects of moving from income to 

consumption taxation. 

Under a consumption tax, the normal return on an investment bears no burden while the 

supernormal return is still subject to tax. Treasury’s methodology separates the supernormal 

from the normal return, so that the difference between a consumption tax and the income tax can 

be shown. Further, while tax may be collected on the normal return under a consumption tax, 

there is no tax burden on the normal return over the life of the investment. The present value of 

the tax savings arising from expensing allowed in year one is offset by the tax collected on the 

normal returns to the investment over its lifetime. Under the new methodology, Treasury 

differentiates between corporate tax liabilities and corporate tax burden. The part of the corporate 

tax that represents a cash flow tax, and not a burden, is not distributed. 

Table 4 compares the distribution of the corporate income tax under the current and prior 

methodology. Both methodologies lead to a progressive distribution of the corporate income tax. 

The current methodology is only slightly less progressive than the methodology prior to 2008. 

Under the current methodology 73 percent of the burden falls on the top decile of families 

whereas the previous methodology would have estimated that 79 percent of the burden fell on 

the top decile. The current methodology allocates a portion of the tax to labor income which is 

not as highly concentrated as capital income (see Table 2), but it allocates a large portion of the 

burden to supernormal corporate capital income which is more highly concentrated than normal 

capital income. The net result of apportioning the burden to labor income, normal capital income 

and supernormal capital income is a baseline distribution that is not much different than the prior 

methodology.

24 CBO (2016), JCT (2013) and TPC (Nunns (2012)) have also revised their corporate income tax incidence 

assumptions to allocate a portion of the incidence to labor. TPC also differentiates between the treatment of normal 

and supernormal returns.

25 Treasury had maintained this assumption since 1990, although some earlier Treasury studies (including Nelson, 

1987) took a shorter run view and distributed the corporate income tax to corporate shareholders.
18 

However, the new methodology allows us to differentiate among proposals that only effect 

supernormal returns or only effect normal returns. For example, while a change in the corporate 

tax rate affects both the normal and supernormal return and would be distributed in proportion to 

the baseline distribution, a change in depreciation only affects the normal return. Allowing full 

expensing for all investments (a consumption tax) would remove the taxation of the normal 

return, leaving only supernormal returns taxed. 

Payroll Tax Incidence 

Payroll taxes are broadly assessed on wages and self-employment income. Because of nearly 

universal coverage and because aggregate labor supply is very inelastic, Treasury assumes that 

labor bears the entire burden of the payroll tax, both the employee and the employer shares.26 

The payroll tax has three components. The hospital insurance (HI) component applies to all 

wages and self-employment income with an additional tax on high levels of wage income (over 

$250,000 for joint filers). The old-age, survivors, and disability insurance (OASDI) component is 

capped at a relatively high level of wage income ($142,800 in 2021), and the unemployment 

insurance (UI) component is capped at a relatively low level of wage income ($7,000). Only the 

federal component of UI is distributed in Treasury tables.27

26 This incidence assumption is followed by JCT, CBO, and TPC. 27 Unemployment Insurance is funded under the Federal Unemployment Tax Act (FUTA) by a 6 percent federal tax 

on the first $7,000 of wages. The tax is paid by the employer and not withheld on wages paid to the employee. 

0 to 101 0.2 0.1

10 to 20 0.5 0.2

20 to 30 0.7 0.4

30 to 40 1.1 0.7

40 to 50 1.7 1.2

50 to 60 2.8 2.1

60 to 70 4.2 3.3

70 to 80 6.1 5.0

80 to 90 9.4 8.2

90 to 100 73.1 78.8

Total1 100.0 100.0

90 to 95 8.5 8.2

95 to 99 16.6 18.6

99 to 99.9 18.9 21.1

Top .1 29.0 30.8

Table 4: Distribution of Corporate Income Tax

1

Families with negative incomes are excluded from the lowest 

income decile but included in the total line. 

Adjusted Family 

Cash Income Decile

Methodology 

Prior to 2008 

(100% on positive 

capital income)

Current 

Methodology 
19

Excises and Customs Duties Incidence

In general, excise taxes (and other consumption taxes such as value added taxes and carbon 

taxes) create a wedge between the prices received by producers and the prices paid by 

consumers. The tax might be passed forward, only increasing the prices paid by consumers, or it 

might be passed backward, only decreasing the prices received by producers. Or, it might be 

passed partly forward and partly backward, both increasing the prices paid by consumers and 

reducing the prices received by producers. How much of the tax is passed forward versus 

backward depends primarily on demand and supply price elasticities (how responsive producers 

and consumers are to changes in price). 

If the tax is passed forward, the prices paid by consumers are the original prices plus the tax. 

This would result in a general price rise which is inconsistent with revenue estimating 

assumptions. In contrast, if the tax is passed backward, the prices paid by consumers are 

unchanged and the producer receives the original price less the tax. To pay the tax, producers 

lower wages and capital returns. Thus, under either method the purchasing power of consumers 

falls (either because of higher prices or lower wages and capital income). Treasury assumes that 

the tax is passed back, decreasing the prices received by producers but leaving the prices paid by 

consumers unchanged. This assumption makes the distributional model consistent with 

Treasury’s revenue estimation procedures, which assume that the general price level is 

unchanged.

Given this approach, there are three components to Treasury’s excise tax distribution estimates. 

First, the tax is passed back to factor incomes. Second, because factor incomes fall, we assume 

that the taxes associated with those factor incomes (individual income, payroll, and corporate 

income taxes) also fall. Lastly, although the general price level does not change, relative prices 

do change. Goods subject to excise taxes become more expensive relative to goods that are not 

subject to excise taxes. Each component is discussed below. 

