DISTRIBUTIONAL ASPECTS OF TAX REFORM 

DURING THE PAST FIFTEEN YEARS 

Benjamin A. Okner 

U.S. Treasury Department 

OTA Paper 35 October 1378 

. 

OTA Papers are circulated so that the preliminary findings of 

tax research conducted by Staff members and others associated 

with the Office of Tax Analysis may reach a wider audience. The 

views expressed are those of the author, and do not reflect 

Treasury policy. Comments are invited, but OTA papers should 

not be quoted without permission from the author. Managing

editors are Michael Kaufman and Gary Robbins. 

Office of Tax Analysis 

U. S. Treasury Department, Room 1104 

Washington, D.C. 20220 

Issued: October 1978 
September 15, 1978 

DISTRIBUTIONAL ASPECTS OF TAX REFORM 

DURING THE PAST FIFTEEN YEARS 

Benjamin A. Okner* 

Presented at the 

Meetings of the Allied Social Sciences Associations 

National Tax Associati,pn 

Chicago, Illinois 

August 29, 1978 

*The author is a Senior Staff Economist, Office of Tax Analysis, 

U.S. Treasury Department. The views expressed are the author's 

and are not necessarily those of the officials or other staff 

members of the Treaswy Department. The author is grateful to 

Brenda James whose computer programming assistance was 

invaluable in producing tablDations needed for the paper and tQ 

Cue Parker for her general research assistance. 
TABLE OF CONTENTS 

Y 

Page 

Introductory Remarks . . . . . . . . . . . . . . . . . . 1 

Concepts and Methodology . . . . . . . . . . . . 3 

Comparison of Tax Changes During the Past Fifteen Years 12 

Current Law Compared With the 1978 Carter Proposal and 

the Congressional Alternatives for Future Years . . . 19 

Conclusion . . . . . . . . . . . . . . . . . . . . . . . 28 

Appendix A - Summary of Major Tax Provisions of Selected 

Revenue Bills, 1964-1978 . . . . . . .. . . . . . . . . 31 

Appendix B - Supplementary Statistical Material . . . . 50 
- 1-

DISTRIBUTIONAL ASPECTS OF TAX REFORM 

DURING THE PAST FIFTEEN YEARS 

Benjamin A. Okner 

Since the mid-l960s, each of the U.S. revenge acts has been 

skewed so as to distribute a large part of the tax redgction to 

chose in the lower- and lower-middle income groups. While these 

cuts have served in large measgre to alleviate the income tax 

burden on the poor, they have also helped to maintain athe 

prsgressivity of the individual income tax. This has occurred 

mainly because Congressional changes generally have offset the 

effects of rising money incomes that push taxpayers into higher 

tax brackets and becasse the tax-free income level has been 

raised several times. Thus, when measured at 1978 income 

levels, we find that the overall ratio of personal taxes to 

income is actually lower in 1978 than it was under 1964 law. 

This is true for taxpayers at all income levels except those 

with incomes of $100,000 and over. 
- 2-

Tax liabilities will change over time'both because of 

changes in money income and statutory changes in the law. Thus, 

if we want to keep the relative distribution of the tax burden 

constant over time, it would be necessary to index the tax 

system 'both for inflation and real growth. The basic exemption, 

the per exemption tax credit, the standard dedlJction, and the 

width of the marginal tax brackets all would have to be 

increased at the rate of growth in money income. However, there 

seems to be little enthgsiasm in Congress for enacting any sxh 

"agtomatic" system of indexing for personal tax pgrposes. 

Even thoggh the United States has no formal indexing 

system, in order to analyze properly the effects of various tax 

strgctures over time, it is necessary somehow to hold constant 

the level of money income. One way to do this is to go back and 

adjgst the money incomes, standard and itemized dedQctions, and 

exemption level data for changes in the price level that have 

occgrred during the past 15 years. A simpler alternative 

involves gsing a single data set that contains individgals' 

incomes for one particglar year and applying to it the tax rates 

and strQctura1 tax provisions that were in effect at different 

times during the period being studied. The latter procedgre is 

the one gsed in this analysis. 
- 3-

In the remainder of this paper, the distributional effects 

of several major U.S. tax cuts enacted during the past 15 years 

are assessed at 1978 income levels and are compared with 

personal tax liability gnder 1978 law. Before this, there is a 

brief section outlining the definitions and concepts used in the 

analysis. The last section of the paper contains a description 

and examination of the Carter Administration's 1978 tax 

proposals for individuals as well as the individual provisions 

of the "Revenue Act of 1978," approved by the House of 

Representatives in Aggust 1978. Appendix A provides a brief 

outline of major personal income tax changes since 1964 and 

Appendix B includes additional statistical material. 

Concepts and Methodology 

Income 

Unless otherwise noted, the income concept used in this 

.. paper is "expanded income." This is as close as it is possible 

to get to a taxpayer's net, or 

the information reported on his 

to adjusted gross income (AGI) 

less investment interest to the 

not exceed investment income. 

economic, income based solely on 

income tax return. It is equal 

plgs tax preference items and 

extent that such interest does 
-4 -

When calculating expanded income, tax .preferences are 

defined as the dicidend exclssion (of ~1pto $100 per taxpayer) 

and income from sowces that are considered to be tax 

preferences for purposes of the minimum tax. The principal item 

'L 

in this. category is the excluded half of net long-term capital 

gains. 

