JATA - Spring 1996

Volume 18, No. 1

The Impact of Personal Credits on the
Progressivity of the Individual Income Tax

Amy E. Dunbar


This research examines the impact of three personal credits, earned income, child care, and elderly, on the progressivity of the federal individual income tax during 1979-1988. Progressivity and income redistribution indices are computed for each credit, using three samples: all filing statuses, married-filing-joint, and combined married-filing-joint and head-of-household. Because married-filing-joint taxpayers are underrepresented in the lower population deciles, credits that can be claimed at an increased rate by low-income taxpayers are sensitive to filing status. The combined sample most clearly shows the effect of tax law changes because it excludes most taxpayers who are not eligible to claim the earned income or child care credits. The progressivity indices indicate that the earned income and the child care credits increased progressivity, while the elderly credit had little effect on tax progressivity because it is small, relative to tax liability. The earned income credit's contribution to income tax progressivity increased after the tax law changes in 1985, 1987, and 1988, as did the contribution of the child care credit after the tax law change in 1982. The redistribution index indicates that only the earned income credit reduces income inequality.

A Cluster Analysis of Horizontal Tax Equity

Ronald Gage Allan and Harvey J. Iglarsh


Horizontal inequity occurs in the federal income tax system when taxpayers with equal ability to pay taxes are not assessed equal taxes. This paper identifies and examines the horizontal inequities that arise from the differential tax treatment of different income sources. The study is based on taxpayer data from the 1988 Individual Public Use Tax File. Cluster analysis is used to separate similarly situated taxpayers into groups with similar source-of-income profiles. Clusters at the same income level are shown to have distinct economic profiles. In a majority of income levels, different clusters have significantly different mean effective tax rates, supporting the proposition that source of income is a determinant of horizontal inequity. In particular, in most income ranges, a cluster with salary income as highest income source has the highest mean effective tax rate. An analysis of dispersion within clusters leads to observations as to which sources of income have higher uniformity of explicit taxation.

Tax Shifting in a Regulated Industry:
An Analysis of the Property
and Casualty Insurance Industry

Cynthia C. Vines


This paper explores the extent to which the property and casualty (P & C) insurance industry shifted the 1986 tax increase to owners, labor, and consumers. The theory of tax incidence suggests that, in general, capital owners bear the burden in the short-run, consumers bear the burden in the long-run, and labor costs are unaffected. However, the degree and timing of the tax shift is hypothesized to vary depending on the rate regulatory regime under which the industry operates. Two competing regulation theories (public good theory and private interest theory) provide predictions on the effect of rate regulation on the shifting to owners, labor and consumers. Using a simultaneous equation model, results indicate that consumers bore the burden of the tax increase, and that rate regulation constrained this consumer price increase.

A Taxpayer Compliance Application of
Beneford's Law

Mark J. Nigrini


This study investigates whether the nonrandom element of human behavior could facilitate the detection of tax evasion. Unplanned Evasion (UPE) is defined to be blatant manipulation by the taxpayer of line items at filing time. Planned Evasion (PE) is the result of planned actions to conceal an audit trail. UPE requires that the taxpayer invent a number(s) for the line item(s).

Beneford's Law (Beneford 1938) is used as an expected distribution for the digits in tabulated data. The assumption is that the digits of data that are truthfully reported, or are subject to PE, should conform to the expected digital frequencies. A Distortion Factor model that quantifies the extent of UPE is developed. Tax returns on the U.S. Internal Revenue Service Individual Tax Model Files are analyzed. The analysis, based on digital frequencies, indicates that Low Income taxpayers practice UPE to a greater extent than High Income taxpayers.