Component 1: Factor income effect 

Under the assumption that excise taxes lower the price producers receive, factors of production 

receive lower returns. Although the tax initially hits producers of the taxed good, under the 

assumption of mobile labor and capital, the returns to all labor and supernormal capital would 

fall. As a result, labor and supernormal capital returns bear the burden of the excise tax.28 In the 

distribution model, a family’s share of the factor income tax is proportional to their share of total 

labor and supernormal capital income. Labor income, which primarily includes wages, earnings 

from self-employment and certain work-related fringe benefits, is estimated to be about $13.1 

Employers generally receive a 5.4 percent credit against FUTA taxes for payment of state unemployment taxes which 

effectively reduces the Federal rate to 0.6 percent. Treasury includes 0.6 percent of the first $7,000 of wages paid by 

the employer as a Federal tax burden on the employee (and as pre-tax income to the employee). 28 As discussed in Cronin et al. (2013) the normal return to capital is exempt from consumption taxes. Under a 

consumption tax, such as a value added tax, new investments are expensed (allowed a full deduction). On a present 

value basis, this is equivalent to exempting the normal return from tax. Only returns in excess of the normal return, 

referred to here as the supernormal return, are taxed. In this context, the supernormal return includes all returns in 

excess of the normal return. Supernormal returns could be the result of successful risk taking or rents. For consistency, 

Treasury applies the same methodology to all forms of a consumption tax (including excises and a carbon tax). 
20

trillion at 2021 levels. Supernormal capital income, which includes a share of dividends, realized 

gains, and capital income from noncorporate businesses, is estimated to be about $1.5 trillion at 

2021 levels. Families ranked in the top ten percent of the income distribution receive about 39 

percent of all labor income and 82 percent of all supernormal capital income (see Table 2). The 

factor income effect of an excise tax is progressive; the factor income tax burden as a share of 

income rises with income. 

Component 2: Tax offset 

Because an excise tax reduces factor incomes, it reduces the taxes that are paid by factor 

incomes, namely individual income, corporate income, and payroll taxes. The reduction in 

income and payroll taxes offsets part of the revenue raised by the excise tax. OTA uses a 

standard total offset of 25 percent of the excise tax revenue. In the distribution model, half of the 

offset is for individual income tax liabilities, 15 percent for corporate income tax liabilities and 

the remaining 35 percent for payroll tax liabilities. A family’s share of each tax offset is in 

proportion to their positive tax burdens under each tax. Families ranked in the top ten percent of 

the income distribution bear 74 percent of the burden of the positive individual income tax, 73 

percent of the corporate income tax burden and 33 percent of the payroll tax burden. On net the 

tax offset component is regressive (reduces progressive taxes). 

Component 3: Relative price effects 

Under the third component, taxed goods are assumed to become more expensive relative to all 

other consumption goods. This occurs even though the general price level is unchanged. To 

achieve this relative price effect, we first estimate the increase in price that would occur if the 

tax were passed forward into increases in prices of the taxed good. Next, to keep the price level 

unchanged, we impose a general price decrease for all other goods. We are left with higher 

prices for the taxed good and lower prices for all other goods. Whether or not this component is 

regressive depends on the relative consumption of the taxed good for low- and high-income 

families. For example, because tobacco is a relatively high share of consumption for low-income 

families compared to high-income families, this component is regressive for the tobacco excise. 

For purchases made by businesses and customs duties, we assume there are no relative price 

effects. Excises generally apply to all purchases, including those made directly by families in 

their role as consumers as well as those made by businesses that use the taxed good or service to 

produce other goods and services. Certain taxed goods and services, such as gasoline and air 

transportation, are used extensively as intermediate inputs by businesses to produce a wide range 

of goods. Treasury assumes that the incidence of excises on purchases by businesses is the same 

as that of a broad-based consumption tax.29

The share of consumption attributable to purchases by businesses varies by excise. Purchases by 

businesses are assumed to be 55 percent of the dollar value of airline services, 50 percent of 

29Price effects would occur for consumption taxes that exclude certain goods, such as food, or have varying rates 

depending on the good. A carbon tax, for example, would fall more heavily on carbon intensive goods and many value 

added taxes exclude basic necessities. 
21 

phone services, 25 percent of gasoline purchases, 20 percent of alcohol consumption, and 0 

percent of tobacco consumption. 

As an illustration of our excise tax methodology and the importance of price effects, Table 5 

shows distributions for the two hypothetical increases in excise taxes, an additional $10 billion 

excise tax on air transportation compared to an additional $10 billion tax on tobacco. Table 5 

includes the total excise tax increase and separately the three components of the tax increase. The 

first two components, the factor income effect and the tax offset are the same for each excise. 

The last component, the price effect is different. Both price effects net to zero. The airline excise 

price effect is a $4.5 billion increase in the price of airline services purchased made by 

consumers net of a $4.5 billion decrease in all other goods (the other $5.5 billion is assumed to 

be purchases for intermediate goods which has no price effect). On net, because airline services 

are consumed disproportionately by higher-income families, this amounts to a subsidy for goods 

purchased by lower income families and a net tax for purchases by higher income families. In 

contrast, the tobacco excise price effect is very regressive. All tobacco purchases are assumed to 

be purchases by consumers. The price effect is a $10 billion tax on tobacco products net of a $10 

billion subsidy on all other products. Although the net effect is zero (as seen in the total line), 

low-income families spend a disproportionate share of their budget on tobacco and the price 

effect increases their burden relative to high income families. 

Table 5: Comparing the Distributons of Airline and Tobacco Excise Taxes

Airline Tobacco

$B % $B % $B $B $B $B

0 to 101 0.0 -0.2 1.4 18.4 0.0 0.0 -0.1 1.3

10 to 20 0.0 0.3 1.1 14.5 0.2 0.0 -0.1 1.0

20 to 30 0.1 1.0 0.9 12.6 0.2 0.0 -0.1 0.7

30 to 40 0.1 1.8 0.8 10.8 0.3 0.0 -0.1 0.5

40 to 50 0.2 3.0 0.7 9.3 0.4 -0.1 -0.1 0.3

50 to 60 0.4 4.9 0.7 8.8 0.6 -0.1 -0.1 0.2

60 to 70 0.5 6.9 0.6 7.8 0.8 -0.1 -0.1 -0.1

70 to 80 0.8 10.4 0.5 6.3 1.1 -0.2 -0.1 -0.4

80 to 90 1.2 16.3 0.5 6.3 1.6 -0.4 0.0 -0.7

90 to 100 4.1 55.3 0.3 4.6 4.7 -1.5 0.9 -2.9

Total1 7.5 100.0 7.5 100.0 10.0 -2.5 0.0 0.0

90 to 95 1.0 12.9 0.2 2.9 1.1 -0.3 0.1 -0.6

95 to 99 1.5 19.7 0.1 1.9 1.6 -0.4 0.3 -1.0

99 to 99.9 0.9 12.4 0.0 0.4 1.0 -0.4 0.2 -0.7

Top .1 0.8 10.3 0.0 -0.6 0.9 -0.4 0.2 -0.6

Factor 

Income 

Effect

Adjusted Family 

Cash Income 

Decile1

Tax Offset

1

Families with negative incomes are excluded from the lowest income decile but included in the total line. 