It is particslarly difficult to define correctly investment 

expense and income when calculating'expanded income, In terms of 

existing tax data, it is hard to determine investment expenses 

other than interest because normally they are lumped into the 

"miscellaneoss deduction" category along with ssch items as 

the various other business or employee-expense deductions, 

Accordingly, for computational purposes, investment expense is 

defined as all interest expense (other than mortgage interest) 

deducted on the tax retgrn. Investment income is defined as the 

total of realized capital gains, interest, and dividend income 

reported on the return. 

To the extent that investment interest expense does not 

exceed investment income, it is considered to be an ordinary 

expense incurred in obtaining such income. Thss, on a return 

with $1,000 of investment income and $800 of investment 

interest, the investment interest dedQction worald be redsced by 
-5-

Y 

$800 and expanded income would include only the net amount of 

$200 investment irfcome. The same procedure is wed when 

investment interest exceeds the amount of investment income 

reported on the tax retljrn. In that case, investment interest 

would be deducted from investment income and the latter amount 

would be set equal to zero (along with an appropriate adjustment 

of the interest-paid deduction). 

All these adjustments to AGI obviously represent an attempt 

to convert the statutorily defined income concept into one that 

is more meaningful for economic analyses. While the adjustments 

described may have a rather large impact on the incomes of 

those at the upper end of the income scale., they play only a 

minor role for those in the low- and middle-income ranges. 

Distribution of Income 

Because there appears to be widespread misinformation about 

the distribution of income in the United States, it seems 

appropriate to include some data on where people with different 

absolute income amounts rank in the overall spectrum. In the 

recently released Roper Survey, -/ the researchers found that 

-/ The Roper Organization Inc., The American Public and the 

Income Tax System, (New York, 1978). This sosrce is hereinafter 

referred to as the "Roper Survey." 
- 6-

the public defines "middle-income" families as those having 

annual incomes of 'between $20,000 and $40,000. Below $20,000 is 

"low;" above $40,000 is "high." When asked this question, 

respondents were queried about a "family of four with two 

children." While the wording of the Roper question was not 

detailed, the responses indicate an extremely unrealistic 

appraisal of the distribution of income in this country. 

Recently released data from the U.S. Bclreau of the Census -/ 

-/ U.S. Blireau of CensVJs, Current Population Reports, Series 

P-60, No. 116, "Money Income and Poverty Status of Families in 

the United States: 1977" (Advance Report), (Washington, 1978),

Table B, p. 2, and Table 4, p. 11. 

indicate that income for families in 1977 was actually 

distributed quite differently than the Roper respondents 

believed. The Census data which were collected in March 1978 

are shown in Table 1 which also contains information on the 

distribgtion of expanded income in 1978. 

The two sets of data in Table 1 are not directly comparable 

becase of important differences in the reporting unit (i.e., 

the Census family versus the tax-filing unit) as well as 

differences in the way income is defined in the two data sets. 
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-a -

Despite these caveats, it is clear that if.the public believes 

that those with fimily incomes below $20,000 should be 

classified in the low-income category while the Census data show 

that families with such incomes actually include more than GO 

percent-of all U.S.'families, there must be a serious 

misgnderstanding of the facts by the Roper respondents (i.e.t 

the general public). In like fashion, the Roper respondents 

indicated that a family would need income of $40,000 or above to 

be classified as a high-income mit; in fact, the Census data 

indicate that families with incomes that high are financially 

better off than 95 percent of all U.S. families. 

The qgintile breakpoints for the 1978 expanded income 

distribution are also shown in Table 1. The absolute income 

breakpoints are lower than those shown for the Census data 

primarily beca*Jse the Census money income concept includes 

transfer payments that are not taxable and hence are excluded 

from expanded income. Despite this, it is interesting to note 

how closely the income levels become for those in the fourth and 

highest quintiles. Finally, for each distribution, the top 
-- 

- 9 -

5 percent of families is comprised of those with incomes of 

rogghly $40,000 and above. -/ While the Roper respondents 

-/ The slightly higher income level and difference in the 

percentage of total income received by those in the tax 

distrib'gtion are .probably due primarily to the fact that capital

gains income is inclgded in taxable income, bgt excluded from 

the Census income definition. 

defined families with incomes of $40,000 and over as being in 

the high-income category, it seems dogbtful that they really 

were talking abogt the richest 5 percent of U.S. families. 

While a more detailed analysis of recent tax changes 

might use a different income classification, for most 

tabglations in this paper approximately half of all families 

are inclgded in the lowest income class "Under $10,000." -/ 

-/ For reference piJrposes, the following information on the 

distribution of retgrns by income class is presented:. Under 

$10,000, 47.7% of all retgrns; $10,000-$20,000, 29.0%; $20,000 

to $50,000, 21.2%; and $50,000 and over, 2.0% of total 

retgrns. 

This makes it convenient to compare what happened to tax 

bgrdens of those in the bottom half of the income distribution 

with the effect of tax changes on the more afflgent. 
-- 

-- 

-10 -

Progressivity 

While there are many ways to measure and compare the 

progressivity of alternative tax structures, the method used 

here is. ytlite simple. If the effective tax rates taxes 

divided by expanded income for low-income units fall and 

the rates for high-income ones drop less or rise when 

comparing a new with an old tax distribution, the new tax 

structtlre is considered to be more progressive than the old 

one. If the reverse occvJrs, the new tax law is considered to 

be less progressive. 

