Making Tax Policy: A Variance Ratio Approach to Measuring Tax Incidence

By Whicker, Marcia L.; de Lancer Julnes, Patria et al. | Journal of Public Budgeting, Accounting & Financial Management, Spring 2001 | Go to article overview

Making Tax Policy: A Variance Ratio Approach to Measuring Tax Incidence


Whicker, Marcia L., de Lancer Julnes, Patria, Williams, Daniel W., Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. This paper briefly examines previous Lorenz Curve approaches to measuring tax incidence, including the Gini coefficient approach, and Suits's S measurement of tax effects. Both approaches have advantages, but are found lacking in providing useful simple information to policy makers and citizens, especially when comparing proposed but not yet implemented taxes or tax changes. A variance ratio measure, TIC, is suggested to evaluate proposed tax policy changes. This measure uses income data and tax rates to compare the variance for relative tax shares to the variance for income shares. In several examples, TIC performs as expected.

INTRODUCTION

The two chief issues in budgeting are expenditures and revenues. In recent years, revenue discussions have focused on tax reductions. The redistributive impact of proposed tax cuts has often proved secondary in both analysis and decision-making to the implementation and magnitude of tax cuts. Yet, distribution is the core of politics, identified as such by Aristotle as well as subsequent scholars. As a concept, distribution has been central to concerns of political science, economics, and sociology (Allison 1978; Rivlin 1975; Whicker and Strickland 1990; Whicker, Strickland and Olshfski 1993; Slemrod 1994). Little consensus exists on the preferred distribution of income held by individuals, although some theorists argue for equality (Rawls 1971). Increased concern about the distribution of income in the United States grew in the 1980s and 1990s as evidence mounted that distribution was becoming more unequal (Edsall 1984; Phillips 1990, 1993; Dazinger and Gottschalk 1993).

By the end of the 1980s, it was very apparent that the rich were getting richer and the poor were becoming relatively poorer, while the middle class shrunk. According to the U.S. Bureau of Statistics, the share of total income going to the top 20% of all families in 1985 was 43.5%, the highest level since 1947 when such statistics were first compiled. The bottom three-fifths of the population received the smallest share of income ever -- 32.4 %. Thus the top fifth received 11 % more than the bottom three-fifths combined. Nor is this income distribution skew racially neutral, since racial minorities continue to lag behind whites in earnings and have higher incidence of poverty.

Phillips (1990) among others has argued that changes in tax rates and shifting tax burden, in addition to differential income growth across income cohorts, has contributed to the growing disparity in post-tax income distribution. Musgrave and Musgrave (1976), and Okun (1975) have produced the classic tax incidence studies for the United States. These authors derived different estimates of incidence, depending on the assumptions they employed about shifting of tax burden from one income group to another. Under competitive assumptions, the corporate income tax, property tax, and other taxes cannot be passed forward to consumers. With competitive assumptions, the pre-1980s tax system was modestly progressive at the very top and bottom of the income distribution, but proportional over the middle income range. Changing to non-competitive assumptions so that the property tax, corporate income tax, and social security payroll tax could be passed forward to consumers causes even this small amount of progressivity to disappear (Browning, 1978).

Plainly, decision-makers need information about the distributional affects of proposed tax legislation. The purpose of this paper is to examine the information available to policy makers when enacting revisions in the U.S. tax code. It will discuss the need for a simple measure of tax structure incidence that can be readily and easily communicated to the public before tax changes are enacted. One measure -- a variance ratio approach will be suggested. Examples of how the Tax Incidence Coefficient (TIC) could be applied will be provided.

PREVIOUS EMPIRICAL ESTIMATION APPROACHES TO MEASURING TAX INCIDENCE

Various approaches to date have been used to measure tax incidence.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Making Tax Policy: A Variance Ratio Approach to Measuring Tax Incidence
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.