U.S. Inequality, Fiscal Progressivity, and Work Disincentives: An Intragenerational Accounting

74 Pages Posted: 14 Mar 2016

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Darryl Koehler

Economic Security Planning

Date Written: February 2016

Abstract

This study combines the 2013 Federal Reserve Survey of Consumer Finances data and the Fiscal Analyzer, a highly detailed life-cycle consumption-smoothing program, to a) measure ultimate economic inequality – inequality in lifetime spending power – within cohorts, b) assess fiscal progressivity within cohorts, c) calculate marginal remaining lifetime net tax rates, taking into account all major federal and state tax and transfer policies, d) evaluate the ability of current income to correctly classify households as rich, middle class, and poor, e) determine whether current-year average net tax rates accurately capture actual fiscal progressivity, and f) determine whether current-year marginal tax rates on labor supply accurately capture actual remaining lifetime marginal net tax rates. We find far less inequality in spending power than in wealth or labor earnings due to the fiscal system’s high degree of progressivity. But U.S. fiscal redistribution generally comes at a price of very high work disincentives for households regardless of age and resource class. There is, however, very substantial dispersion in marginal net tax rates, which seems hard to reconcile with standard norms of optimal taxation. We also find that current income is a very poor proxy for remaining lifetime resources and that current-year net tax rates can provide a highly distorted picture of true fiscal progressivity and work disincentives.

Suggested Citation

Auerbach, Alan Jeffrey and Kotlikoff, Laurence J. and Koehler, Darryl, U.S. Inequality, Fiscal Progressivity, and Work Disincentives: An Intragenerational Accounting (February 2016). NBER Working Paper No. w22032. Available at SSRN: https://ssrn.com/abstract=2747187

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-0711 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4002 (Phone)
617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

Darryl Koehler

Economic Security Planning ( email )

416 S. Ludington Street
Columbus, WI 53925
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
173
PlumX Metrics