Another statistic med extensively is that relating to 

percentage changes in tax liability experienced by mits at 

different income levels when comparing two tax strtlctures. 

Under this meastlre, B change is considered progressive if the 

percentage ctlt in tax burdens is greatest at low income levels 

and the percentage change then declines for those at higher 

income levels. 

Of cotlrse, there are many other ways to meastlre 

yrogressivity, but more complex meastlres are not used in this 

analysis primarily because the restllts often are diffictllt to 

interpret (for example, when two Lorenz cgrves cross) and they 

normally provide the same information as one can get from 

examining patterns of effective tax rates. 
-11 -

One final thing that should be noted in this section is 

that the data used lead gs to mderstate somewhat the "trge" 

effect of tax changes for taxpayers in the lowest income 

group for the early years. This is because all the 

tabglations were done using information in the Treassry's 

Individual Income Tax File for 1975, with incomes and 

population projected to calendar 1978 levels. If a family had 

been required to file a return under the 1964 or 1969 tax 

laws, but did not have to do so under 1975 law, it will not be 

represented in the basic 1975 Tax File. Since it is "missing 

from" the 1975 File, there is no way to simulate the effects 

of earlier tax changes for such a family--although in 

fact its income tax liability dropped from. some positive 

value to zero. For the same reason, the calculated quintile 

points and 1978 median income for tax returns shown in Table 1 

also are a bit too high. -/ 

-/ Examination of detailed tabluations indicates that this is

a problem only for those in the "Under $10,000" income class. 

For all other income levels, the number of returns inclgded in 

the tabulations for each year is quite constant over time. 
-12 -

Comparison of Tax Changes Dgring the 

Last Fifteen Years 

There have been several tax laws enacted dgring the past 

15 years: the ones included here are the Revenge Act of 1964, 

the Tax Reform Act of 1969, and the Tax Hedclction Act 

of 1975. The figures shown below are for each of these tax 

laws as they existed after all the permanent featgres of the 

legislation were implemented. Similarly, those for the Tax 

Redgction Act of 1975 are for that law when it was fully 

effective. The cgrrent-law data reflect the tax law that is 

in effect for calendar year 1978. 

At present, the conventional wisdom is that the tax 

proposals sent to Congress by the Administration last Jan:iary 

closely followed in the popglist-liberal tradition of the 

1950s and early 70s, while the bill passed by the Hogse of 

Representatives in early Asg'Jst (H.R. 13511) skewed the 

distribgtion of individual income tax cclts much more heavily 

in favor of middle- and gpper-income taxpayers than normally 

had been the case in the past. / Somewhere in the 

-/ It sho3ld be noted that this analysis deals only with the 

Federal individgal income tax. Many findings wogld be 

different if changes in Social Sectlrity payroll taxes were 

also considered. 
-13 -

discussion there is usually incl2ded the explanation that the 

poor and lower-income families had been given more than 

enough of the "tax largess" in prior years and the country 

wogld be faced with an unparalled tax revolt if the past 

pattern, was repeated. 

Additional evidence to support the revolt scenario was 

provided by the 2-to-1 victory of Proposition 13 (that 

sQbstantially cut property taxes insCalifornia) and the 

introduction (or threat of introduction) of similar measures 

in several other States. The interesting question at this 

point seems to be, which (if any) of these allegations are 

true? 

Perhaps the best way to assess what took place during the 

past 15 years is to examine the net change in the distribution 

of tax burdens between the beginning and end of the period. 

Information on tax liabilities and changes between 1964 and 

1978 is shown in Table 2. At the time of its enactment, the 

RevenQe Act of 1964 was estimated to involve a revenue loss of 

some $10 to $12 billion, when compared with the law then in 

effect. The figures in Table 2 indicate that at 1978 income 

levels the revenue loss associated with that legislation would 

now be about $37 billion. 
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-15 -

Of particular interest for this analysis is the 

distribution of the total cut among families at different 

income levels. The 22.3 million taxpayers with incomes mder 

$5,000 account for about one-fourth of all returns. -/ 

-/ If the earlier-year returns that are now "missing" from the 

data file were included, there is little doubt that the "Under 

$5,000'' income class would include at least 30 percent of all 

returns. 

Between 1964 and 1978, the average effective tax rate for 

these returns dropped by more than 8 percentage points and 

their aggregate tax liability dropped by more than 100 

percent. -/ In similar fashion, the effect'ive rate for the 

-/ It is possible for low-income returns to have negative tax 

liability because of the refundable earned-income credit 

enacted in 1975. 

19.2 mi3.lion returns in the $5,000 to $10,000 income class 

dropped by over 6 percentage points during the 15-year 

interval and the aggregate tax liability of these returns 

dropped by more than 50 percent. 

While these are impressive drops, again the data are 

understating the situation because the very lowest income 

retlrns are absent. Over the course of time, a large 
-- 

-- 

-16 -

proportion of the lowest-income units simply have been unable 

to partake in any'additional tax cuts becagse their tax 

liability was already down to zero and we have only limited 

refgnds (e.g., the earned-income credit) for such tax units. 

During the same time period, effective tax rates for 

those with incomes of $50,000 and over -- who compromise the 

top 2 percent of the population fell by only 0.2 percentage 

points. And the effective tax rate for those in the $100,000 

and over income class rose slightly from 34.6 percent to 

35.3 percent. 

