How do financing methods affect the distributional analyses of tax cuts?
Tax cuts are financed through reductions in current outlays or higher government debt that will eventually have to be repaid. Distributional analyses omit this information as well as the effects of tax increases on current outlays and debt.
Distributional analyses omit the ways tax cuts and tax increases affect other government finances—either through lower (or higher) spending or higher (or lower) debt. These omissions implicitly assume that lost revenue from tax cuts is never paid for, and that additional revenue from tax increases simply disappears. No one believes these assumptions are realistic, but there is no generally accepted way to include these financing effects. Burman (2007) shows that the distributional effects of the 2001-06 tax cuts are significantly altered if alternative financing effects are taken into account.
Burman, Leonard E. 2007. “Fairness in Tax Policy: Testimony Before the Subcommittee on Financial Services and General Government, House Appropriations Committee.” Washington, DC: Urban Institute.
Congressional Budget Office. 2016. “The Distribution of Household Income and Federal Taxes, 2013.” Washington, DC: Congressional Budget Office.
Cronin, Julie-Anne. 1999. “U.S. Treasury Distributional Analysis Methodology.” OTA paper 85. Washington, DC: US Department of the Treasury.
Joint Committee on Taxation. 2015. “Fairness and Tax Policy.” JCX-48-15. Washington, DC: Joint Committee on Taxation.