Net Price Effect Total Tax Change 

(Factor Income Effect+Tax Offset+Net Price Effect)

Airline Excise Tobacco Excise
22 

Estate and Gift Tax Incidence

Estate and gift taxes are assumed to be borne by decedents. We measure the burden by applying 

the estate tax calculator to our imputed wealth and probabilities of death. To the extent that the 

family income of decedents and heirs are comparable, assuming estate and gift taxes are borne 

by decedents as opposed to heirs will not greatly affect their distribution by income. This 

assumption is also consistent with Treasury’s treatment of other taxes on capital, which are 

assumed to be borne by the current owners of capital income. 

4.3 Baseline Distribution of Taxes 

Table 6 shows the resulting distribution of total federal taxes and each federal tax separately. A 

version of this table is available for each model year on Treasury’s Office of Tax Analysis 

webpages.30 Table 6 has three banks. The first bank shows the distribution of the levels of each 

tax, the second bank shows the distribution of shares for each tax and the last bank shows the 

average rates, defined as tax divided by cash income. Total federal taxes are fairly progressive, 

ranging from negative average rates for the bottom deciles to 31.6 percent for the top 0.1 percent. 

The average total federal tax rate (all taxes divided by all cash income) is 19.1 The highest decile 

pays 60 percent of the total tax burden relative to its 45 percent share of total cash income. The 

lowest two income deciles, on net, receive refundable credits but combined they have less than a 

3 percent share of total cash income. 

Two other general observations before considering the distributions of each tax. One, Treasury 

distribution tables have an equal number of families in each decile, not an equal number of 

people. Even with the adjustments for family size, the lowest income deciles have relatively 

fewer people. This will affect the resulting distribution of benefits that are dependent on family 

size. Second, the largest taxes (in terms of revenue) are the individual income tax and the payroll 

tax. Corporate income taxes are relatively small. As a result, changes to the distribution of 

corporate income tax have relatively small impacts on the distribution of total federal taxes. 

The distribution of the individual income tax. The individual income tax is very progressive. 

The average rates for the bottom 4 deciles of the income distribution are negative, meaning on 

net families in the bottom 40 percent of the income distribution are receiving individual income 

tax credits in excess of their individual income tax liability. Many of these families pay payroll 

and excise taxes and therefore have a positive Federal tax liability.31 Current law includes 

several refundable tax credits (the premium tax credit, the earned income tax credit, the child tax 

credit and the American opportunity tax credit). The average rate for the lowest income decile is 

-10.8. The average rate for the top decile is 16.9 percent and for the top 0.1 percent, it is 23.0 

percent. Of note, the second lowest income decile, not the lowest income decile, has the largest 

refundable credits. There are more families with children in the second decile. 

30 https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis. 31 For greater detail on who pays Federal tax, see Distribution Table 2016 006, “Number and Share of Families Paying 

Individual Income and Payroll Taxes under 2016 Current Law.” (https://www.treasury.gov/resource-center/taxpolicy/tax-analysis/Documents/Number-and-Share-of-Families-Paying-Taxes-Current-Law-2016.pdf) 
23 

The distribution of the corporate income tax. The distribution of the corporate income tax burden 

is also progressive. Because labor bears a small fraction (18.5 percent) of the burden of the 

corporate income tax and some low-income families receive capital income (certain retirement 

distributions for example), the lower deciles do bear some of the burden of the corporate income 

tax. However, because capital income bears the larger burden of the corporate income tax, highincome families bear a large share of the burden. The bottom 50 percent of the income 

distribution bears 4 percent of the burden of the corporate income tax and the top decile of 

families bears 73 percent of the burden of the corporate income tax. The top 0.1 percent of 

families alone bears 29 percent of the corporate income tax. The average rate for the lowest 

income decile is 0.4 percent. The average rate for the top decile is 2.7 percent and for the top 0.1 

percent it is to 5.4 percent. 

The distribution of the payroll tax. Although the statutory rate for all but very low and very high 

income wage earners is flat (15.3 percent combined employer and employee rate on wages in 

excess of $7,000 but below $142,800 in 2021), the payroll tax is mildly progressive (not 

proportional or regressive as is generally assumed) through the first nine cash income deciles. As 

was shown in Table 2, labor income as a share of total income generally rises through the first 

nine income deciles; a flat rate applied to a component of income whose share of income grows 

as income increases produces a progressive distribution. 

The average payroll tax rate rises from 7.2 percent in the first decile to 8.9 percent in the ninth 

decile. The payroll tax becomes regressive, falls as a share of income, after the ninth decile for 

two reasons. First, the OASDI wage cap lowers the statutory payroll tax rate for wage earners 

over the cap and second, the share of labor income as a percent of total income falls in the top 

decile as the share of capital income increases. The Affordable Care Act (ACA) of 2010 

introduced an additional Medicare tax for high wage families (an additional tax of 0.9 percent for 

families with wages over $200,000 ($250,000 for joint filers)) but average payroll tax rates still 

fall dramatically at the top of the income distribution. The average rate for payroll taxes falls to 

8.7 percent for the 90 to 95th percent, 6.5 percent for the 95th to 99th percent, 3.3 percent for the 

99th to 99.9 percent and 1.2 percent for the top 0.1 percent. 