An equally illuminating picture of what occured to the 

tax liabilities of the low-income population can be seen by 

examining the effective tax rates shown in Table 3. Tax 

relief for those in the lowest income group (under $10,000) 

obviously was sgbstantial since the percentage of their 

expanded income that went for tax payments dropped from almost 

11 percent under 1964 law to about 4 percent gnder 

cQrrent law. As can be seen in the remainder of the table, 

the percentage point reductions in effective tax rates for 

taxpayers in the other income classes were considerably Lower 

during the 1964-78 period. 
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- 18 -

The data in Table 2 (plus the inore det,ailed information 

given for the laws in intervening years in Table 3) strongly 

support the proposition that tax cuts during the past 15 years 

were extremely progressive. 

Moreover, it is inevitable that futrJre tax cuts will have 

to be concentrated among wealthier groups in the economy. The 

reason for this is that the various structural changes enacted 

between 1964 and 1978 removed 13 miliion (aboot 74 percent) of 

the retarns with incomes below $5,000 that were taxable under 

1964 law from the tax rolls. An additional 3 million (a 

little over 16 percent) of all formerly taxable returns with 

incomes of $5,000 to $lO,OO,O were also removed. 

Since it is not possible to provide very much additional 

relief to families in the very lowest income brackets, a tax 

relief bill that contained sgbstantial cuts concentrated among 

the 51 percent of all families with incomes between $5,000 and 

520,000 wosld now be needed to continue the progressive 

pattern of tax relief that has taken place dwing the past 15 

years. Conversely, sgbstantial new cgts aimed at the 18.8 

million families with incomes of $30,000 to $50,000 

essentislly the richest 25 percent of all families in the 

United States -- would reverse substantially the trend of the 

recent past. 
-19 -

Currrent Law Compared with the 1978 Carter Proposal 

, and The Congressional Alternatives for Future Years 

In the preceding section, it is easy to see the tendency 

towards relatively stable tax bgrdens for those at the gpper 

end of the income scale, along with sharp drops for those at 

the bottom since 1964. This tendency towards greater 

progressivity in the income tax occyrred fairly quietly, with 

little explicit debate abogt the "proper distribgtion" of the 

tax bsrden or the distribgtion of after-tax income. It was 

fairly generally agreed that whenever taxes were cut, a 

relatively large proportion of the benefits should go to those 

at the low end of the income scale. 

President Carter's proposed changes to the personal 

income tax stryctiJre, introduced as H.R. 12078 in the House of 

Repr2sentatives last spring, would have continged the gene'ral 

jattern of the last 15 years. Effective tax rates for those 

with incones gnder $20,000 wogld have dropped a little, while 

the rates for the more afflgent wogld have risen i! bit. In 

the aggregate, the effective tax rate for all individgals 

wogPd have dropped by 1.1 percentage points (see Table 4). 
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-21 -

The most significant aspects of the Carter proposals for 

increasing tax progressivity were the $240 tax credit that 

would have replaced the current $750 personal exemption plus 

the. lower tax rate schedules. By themselves those provisions 

would have resulted'in a revenue loss of $20.4 billion dollars 

at 1978 income levels; and of this total, aboDt 40 percent of 

the tax relief would have gone to taxpayers with incomes of 

$20,000 or less. Other proposals affecting individuals would 

have raised revenue by $7.6 billion, and the net cut for 

individual taxpayers was estimated to be $12.7 billion. 

It was not until after the proposals were made public and 

sent to the Congress "that,the growing burden of taxes on 

middle- and upper-income taxpayers" became an important 

political issue. 

Based on the data presented earlier, it seems that there 

was (and probably still is) a serious misunderstanding in the 

Congress and by the general pQblic about the distribution of 

the Administration's proposed personal income tax cuts. 

Families with incomes below $20,000 comprise more than 75 

percent of the 88.5 million total returns and would have 

received only 52 percent of the individual tax relief under 

H.R. 12078 (see Table 5). All of the remaining ciJts would 
Table 5 

Distribution of Individual Tax Change"s by 

Class under Various Revenue Bills 

Selected Years, 1976-78 d/ 

(1978 Levels of Income) 

ExEanded income : 1978 

Administration 

Income 

Re venue 

Act 

of 1978 

H.R. 13511 t 

class b /

-

($000) 

Under $10 

$10 - 20 

20 - 50 

50 and over 

Total -c/ 

Under $10 

$10 -' 20 

20 - 50 

50 and over 

Total -e/ 

-1-1-

: 

proposal 

H.R. 12078 

(................$millions....................) 

-1 ,998 -508 

-4,668 -2 ,124 

-6 ,458 -5,021 

408 -2,469 

-12,731 -10,271 

Percentage distribution of tax cuts 

15.7 4.9 

36.7 20.7 

50.7 48.9 

-3.2 24.0 

100.0 100.0 

August 25, 1978 

Source: Computed from the Treasury 1975 Individual Income 'Qx Tile, 

with income and population projected to 1978 levels'." 0 . 

-a/ All comparisGns are wit23 cu,rrent law effective f.or 1978. 

-

L/' Expanded income is equal to adjusted gross income (AGI) plus

individual tax preferences less investnent interest expense to 

the extent that it does not exceed investment income. 

-c/ Includes negative incomes not shown separately: therefore, 

components will not add to totals. 
-- 

-23 -

have gone to those with incomes between $20,000 and $50,000 

families that comprise virtually all of the remaining families 

in the top quintile of the population. Only the richest 2 

per,cent of all families would have experienced a small tax 

hike under the Administration proposals. Surely, a tax 

program where 87 percent of the net tax cuts would have gone 

to some .50 percent of the families with incomes greater than 

the median would be of great benefit to those who in reality 

are in the middle- and upper-middle income categories. 

