A Re-Examination of the Effects of Personal Deductions, Tax Credits and the Tax Rate Schedule on Income Tax Progressivity and Income Inequality

Abstract

We refine and extend Seetharaman (1994) using tax-return-level Statistics of Income data that represent the population of 1992 federal individual income tax returns. Our results indicate that while the standard deduction, exemptions and tax rate schedule continue to contribute the most to progressivity, the rate schedule plays a much greater role (and the standard deduction and exemptions a much lesser role) than previously reported. In addition, consistent with Dunbar (1996), we find that tax credits, in particular the earned income credit, have a substantial effect on overall tax progressivity. Although itemized deductions continue to reduce overall progressivity, with housing costs (mortgage interest and real estate taxes) and state and local income tax deductions being the dominant items, our results indicate that their effect on tax progressivity is smaller than indicated in the earlier study. Finally, we find that the effect of the income tax system on income inequality is more pronounced than previously reported, especially when the data are partitioned by filing status.