The distribution of excise taxes. Federal excises are fairly flat, between 0.6 percent and 0.8 

percent of income for all income deciles except the lowest income decile. The lowest decile has a 

significant excise tax burden, 1.7 percent of cash income, due to the excise tax on cigarettes and 

other tobacco products 

The distribution of estate and gift taxes. The estate and gift tax is highly progressive, but it is 

small compared to other taxes. Over 93 percent of the estate and gift tax burden falls on the top 

0.1 percent. Five percent of the estate tax burden is not shown in the tables other than the total 

because it accrues to decedents with negative income. Families with negative income are not 

shown in the detail but are included in the total. We separate these families from the lowest 

decile because they have large capital losses and are otherwise not similar to low-income 

families. 
24 

Table 6: Distribution of Income and Federal Taxes under 2021 Pre-Pandemic Income Levels and Law

0 to 101 17.7 26.4 131.6 -2.1 -14.2 0.5 9.4 2.2 0.0

10 to 20 18.3 36.9 376.3 -16.8 -52.7 1.4 31.5 3.0 0.0

20 to 30 18.3 34.0 524.4 16.3 -36.4 2.2 46.8 3.8 0.0

30 to 40 18.3 32.2 692.4 49.6 -17.9 3.3 59.6 4.6 0.0

40 to 50 18.3 32.0 905.7 91.9 4.1 5.2 76.7 5.9 0.0

50 to 60 18.3 32.8 1,191.6 147.7 30.5 8.4 100.9 7.9 0.0

60 to 70 18.3 34.4 1,552.8 220.7 66.6 12.5 131.2 10.4 0.0

70 to 80 18.3 35.5 2,029.6 337.9 127.9 18.3 177.9 13.8 0.0

80 to 90 18.3 37.0 2,804.1 540.4 242.1 28.2 250.7 19.3 0.0

90 to 100 18.3 38.9 8,162.2 2,105.8 1,375.5 219.2 432.2 57.9 21.1

Total1 183.0 340.9 18,322.7 3,495.0 1,725.6 299.8 1,318.4 129.0 22.3

90 to 95 9.2 19.0 2,008.3 440.0 225.2 25.6 175.1 14.1 0.0

95 to 99 7.3 15.8 2,751.1 651.2 403.7 49.8 178.2 19.5 0.0

99 to 99.9 1.6 3.7 1,784.5 502.7 373.6 56.8 59.2 12.8 0.2

Top .1 0.2 0.4 1,618.3 511.9 373.0 87.1 19.6 11.4 20.8

0 to 101 9.7 7.7 0.7 -0.1 -0.8 0.2 0.7 1.7 0.0

10 to 20 10.0 10.8 2.1 -0.5 -3.1 0.5 2.4 2.4 0.0

20 to 30 10.0 10.0 2.9 0.5 -2.1 0.7 3.5 2.9 0.0

30 to 40 10.0 9.5 3.8 1.4 -1.0 1.1 4.5 3.5 0.0

40 to 50 10.0 9.4 4.9 2.6 0.2 1.7 5.8 4.6 0.0

50 to 60 10.0 9.6 6.5 4.2 1.8 2.8 7.7 6.2 0.0

60 to 70 10.0 10.1 8.5 6.3 3.9 4.2 10.0 8.0 0.0

70 to 80 10.0 10.4 11.1 9.7 7.4 6.1 13.5 10.7 0.0

80 to 90 10.0 10.8 15.3 15.5 14.0 9.4 19.0 15.0 0.0

90 to 100 10.0 11.4 44.5 60.3 79.7 73.1 32.8 44.9 94.6

Total1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

90 to 95 5.0 5.6 11.0 12.6 13.0 8.5 13.3 11.0 0.0

95 to 99 4.0 4.6 15.0 18.6 23.4 16.6 13.5 15.1 0.1

99 to 99.9 0.9 1.1 9.7 14.4 21.7 18.9 4.5 9.9 1.0

Top .1 0.1 0.1 8.8 14.6 21.6 29.0 1.5 8.9 93.6

0 to 101 -1.6 -10.8 0.4 7.2 1.7 0.0

10 to 20 -4.5 -14.0 0.4 8.4 0.8 0.0

20 to 30 3.1 -6.9 0.4 8.9 0.7 0.0

30 to 40 7.2 -2.6 0.5 8.6 0.7 0.0

40 to 50 10.2 0.5 0.6 8.5 0.6 0.0

50 to 60 12.4 2.6 0.7 8.5 0.7 0.0

60 to 70 14.2 4.3 0.8 8.5 0.7 0.0

70 to 80 16.6 6.3 0.9 8.8 0.7 0.0

80 to 90 19.3 8.6 1.0 8.9 0.7 0.0

90 to 100 25.8 16.9 2.7 5.3 0.7 0.3

Total1 19.1 9.4 1.6 7.2 0.7 0.1

90 to 95 21.9 11.2 1.3 8.7 0.7 0.0

95 to 99 23.7 14.7 1.8 6.5 0.7 0.0

99 to 99.9 28.2 20.9 3.2 3.3 0.7 0.0

Top .1 31.6 23.0 5.4 1.2 0.7 1.3

--- Percent Distribution ---

 --- Average Rates ---

1

Families with negative incomes are excluded from the lowest income decile but included in the total line. Famiies with negative income incur over 1 percent of 

estate and gift tax burden. 

Corporate 

Income 

Taxes

Payroll 

Taxes

Excises and 

Customs 

Duties

Estate and 

Gift Taxes1

--- Millions of Families and Billions of Dollars ---

Number of 

Families 

Number of 

Individuals

Family Cash 

Income

Total 

Federal 

Taxes

Individual 

Income 

Taxes

Adjusted 

Family Cash 

Income 
25 

5. The Mechanics of Measuring Income and Tax Burden 

Treasury’s Individual Tax Model (ITM) is the foundation of Treasury’s Distribution Model 

(DM). The ITM is Treasury’s basic tool for estimating the revenue effects of individual income 

tax changes. The DM starts with all the imputations and calculations on the ITM and adds 

imputations necessary to estimate cash income and other federal taxes at the return level to create 

the DM. 

5.1 The Individual Tax Model (ITM)

The base ITM file is the Statistics of Income (SOI) annual stratified random sample of individual 

income tax returns. The current version of the ITM is based on the SOI sample from tax year 

2016. Over 338,000 unweighted, nondependent returns are included in the 2016 SOI sample. 

These returns represent 150 million returns that were filed in 2017. The SOI Division of the IRS 

collects entries from each sampled return’s form 1040EZ, 1040A, or 1040 including attached 

schedules and supporting forms. The Office of Tax Analysis (OTA) then creates a set of 

imputations based on the SOI tax data. For example, to simulate the response to a proposal that 

changes the treatment of itemized deductions, non-itemizers must have the option to itemize. 

Because non-itemizers do not report itemized deduction expenses, OTA imputes itemized 

deduction expenses to non-itemizers. Other SOI-based ITM imputations include wage and selfemployment earnings attributable to each spouse for two-earner joint returns; employee pension 

plan participation; classification of partnership and S corporation income by business sector; and 

social security income for tax returns with AGIs below the tax inclusion threshold. Such 

imputations are based on information returns (forms W-2 and SSA-1099) matched to the tax 

returns.