Nevertheless, instead of the $12.7 billion individyal tax 

cut that the President settled on, the House Ways and Means 

Committee reported out a bill with a $10.3. billion individual 

tax reveniJe loss. Even though the House bill (H.R. 13511) 

provides $2.5 billion less tax relief for individuals, the way 

in which the relief is distributed among income classes is 

qirite different both from the patterns in the past and also 

from the distribution of cuts in the Administration's tax 

proposal (See Tables 6 and 7). 

Under H.R. 13511, families with incomes below the median 

income would receive only 5 percent of the tax benefits as 

compared with 16 percent under the Administration proposal. 

At the high end of the income scale, the richest 2 percent of 
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-25 -

all families would receive nearly a quarter of the total 

individual tax relief provided.by the House bill; mder the 

Administration proposals their tax burden would increase 

slightly. 

When the two proposals are viewed in terms of the 

percentage tax cut to be experienced by families at various 

income levels (see Table 7), it is even more evident that the 

Carter proposal was mych more progresive than is H.R. 13511. 

Taxpayers in the $5,000 to $10,000 income class would have 

received a tax cQt in excess of 20 percent; those in the 

$10,000 to $30,000 income ranges would have received aggregate 

tax reductions of 10 percent to 20 percent'; and much smaller 

percentge reductions including a small tax increase for 

those with incomes of $100,000 and over -- would have gone to 

the very richest taxpayers Qnder H.R. 12078. Under the 

HoQse-passed measure, on the other hand, the aggregate tax 

redxtion amounts to 5,6 percent, and cuts in the 4 percent to 

6 percent range are realized by taxpayers at all income 

levels. 

The Ho3se-passed bill not only favors high-income 

families generally but is especially beneficial to people with 

wealth since it also lowered the maximum tax rate on income 
-26 -

from capital gains. And finally, the Housq scuttled virtually 

all of President Carter's tax reform proposals. 

Obviously Mr. Carter and the Administrtion believed that 

1. 

most Americans want' "fairness" in the form of increased 

progressivity and fewer "loopholes" in their tax system. This <. 

was reflected in the President's tax proposals. What is 

perplexing is that the very same goals are found in the 

resglts of the recent Roper Sgrvey. Roper indicates that the 

American public considers tax reform the third most pressing 

national problem, ranking only behind controlling inflation 

and lowering the crime rate. And significantly, "tax reform" 

to the Roper respondents is equated much more frequently with 

tax fairness than with tax redgctions. 

The popularity of the capital gains tax cut partly may be 

explained by other findings in the Roper Survey. Roper found 

that, by a modest margin, Americans consider the existing 

treatment of capital gains to be a "reasonable dedgction" 

rather than a "tax loophole.'' Indeed, the Report indicated 

that "there is strong sentiment for a lower capital gains 

tax." Even among people who own no stock, only 23 percent 

want. to tax capital gains at the same rate as other income. 
-27 -

This seems an anomaly, in light of the fact that most 

capital gains go to the rich. But presumably everyone, at one 

time or another, hopes that he will make a profit on the 

mgtual funds stock or other property he owns. And when he 

does, he wants the capital gains tax break waiting for him. 

At this time, obviously there are many paradoxes between 

many of the siJrvey findings and Congressional action. Of 

course, H.R. 13511 mgst still be passed by the Senate and go 

through a conference procedgre to reconcile differences 

between the House and Senate versions of the bill before it 

becomes law. Thus, the final bill passed by the Congress may 

look quite different from what we now see: It simply is much 

too early to know whether the economic and political p5ndits 

who think that the shape of the current and future tax bills 

is likely to be quite different from the norm during the past 

decade or so, or whether we are indeed witnessing a one-time 

aberration. 
- 28 -

conclusion 

. When assessed in political terms, it is clear that the 

pattern. of ever-increasing individaal income tax progressivity 

that was prevalent during the last fifteen years is now being 

seriogsly questioned. Whatever the exact shape of the tax 

bill that finally emerges from the 95th Congress this fall, 

the distribDtiona1 effects are sare to be far less progressive 

than the pattern fognd in the past. 

Inasmwh as there is no particalar reason why we cannot 

have both tax reform (i.e.t increased horl'zontal equity) along 

with any degree of progressivity in the tax system that 

is desired, what is now emerging seems to be a backward step 

in the formalation of tax policy. Once a taxable income base 

is defined, the rates, credits, or personal exemptions all can 

be easily manipglated so as to achieve any given 

distribational effect that is desired. 

Hence, it seems that neither the Administration nor the 

Congress has dealt realistically with the sgbstantive 

questions in this area. Stracutgral provisions in the law can 

and shoald be dealt with separately on their merits (or 
-- 

-- 

- 29 -

demerits!). Once taxable income is defined and only after 

that is completed should the Congress tackle the question 

of distribgting tax burdens among persons at variogs income 

levels. The final outcome might be a sgbstantially less 

progressive system than now exists; it might simply be a 

proportional tax on a newly defined tax base; or conceivably, 

it might. even be a regressive rate schedule with those in the 

low tax brackets paying higher marginal rates than those at 

the top. 

