Federal Income Tax Revenue Volatility Since 1966
40 Pages Posted: 8 Nov 2013 Last revised: 26 Apr 2015
Date Written: June 1, 2013
Over the past two decades, the volatility of the United States federal income tax revenue has increased. Looking deeper into the income composition of taxable sources, we find that tax revenue has increased its dependence on volatile — broadly defined--capital income, due in part to an increasing dependence on high-income taxpayers. While the share of capital and business incomes have slightly increased since 1960, most of this increase was driven by net capital gains or losses which share of gross income has more than doubled to about 8.8 percent in 2007. Using individual federal tax files from 1966 to 2007 from the Internal Revenue Service Public Use Files, we identify the sources of federal income tax revenue volatility and find strong evidence that it has been increasingly driven by the volatility of income of high income groups and capital income and less by the volatility of their wage income — and other income groups. Before 1986, both capital income growth and wage income growth were negatively related with income tax growth, suggesting a smoothing effect of taxation. However, after 1986, capital income growth has been positively related to income tax revenue growth, and this positive relationship has increased more than tenfold in 20 years. We also find that this increased dependence of tax revenue growth on capital income is essentially related to top income earners. The results show evidence that capital income growth and tax revenue growth almost continuously increased from the bottom to the top quintile.
Keywords: tax volatility, public revenue, income sources, tax policy, inequality, wage income, capital markets, built-in flexibility
JEL Classification: H2, H21, H24
Suggested Citation: Suggested Citation