The base tax file is augmented by files containing other demographic and economic data. These 

additions include an exact match for age using date of birth from social security records, and 

imputations for non-filers, retirement savings decisions, health insurance coverage and 

premiums, and wealth. Each imputation is discussed briefly below. 

ITM Imputations

Non-Filer imputation. The base SOI file only represents families that filed an individual income 

tax return. Some tax proposals may cause non-filing families to file so all potential tax returns 

must be represented on the ITM for revenue estimating purposes. Further, Treasury distributional 

analyses measures the total federal tax burden for all U.S. residents (plus U.S. citizens living 

abroad who should file tax returns) whether or not they actually file an individual income tax 

return. Most families that do not file federal individual income tax returns will still bear a burden 

from other federal taxes, such as payroll or excise taxes. 

To impute non-filers, the base SOI sample is augmented with a sample of information returns 

(such as Form SSA-1099s) using the same sampling criteria used for the stratified random 

sample of tax returns.32 OTA weights these returns so that along with filers, the total estimated 

32In more detail, the tax sample has two components: a random sample based on social security number (SSN) ending 

digits and an oversample of high-income returns and returns with certain low-probability characteristics, such as 
26 

population matches our covered population as approximated by the Social Security Area 

Population. OTA uses Census targets to group non-filers into tax return units and assign certain 

demographic characteristics, such as filing status and the number and age of children. 

Retirement savings decisions. The ITM also models contributions to, withdrawals from and 

balances and accumulated benefits in tax preferred retirements savings account for each 

individual. The model includes tax data on deductible employee contributions to tax-preferred 

retirement savings accounts such as traditional 401(k) plans, on withdrawals from defined 

contribution plans and on pension payments from defined benefit plans. The model imputes 

estimates for nondeductible employee contributions to tax-preferred retirement savings accounts, 

such as Roth IRAs and Roth 401(k)s, for employer contributions to defined benefit plans, for 

balances in defined contribution accounts and for accumulated benefits in defined benefit 

plans. These imputations are based on Administrative data, tax data (Forms W-2 and 5500) and 

the Survey of Consumer Finances (SCF).

Health Insurance Coverage and Premiums. Beginning with tax year 2015, all insurers (including 

self-insured employers, private insurers, and government entities) are required to report, using 

the Form 1095 series, to the enrollee and the IRS information about the enrollee’s health 

insurance offers and coverage. There are three forms in the 1095 series: Form 1095-A "A Health 

Insurance Marketplace Statement," Form 1095-B "Health Coverage," and Form 1095-C 

"Employer-Provided Health Insurance Offer and Coverage." Individuals may receive more than 

one form in this series. Treasury uses the information on these forms to assign the type of 

insurance coverage to each individual on the ITM. The coverage types are marketplace, 

uninsured (no indication of coverage on the 1095 series), employer-sponsored coverage, nongroup private coverage outside marketplace (off-exchange), Medicare or other public coverage. 

Marketplace premiums are imputed using information from Forms 1095-A and 8962 (Premium 

Tax Credit). Employer sponsored insurance premiums are imputed using months of coverage 

from Forms 1095-B/C for employer sponsored insurance and Form W-2. Large employers are 

required to report the total premium for policies provided to employees each year on Form W-2. 

More detail on the distribution of coverage by type can be found on Treasury’s website: 

https://home.treasury.gov/policy-issues/tax-policy/office-of-tax-analysis. 

Wealth imputation and estate tax calculator 

The ITM includes a wealth module for each tax return that imputes values of assets (namely, 

stocks, bonds, real estate assets, business assets, retirement assets, and other nonfinancial and 

financial assets), liabilities (namely, mortgage debt and other debt), and unrealized capital gains 

(at death), and the holding periods associated with these assets and liabilities. The imputation 

uses tax data (Forms 1040 and 706) and the Survey of Consumer Finances (SCF). The model 

negative income or a high number of capital gains transactions. Oversampled strata receive lower weights. The 

highest-income returns have a weight of one (all are included in the sample). Treasury uses the same sample design 

to choose non-filers from information returns for individuals who do not file an income tax return. If an individual 

with one of the random SSN ending digits receives a Form W2 or 1099 but does not file an income tax return, then 

they are included in the sample.
27 

imputes unrealized capital gains using the SCF and estimates for holding periods using the SOI 

2007 Sales of Capital Assets study. 

To calculate estate tax liability, mortality probabilities are estimated for each return. Mortality 

probabilities vary by age, gender and income and are imputed to the tax data from administrative 

data on deaths from the Social Security Administration. Estate tax liability, conditional on the 

probability of death, is estimated using estate calculators applied to our imputed wealth. 

Extrapolation and Tax Calculators

In addition to its detailed data base, the ITM consists of an extensive set of computer programs 

which are used to simulate individual income tax liabilities and payroll tax liabilities, and 

changes in these liabilities, for every year of the budget window. The Office of Management and 

Budget (OMB) provides Treasury with an economic forecast of income levels, employment, 

price levels, and interest rates which are then used to extrapolate the base-year ITM over the tenyear budget window, and thus ensure that Treasury’s model is consistent with OMB’s forecast of 

national income, employment, and inflation. The ITM is updated twice a year for January budget 

assumptions and for mid-session review assumptions. In contrast, the DM only uses the 

extrapolated population and income levels present in the first year of the budget period. In 

general, the DM is updated only once a year, based on January budget assumptions. 

5.2 The Distribution Model (DM)

The DM starts with the ITM data, imputations, calculators, and extrapolation for the first year of 

the budget period. It then adds nontaxable sources of income and consumption to create the 

components necessary to estimate Cash Income and simulate each federal tax. The DM uses the 

ITM calculators to simulate individual income, payroll, and estate tax changes. The distribution 

of the corporate income tax is simulated using the DM’s capital and labor income distributions. 

The distribution of excise taxes is simulated using the DM’s capital, labor and consumption 

distributions. Brief descriptions of the major DM imputations are given below. 

Estimating Nontaxable Sources of Income

Nontaxable sources of income include nontaxable social security income, the insurance value of 

Medicare and Medicaid, means-tested transfer income, employer-provided fringe benefits, and 

realized housing gains. 