Whatever the final outcome, the rational way to enact tax 

legislation would seem to require dealing with it in the order 

that is outlined above. 
- 31 -

APPENDIX A 

Sgmmary of Major Individual Tax Provisions 

of Selected Revenge Bills, 1964-78 
-- 

- 33 -

The Revenge Act' of 1964, 

A. Deductions 

1) 5% floor on itemized deductions was eliminated. 

Eliminated deductions for state and local 

taxes other than income, sales, property, and 

gasoline taxes. Limited deductions for 

casualty losses to amognts in excess of $100. 

2) Maximum charitable deduction was increased from . 20% to 30% of taxpayer's income for all types of 

contribgtions except those to organizations not 

supported by the public to which the 20% limit 

still applies. 

3) 5-year carryover was permitted for mused charitable contribgtions, still subject to the 30% 

limitation each year. 

4) Deductions for child care were liberalized and a 

new deduction for moving expenses was added. 

5) The Act permitted a minimgm standard deduction of 

$300 for each taxpayer plgs $100 for every

exemption allowed the taxpayer (up to a maximiJm of 

$1,000). 

B. Canital Gains 

1) The percentage inclusion was reduced for capital

gains on sales of securities held more than 2 

years from 50% to 40%. 

2) The alternative tax on capital gains was cht from 

25% to 21%. 

3) Special capital gains tax reductions were deleted. 

C. Aged 

1) Retirement income credit was reduced from 20% to 

15%. 

2) 3 more special provisions were added: 
- 34. -

a) Profits from the sale of the principal

residence by persans'65 years and over were 

given a one-time capital gains exemption of up 

to $20,000; 

b) For a husband and wife both over 65, the 

limit on income sgbject to retirement credit on 

joint retgrns was raised 50% from $1,524 to 

$2,286; 

c) Cost of medicines and drugs pgrchased by 

persons over 65 was made fully deductible. 

D. Income Averaaina 

1) Averaging of income over .a 5-year period was 

allowed if income in the cgrrent year exceeded the 

average of the four prior years by 33-1/3 percent 

and this excess was greater than $3,000. 

2) Averaging was available to taxpayers who had been 

self-supporting for 5 years. 

E. Stock Options 

Limited stock option privilege was provided to cases 

where it was used for incentive purposes and the 

chance of manipulation was eliminated: 

1) stock must be heid for 3 years or more; 

2) Option must not be for a period of more than 5 

years; 

3) The option price must be at least equal to'the . market price of the stock when the option was 

issged; 

4) Stockholders' approval for the options must be 

obtained; 

5) The extent to which new options could be exercised 

when old options were outstanding was restricted. 
- 35 -

F. 

I 

G. 

Sick Pay 

Redesigned to be of assistance primarily to persons

with long illnesses: ' 

1) The exclusion was restricted during the first 30 

days of absence to $75 per week or 75% of 

employee's regular pay (whichever was less) ; 

2) No exclusion was permitted during the first 30 

days if the employee's sick pay exceeded 75% of 

reg u1 a r pay ; 

3) The full $100 exclwion per week would continue to 

apply only after an absence of 30 days. 

Other Changes 

1) Premiums paid by employers on coverage above 

$50,000 mder grogp-term insurance plans would be 

included in the taxable income of employees. 

2) Capital losses could be carried forward against

capital gains and at least $1,000 of ordinary 

income per year for an indefinite period rather 

than the 5-year limit under prior law. 

3) Personal holding company provisions were 

tightened. 

4) The 1962 rgle which disallowed as a deduction a 

portion of travel expenses for certain business 

trips which are combined with a vacation was 

repealed. 

5) An interest dedgction was denied for amognts 

borrowed gnder a systematic plan to pay premiums 

OR life insurance. 

H. Final rate structure began at 14% and ended at 70% in 

a s3bstantial downward revision of the marginal tax rate 

schedgle. Instead of two $1,000 brackets, the rate 

schedgle began with four $500 brackets. The top 

bracket began at $100,000 taxable income rather than 

$200,000 as before. 
- 37 -

Tax Reform Act of 1969 

A. Increases in Personal Exemption and Standard Deduction 

1) The personal exemption was increased from $600 to 1 $625 for calendar year 1970; to $650 on Jgly 1, 1970; 

to $650 for 1971; to $700 for 1972; and to $750 for 

1973 and thereafter. 

2) .The standard deduction was increased to 13% with a 

$1,500 ceiling in 1971; to 19% with $2,000 ceiling in 

1972; and to 15% with a $2,000 ceiling in 1973 and 

thereafter. (Ceilings for married taxpayers filing 

separate retgrns were 1/2 the above amounts.) 

B. Low-income Allowance Revised Over 3-year Period 

The prior minimgm standard deduction of $200 plus 

$100 per exemption with a $1,000 limit was changed to 

a flat $1,000 minimum standard dedgction. The new 

minimiJm standard deduction was $1,100 in 1970, $1,050 

in 1971, and $1,000 in 1972 and thereafter. 

C. Tax Treatment of Single Persons 

The Act provided a new, lower rate schedule for 

single persons effective in 1971. This assured that 

tax liabilities for single persons did not exceed 17% 

to 20% of liabilities for married couples for taxable 

incomes between $14,000 and $100,000 with the maximum 

differential of 20% reached at a taxable income level 

of 24,000. (Under prior law, the differential could 

be as mxh as 42%.) 

D. Naximum Tax 

The fifty percent maximgm marginal tax rate on 

earned, personal-service income was introdgced. For 

taxable years after December 31, 1970 and before 

Jangary 1, 1972, the maximgm rate was 60% and for 

taxable years beginning Jangary 1, 1972 or later, the 

maximum rate was 50%. 

