State Revenue Extraction from Different Income Groups: Variations in Tax Progressivity in the United States, 1916 to 1986

Abstract

We examine the conditions that affected the progressivity of the individual income tax in the United States between 1916 and 1986. A multivariate time-series analysis shows how macroeconomic conditions, state imperatives, the organizational capacities of social classes, and political conditions have affected the progressivity and the symbolic component of the income tax. Progressivity is measured by the difference between the effective tax rates paid by moderate income and very high income families. The symbolic component of this tax is measured by the difference between the nominal tax rate and effective income tax rate paid by very high income families. The results reveal that changes in tax progressivity are due largely to macroeconomic and state fiscal conditions, such as unemployment, economic development, and budget deficits, although the organizational capacities of social classes and political conditions, such as labor organization and political participation, also have effects. Changes in progressivity are due primarily to adjustments in the rates paid by very high income families. However, the impacts of these conditions on tax progressivity changed somewhat when the federal income tax was transformed into a mass tax during World War IL Finally, political conditions have a relatively greater effect on the symbolic component of the income tax than on progressivity. Overall, this analysis supports a structural theory of the state in which the influences of politics and social classes on revenue extraction are circumscribed by macroeconomic and state fiscal conditions.