Social security income. Social security income was the largest source of both taxable and 

nontaxable transfer income on the DM. Of the $1,121 billion in total social security income 

included in cash income for 2021, $666 billion (59 percent) is excluded from taxable income. 

Nontaxable social security income is added to the ITM and the DM using an exact match with 

social security information returns. 

Insurance value of Medicare and Medicaid. Generally speaking, Medicaid is public health 

insurance for low-income individuals (including the elderly) and Medicare is public health 

insurance for the elderly. Families with either Medicaid or Medicare are identified on the ITM as 
28 

having public health insurance. For simplicity, the DM assumes all elderly individuals identified 

as having public health insurance are in Medicare and all nonelderly individuals identified as 

having public health insurance are in Medicaid.33 

In general, the total value of insurance is equal to the benefits it delivers. Treasury starts with this 

assumption. We also assume that both Medicare and Medicaid are community rated; that is, the 

insurance value does not vary by pre-existing health conditions, actual benefits received or the 

relative health of an individual. We distribute the total cost of Medicare across all Medicare 

recipients equally to arrive at an initial Medicare insurance value, but we cap this value at one 

third of family income. We assume that low-income families are unlikely to value health 

insurance over subsistence levels of other consumption needs, such as food and housing, and the 

cap is a rough implementation of this assumption. 

Medicaid coverage includes coverage for low-income elderly, low-income disabled, low-income 

children and low-income, non-elderly adults. Treasury only models Medicaid expenditures for 

low-income, nonelderly adults. The elderly are covered in our model by Medicare. We are 

considering adding coverage for children to our methodology in the future, but our current model 

does not include Medicaid coverage for children. We also do not include Medicaid coverage for 

disability in our model. All individuals run a small risk of becoming disabled and if disabled, the 

very high medical expenditures and inability to earn income could reduce their circumstance 

such that they become eligible for Medicaid. Therefore, an imputed insurance value for 

Medicaid’s disability coverage would be spread across all individuals and would have little 

effect on any family’s relative position in the distribution of income. 

We spread the insurance value of all Medicaid expenditures for low-income, non-elderly adults 

across all nonelderly adults currently enrolled in public insurance as well as all adults who are 

currently uninsured who are eligible for Medicaid and who would be expected to enroll in 

Medicaid if they incurred medical expenses. At 2021 levels, this value is $4,328 per eligible 

adult. As with our imputed insurance value for Medicare, we cap this value at one third of family 

income in recognition that the value to the recipient cannot exceed the value of other basic needs. 

Means-tested transfers include SSI, TANF, SNAP, WIC, LIHEAP, as well as certain veteran’s 

benefits. For each transfer program, the DM uses Current Population Survey (CPS) data and a 

logistic regression to estimate the probability that a family in the tax data would receive a 

particular transfer (e.g., SNAP). The total number of recipients is then targeted to the counts 

projected by each program. The level of benefits is assigned by matching tax families to CPS 

families with similar characteristics who are receiving the benefit.

Employer-provided fringe benefits. As discussed above, employer sponsored health insurance 

coverage (including flexible spending accounts (FSAs) and dental and vision coverage) is 

modeled on the ITM. In addition, the DM uses Form W2s and administrative data to impute the 

33 Roughly 9 percent of Medicaid recipients are elderly, but in our model we will place them in Medicare not Medicaid. 

Average Medicaid expenditures for elderly Medicaid recipients are higher than average Medicare expenditures so this 

has the potential to affect our imputation. In practice, however, the assignment of the low-income elderly to Medicare 

or Medicaid will not matter. The insurance value of both imputations is capped at one-third of the recipient’s family 

income, and the cap is likely to be binding for the low-income elderly who would have been eligible for Medicaid.
29 

insurance value of nontaxable employer sponsored life insurance, education benefits, and transit 

and parking benefits to families with employers who offer these benefits. 

Realized housing gains. On the ITM, about 74 million returns are estimated to have owner 

occupied housing in 2016. On the DM, the value of each home is estimated using the property 

tax deduction (imputed for nonitemizers) and zip code-level property tax rates. The estimated 

level of accrued but unrealized gains on each home is estimated using the Survey of Consumer 

Finances (SCF) and age of primary taxpayer. Home sales are estimated using probabilities that 

vary by age, income and home value using targets from the American Housing Survey (AHS). 

Estimating Consumption

In order to assess the burden of relative price changes caused by excises and certain other 

consumption taxes (e.g. a carbon tax or value added tax), the DM also includes an imputation of 

each family’s consumption of goods and services. The only source of detailed expenditure 

information is the Consumer Expenditure Surveys (CE). Unfortunately, it has documented 

problems with regard to underreporting of income and the accuracy of its expenditure rates 

(expenditures relative to income), particularly for low and high-income households.34 Further the 

CE only collects information on out-of-pocket expenditures, not all consumption. Some public 

and employer-provided consumption and private transfers are not included in the CE. 

In order to build a more consistent and inclusive relationship between consumption and income, 

Treasury derives a family’s total consumption using tax data and the Survey of Consumer 

Finances (SCF). The CE is still used to apportion a family’s total expenditures across particular 

categories of goods and services. But these expenditures are then adjusted to account for 

consumption that is not out-of-pocket. 

Derived aggregate consumption is equal to cash income minus federal, state and local individual 

income taxes, corporate income taxes35, payroll taxes and savings out of cash income. Treasury 

uses the deductions for state and local income taxes (including the imputations for non-itemizers) 

as an estimate of state and local income taxes. Savings rates by age, marital status, and income 

are estimated using multiple years of the SCF. 

We impose a de minimis consumption amount for each family equal to half of the poverty level 

for a family of its size. We assume that families cannot exist without this level of consumption 

and that unmeasured transfers or debt finance, either public or private, are providing for the de 

minimis consumption levels. This adjustment increases consumption overall by less than 1 

percent but increases consumption for the bottom income decile by 43 percent. 

We compute the share of a family’s annual expenditures on each good or service, by using 6 

years of the CE data from 2012 to 2017 and doing an unconstrained statistical match. The 

statistical match is based on dividing the CE and tax data into 320 similar cells based on marital 

34 See the Sabelhaus et. al. (2012) and Myer, Mok and Sullivan (2009). 35 Corporate income taxes are added to cash income to put it on a pre-tax basis; observed labor and capital income is 

lower than it would be absent the corporate income tax. For determining consumption, we subtract the corporate 

income tax since the pre-tax income it represents is not available to be used on consumption. 
30 

status, 4 age groups (oldest filer), whether or not the family had children and 20 percentiles of 

consumption. Each cell was required to include at least 10 donor records. We collapsed cells 

with insufficient donors to near neighbors so that in the end we used 297 cells to match the tax 

data to the CE. 