E. Minimgm Tax on Preference Income 

A 10 percent minimgm tax on tax preference items such 

as exclgded capital gains, excess depletion and 

depreciation, and other tax shelter items was 

introduced In the 1969 Act. 
- 39 -

Tax Reduction Act of 1975 

A. Special Refund of 1974 Individual Income Taxes

�3. 

C. 

D. 

A refund equal to 10% of 

.liability with a maximum 

rules determining amount 

individuals in the lowThe rules also included 

reduced the refund, but 

an individual's 1974 tax 

of $200 was provided. The 

of refund favored 

and middle-income brackets. 

a phase-out provision that 

not below $100 unless an 

individual paid less than $100 in taxes. 

Tax Credit Based on Dependents. 

For 1975, a tax credit equal to $30 multiplied by the 

number of taxpayer and dependent exemptions (but not 

the extra exemptions for age and blindness) was 

enacted. The credit could not exceed the taxpayer's 

income tax for 1975. 

Standard Deduction Increase and Changes 

1) The Act redefined the standard deduction so that 

the amount no longer was based on filing status of 

ind ividual. 

2) It increased the amount of standard deduction that 

could be deducted by all types of individual 

taxpayers. 

39 For 1975, the low-income allowance was $1,600 for 

singles, $1,900 for married persons who filed 

joint returns, and $950 for married couples who. 

filed separately. 

Earned- income Tax Credit (EIC) 

1) The EIC was available only to low-income workers 

who had dependent children and maintained a 

household. 

2) The maximum credit was equal to 10% of a worker's 

first $4,000 of earned income or $400 and was 

reduced by 10% of AGI above $4,000; therefore, it 

was completely eliminated at $8,000 of AGI. 
- 41 -

E. Postpone Tax on Gain From Sale of Residence 

Tax on capital gain from sale of a principal 

residence was postponed if the proceeds were 

reinvested in the pgrchase or constrgction of another 

principal residence within 18 months, rather than 1 

year (as was the case mder prior law). 
- 42 -

Tax Reform Act of 1976. 

A. Minimum Tax for Individuals' 

1) The Act raised the minimum tax rate on preference

income to 15 percent, and the exemption provided

under the minimum tax was reduced to the greater of . $10,000 or 1/2 of the regular tax liability.

2) New preferences items were added for: 

a) Itemized deductions (other than medical and 

. casualty loss) in excess of 60% of AGI; 

b) Intangible drilling costs in excess of the 

amount deductible if capitalized and 'amortized 

over 10 years; and 

c) Accelerated depreciation on all personal 

property slsbject to a lease (including

acceleration that resvJlted from ADR). 

B. Extensions of Individual Income Tax Reductions 

1) General Tax Credit *(Revenue Adjustment Act of 1975). 

The credit was equal to the greater of $35 per

capita or 2% of the first $9,000 of taxable 

income. It was extended for the second 6 months 

of 1976 and for calendar year 1977. 

2) Standard Deduction Made Permanent (Revenue Adjustment 

Act of 1975). 

Minimum standard dedgction remained at $1,700 for 

single returns and $2,100 for joint returns; thre 
- 43 -

percentage standard dedgction remained at 16%; and 

the maximum standard deduction remained at $2,400 

for single returns and $2,800 for joint returns. 

3) Earned-income Credit: 

a) The credit was extended through the last 6 

months of 1976 and calendar year 1977; and 

d' 8 b) Eligibility for the credit was extended to 

pebple with adult disabled dependents and to 

people who maintained a hogsehold for a child 

who was either a student or gnder age 19, but 

who were -not entitled to claim a personal

exemption for the child. 

C. Tax SimPlification for Individgals 

1) Revision of Tax Tables for Individuals. 

New tables for individuals with taxable incomes of 

$20,000 or less to be used by both itemizers and 

those using the standard dedgction were 

established. 

2) Dedgction for Alimony. 

Changed alimony from an itemized deduction to a 

dedtlction in arriving at AGI after December 31, 

1976. 

3) Revision of Retirement Income Credit: 

a) The Act simplified the eligibility on the 

credit and increased the maximum base for 

the credit for a'single person to $2,500 and 

far a married couple to $3,750; 

b) It eliminated the parallel to Social Security

by making the credit available for earned 

income as well as retirement income and renamed 

the provision "credit for the elderly;" 

c) It reduced the maximgm amount of credit base b y

1/2 of AGI in excess of $7,500 for a single 

person and $10,000 for a married couple filing 

a joint retgrn. The maximum amount was redtlced 

by exempted Social Sec3rity and retirement 

income; 

c 
- 44 -

d) For pgblic retirement system ,retirees under 

age 65, the base for the credit was increased 

to the same amounts as for those age 65 

or over . 4) Credit for Child-care Expenses: # 1 1,

a) Theldeduction was converted to a tax credit of 20% 

*, of eligible expenditures. The maximum limit was , $2,000' for one dependent and $4,000 for two or 

more dependents. Also, the $35,000 income limit 

under prior law was eliminated; 

b) The distinction between expenses for services 

inside and ogtside the home for children was 

eliminated; 

c) The credit was extended to married couples where 

one spotlse worked part-time or was a student and 

to a divorced or separated parent who had custody

of the child; 

d) Payments to relatives who are -not dependents of 

the taxpayer were made eligible for the credit if 

the services performed were taxed under Social 

Secljr i ty . 5) Si*k-pay and. Certain Disability Pensions: 

a) The sick-pay exclusion was repealed for temporary

absences from work and the exclusion of LIP to 

$5,200 a year for retirees under age 65 was 

continued only for those who are permanently 

and totally disabled. The $5,200 exclusion 

was redtlced dollar-for-dollar for AGI received 

(including disability income) in excess of * 

$1 5,000; 

b) Disability payments were allowed for injuries to 

civilian government employees that resulted from 

acts of terrorism as it did for combat-related 

injuries granted military disability payments. 