Once we have the match, we apply the share of total expenditures for each good and service of 

the 83 expenditure categories on the CE to the DM’s estimate of out-of-pocket expenditures. We 

then add categories of consumption imputed to Treasury’s distribution model that are not out-ofpocket expenditures represented on the CE. For example, we add employer-paid health insurance 

premiums and the insurance value of Medicare and Medicaid to Treasury’s measure of health 

consumption. Likewise, we add employer-paid childcare, employer-paid life insurance, 

employer-paid transportation benefits, and employer-paid education benefits to their respective 

categories of consumption. 

Table 7 shows the distribution of income and consumption at 2021 levels. Recall that the 

difference between consumption and cash income in Treasury’s model includes both taxes and 

savings or dissavings out of cash income. In total, consumption is 70 percent of income. High 

income families have a disproportionate share of both income and consumption, but as expected, 

income is more skewed than consumption. Families in the top 10 percent of the income 

distribution accrue 45 percent of total cash income but account for only 37 percent of total 

consumption. Further, the ratio of consumption to income is above one for the bottom two 

income deciles but is .6 for the top income decile. 

6. Distributing Tax Proposals 

Table 8 is a standard distribution table for a change in tax law. It shows the distribution of a $100 

per person refundable credit, assuming universal eligibility and take-up. (Table 8 is illustrative, 

Table 7: Distribution of Consumption

(%) (%)

0 to 10 0.7 1.5 1.5

10 to 20 2.1 3.1 1.1

20 to 30 2.9 3.9 1.0

30 to 40 3.8 4.8 0.9

40 to 50 4.9 6.0 0.9

50 to 60 6.5 7.6 0.8

60 to 70 8.5 9.5 0.8

70 to 80 11.1 11.6 0.8

80 to 90 15.3 15.0 0.7

90 to 100 44.5 37.0 0.6

Total 100.0 100.0 0.7

90 to 95 11.0 10.2 0.7

95 to 99 15.0 13.3 0.6

99 to 99.9 9.7 7.3 0.5

Top .1 8.8 6.2 0.5

Adjusted 

Family Cash 

Income 

Decile

Ratio 

Consumption 

to Cash 

Income

Cash Income Consumption
31 

not intended to represent any actual proposal, and only presented to enable a discussion of the 

components of a standard distribution table.) 

Columns 1-3 and 5 are the same in every standard distribution table produced for a particular 

model year. These columns are the distributions of families, cash income, total federal taxes 

under current law and average federal tax rates under current law. They orient the reader to the 

population under consideration, the distribution of pre-tax consumption possibilities (income) 

and tax burden under current law. Columns 3 and 5 are presented for comparison to proposed 

law. The same distributions can be found in the baseline tables (Table 6 in this paper). 

Columns 4, 6 and 7-10 are measures of the effects of the proposed law. Columns 4 and 6 present 

the distributions of total federal tax burdens and average tax rates under policy and are 

distributed next to the distributions of current law for ease of comparison. Columns 7-10 

consider the tax change. 

Column 7 is the distribution of the tax change. In this column we see that the total proposed tax 

change is a $34.1 billion tax cut. In column 8, we see that the average tax cut is $186 per family 

and varies from $149 on average for families in bottom decile to $213 for families in the top 

decile, reflecting the difference in the average family size, 1.49 versus 2.13. Families in the top 

decile are larger on average so they receive a larger tax cut per family. Column 9 is the 

distribution of the tax cut and similarly shows that the tax cut is fairly even across families with 

slightly more going to the top of the distribution because of their slightly larger size. 

Table 8: Standard Distribution Table ($100 per person refundable credit)1

(millions) (%) (%) (%) (%) (%) ($B) ($) (%) (%) (%)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

0 to 103 17.7 0.7 -0.1 -0.1 -1.6 -3.6 -2.6 -149 7.7 -126.0 2.0

10 to 20 18.3 2.1 -0.5 -0.6 -4.5 -5.5 -3.7 -202 10.8 -21.9 0.9

20 to 30 18.3 2.9 0.5 0.4 3.1 2.5 -3.4 -186 10.0 -20.8 0.7

30 to 40 18.3 3.8 1.4 1.3 7.2 6.7 -3.2 -176 9.5 -6.5 0.5

40 to 50 18.3 4.9 2.6 2.6 10.2 9.8 -3.2 -175 9.4 -3.5 0.4

50 to 60 18.3 6.5 4.2 4.2 12.4 12.1 -3.3 -179 9.6 -2.2 0.3

60 to 70 18.3 8.5 6.3 6.3 14.2 14.0 -3.4 -188 10.1 -1.6 0.3

70 to 80 18.3 11.1 9.7 9.7 16.6 16.5 -3.6 -194 10.4 -1.1 0.2

80 to 90 18.3 15.3 15.5 15.5 19.3 19.1 -3.7 -202 10.8 -0.7 0.2

90 to 100 18.3 44.5 60.3 60.7 25.8 25.8 -3.9 -213 11.4 -0.2 0.1

Total3 183.0 100.0 100.0 100.0 19.1 18.9 -34.1 -186 100.0 -1.0 0.2

90 to 95 9.2 11.0 12.6 12.7 21.9 21.8 -1.9 -208 5.6 -0.4 0.1

95 to 99 7.3 15.0 18.6 18.8 23.7 23.6 -1.6 -215 4.6 -0.2 0.1

99 to 99.9 1.6 9.7 14.4 14.5 28.2 28.1 -0.4 -223 1.1 -0.1 0.0

Top .1 0.2 8.8 14.6 14.8 31.6 31.6 0.0 -226 0.1 0.0 0.0

1

 This is not an actual proposal and is being used for the sole purpose of explaining the features of a standard distribution table.

2

 The tax change is as a percent of the absolute value of current law tax liability. As a result, all tax cuts are shown as negative and all tax increases as positive.

3

 Families with negative income are not included in the lowest income decile but are included in the total.

Adjusted 

Family Cash 

Income 

Decile

Number of 

Families

 

Distribution 

of Cash 

Income

Distribution of Total 

Federal Taxes

Average Federal Tax 

Rate Change in 

After-Tax 

Income Current 

Law Policy

Current 

Law Policy Amount Average

Percent 

Distribution

 

Current 

Law2

Tax Change
32

Column 9 compares the size of the tax cut to each decile’s current tax burden. For a tax cut the 

change is presented as a negative and for tax increases it is presented as a positive. It is the 

proposed tax change divided by the absolute value of the current law tax burden. For families 

with net refunds the tax burden may be negative; some families receive more in refundable tax 

credits than they pay in total federal taxes. Presenting all tax cuts (including increases in the level 

of refundable credits) as a negative simplifies interpretation of this column. Table 8, column 9, 

shows that the proposal reduces tax burdens by 1 percent overall but by 126 percent for the 

lowest income decile and by 0.2 percent for the highest income decile. An extra $100 credit per 

person increases refundable credits for the low income by a fair amount but does not affect the 

tax burden of the highest decile by much.

Column 10 shows the change in after-tax income due to a proposal. It is the closest 

approximation to a change in welfare since it shows, by how much a family’s consumption might

increase or decrease due to the proposal. It is the change in consumption possibilities; 

“possibilities” because a family may choose to save (or dissave) instead of changing 

consumption. Table 8, column 10 shows that the proposal increases after-tax income, 

consumption possibilities, by 0.2 percent overall but by 2 percent for the lowest income families 

and by 0.1 percent for the highest income families. This is not surprising. An extra $100 per 

person has a higher utility impact for families with low after-tax income than for families with 

high after-tax income. 

7. Conclusion

Treasury continually strives to improve its modeling. One area that we would like to focus on, 

for distributional analysis, is improving our modeling of pass through businesses (partnership 

and small business corporations). We are considering whether some of the incidence of the 

individual income tax remitted by these businesses are actually borne by their employees. We 

would also like to improve our modeling of the choice of business form and how that might 

affect burden. Finally, we would also like to improve our modeling of the income source for pass 

through businesses; how much of their income is a return to capital versus a return to labor.

Another area we would like to consider improving is the equivalency measure. Should it vary 

with income? Does return to scale have the same meaning for families in the poorest decile as 

those in the top 1 percent. Should we vary equivalency depending on a family’s composition, 

adults versus children or elderly versus non-elderly. 

Our distribution model also does not consider the cost of living. A $100 tax cut has very different 

implications regarding consumption possibilities in low cost-of-living areas as opposed to a high 

cost-of-living areas such as San Francisco or New York City.

Finally, our distribution model does not include the burden of state and local taxes. A more 

complete analysis of how changes in federal tax burden affect changes in after-tax income, 

consumption possibilities, would include these taxes. 
33

In general, distributional analysis is only one of many tools Treasury uses to evaluate current tax 

law and tax proposals, and it has limitations. Treasury’s distribution tables are single-year 

snapshots that do not address changes in distribution over time. Lifetime income and incidence 

may be very different than single-year income and incidence. For example, a family that expects 

to have children may benefit in the future from a child credit proposed now. A low-income 

student may be high income later in her lifetime. Further distributional analysis do not address 

other important aspects of good tax policy such as efficiency. A tax proposal that increases GDP

or requires fewer compliance costs may have very different welfare implications than one that 

does not. Distributional analysis also focuses on vertical equity. Winners and losers tables 

(counts of taxpayers with tax cuts and tax increases by income decile) and examples can be used 

to judge horizontal equity or the implications of tax policy on certain vulnerable groups. 
34

8. References

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2013. Washington, DC: Congressional Budget Office.

Congressional Budget Office. 2013. The Distribution of Federal Spending and Taxes in 2006. 

Washington, DC: Congressional Budget Office.

Cronin, Julie-Anne. 1999. U.S. Treasury Distributional Analysis Methodology. OTA Paper 85. 

Washington, DC: U.S. Department of the Treasury.

Cronin, Julie-Anne, Portia DeFilippes and Emily Lin. 2012. “Effects of Adjusting Distribution 

Tables for Family Size,” National Tax Journal, December 2012, 65(4), 739-758.

Cronin, Julie-Anne, Emily Lin, Laura Power and Michael Cooper. 2013. “Distributing the 

Corporate Income Tax: Revised U.S. Treasury Methodology,” National Tax Journal, March 

2013, 66(1), 239-262.

Haig, Robert Murray. 1921. "The Concept of Income -- Economic and Legal Aspects." In The 

Federal Income Tax edited by Robert Haig. New York: Columbia University Press.

Joint Committee on Taxation. 2013. “Modeling the Distribution of Taxes on Business Income.” 

JCX-14-13.

Joint Committee on Taxation. 1993. “Methodology and Issues in Measuring Changes in The 

Distribution of Tax Burdens.” JCS-7-93.

Kleinbard, Edward D. 2008. “Reading JCT Staff Distribution Tables: An Introduction to 

Methodologies and Issues.” Keynote Address to the 21st Annual Institute on Current Issues in 

International Taxation in Washington, D.C.

Myer, Bruce D., Wallace K.C. Mok, and James X. Sullivan. 2009. “The Under-Reporting of 

Transfers in Household Surveys: Its Nature and Consequences.” National Bureau of 

Economic Research Working Paper No. 15181.

Nelson, Susan C. 1987. “Family Economic Income and Other Income Concepts Used in 

Analyzing Tax Reform.” Chapter 3 in U.S. Treasury, Office of Tax Analysis, Compendium 

of Tax Research, 1987. Washington, D.C.: U.S. Government Printing Office.

Nunns, Jim. 2012. “How TPC Distributes the Corporate Income Tax.” Washington, D.C.: UrbanBrookings Tax Policy Center.

Rosenberg, Joseph. 2013. “Measuring Income for Distributional Analysis” Washington, D.C.: 

Urban Brookings Tax Policy Center.
35 

Sabelhaus, John, David Johnson, Stephen Ash, Thesia Garner, John Greenless, Steve Henderson, 

and David Swanson. 2012. “Is the Consumer Expenditure Survey Representative by 

Income?” Finance and Economics Discussion Series, Divisions of Research & Statistics and 

Monetary Affairs, Federal Reserve Board, Washington D.C. 

Tax Policy Center. 2015. Brief Description of the Tax Model.

(http://www.taxpolicycenter.org/resources/brief-description-tax-model)