The provision also eliminated the excll.sion for 

non-combat related disability pensions. 

6) Moving Expenses: 

a) The $2,500 maximian dedgction under prior law was 

increased to $3,000 and the 50-mile "distance" 

test was decreased to 35 miles; 
- 45 -

b) The Act exempted in-kind services or reimbursed 

moving expenses for members of the armed forces on 

active duty moved by military orders. It exempted

military moves from .time and mileage requirements

and excluded cash reimbursements or allowances to 

the extent of expenses paid or incurred (as well 

, as all in-kind services provided by the military

from taxable income) from taxable income. 

. 
A. 

- 46 -

Tax Reduction and Simplification Act of 1977 

New Standard Deduction 

The two-part standard dedgction (minimum low-income 

allowance and percentage standard ded,xtion) was 

eliminated apd replaced by a flat standard deduction 

renamed the "zero bracket amount." The amounts were 

$3,200 for married persons filing joint returns, $1,600 

for married persons filing separately, and $2,200 for 

single persons and heads of households. 

B. New Tax Tables and Rate Schedgles 

1) Tables were to be issued by the Internal Revenue 

Service which incorporated standard deduction 

figures, personal exemptions, and the general tax 

credit to be gsed by individual taxpayers regardless

of whether they itemized their deductions. 

2) Election to Itemize Deductions. 

An individual cogld .elect to itemize deductions 

only if these deductions exceed his zero bracket 

amoun t . 3) One-year extension of general tax credit, but 

limited in two ways:, 

a) Taxpayer was entitled to include exemptions for 

age and blindness (not allowed in the 1976 Act); 

and 

b) Married taxpayers who filed a separate retGrn . 

Qsed a $35 per exemption method to compgte the 

general tax credit (the 1976 Act stated that the 
- 47 - greater of one percent of the first $9,000 of 

taxable income or $35 for each personal and 

dependency exemption was to be wed). 

5) A one-year extension of earned-income credit was 

p rov id ed . 
- 48 -

Revenue Act of 1978 

A. Overview of Individual Income Tax Reductions 

. 1) The zero-bracket 

2).New tax brackets 

3) The general tax 

increase in the 

$750 to $1,000). 

4) The gasoline tax 

medical expense 

amount will be increased. 

and rate changes will be instituted. 

credit will be replaced with a $250 

personal exemption (raising it from 

dedsction will be disallowed and the 

deduction simplified. 

B. Bill Provides New Tax Rate Schedules 

1) The zero-bracket amount in the joint return schedule 

will increase from $3,200 to $3,400. For single 

persons and heads-of-households, the increase is from 

$2,200 to $2,300. For married persons filing 

separately, the increase is from $1,600 to $1,700: 

a) The bill will increase the floor mder itemized 

deductions by $200 for joint returns and $100 for 

single, head-of-household, and separate returns; 

b) The zero bracket amount addition to base period

income for income averaging will remain at 

existing levels. 

2) The size of the tax brackets in excess of the "zero 

bracket" will increase by 6 percent. 

3) Three of the lower tax rates will be reduced (the 

present 19, 22, and 25 percent rates will each be 

reduced by one percentage point to 18, 21, and 24 

percent). 
- 49 -

C. 

D. 

'7 

E. 

F. 

r 

Increase in the Personal Exemption 

The personal exemption will increase from $750 to 

$1,000 and the general tax credit will be allowed to 

expire at the end of 1978. 

Filing Income Levels Increased 

.Because of t'he increase in "zero bracket" amounts 

and in the personal exemption, income levels at 

which a tax return must be filed will rise: 

a) New filing levels will be $3,300 for a single 

person, $5,400 for a married couple both of whom 

are under age 65; $6,400 if only one spouse is 65 

or over, and $7,400 if both spouses are age 65 or 

over. 

Earned-income Credit Simplified and Made Permanent 

1) The allowable earned-income credit for any taxable 

year will not exceed the excess of $400 or 10 

percent of the excess of AGI (or if greater, earned 

income) over $4,000; and 

2) Individgals with earned income less than $4,000 and 

AGI greater than $4,000 will receive an increase in 

the amount of credit allowed. 

Itemized Deductions 

1) The itemized deduction for state-local nonblsiness 

gasoline and other motor fuel taxes will be repealed. 

2) The bill will repeal the itemized deduction for one 

half of the cost of medical insurance premiums' (up,to 

$150) without regard to the general limitation that 

medical expenses are deductible only to the extent 

that they exceed three percent of AGI. The bill 

provides that only "prescribed drugs" and insulin 

will be eligible for the medical expense dedgction. 

3) The dedgction for political or newsletter fund 

contributions will be repealed; however, the income 

tax credit for such contributions will still remain 

available. 
- 50 -

APPENDIX B 

Sgpplementary Statistical Mater is1 

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