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(Aug 12, 2008) - T07-9999 - Tax Model FAQ

Frequently Asked Questions

1. What are the TPC model's data sources?
2. The model's primary data source is from 2001. How are these data used to model the impact of policies in years after 2001?
3. Does the TPC model include the effects on the entire population or just those who file federal individual income tax returns?
4. Does the TPC model produce analysis at the state level?
5. How does the TPC decide which proposals and policy options to simulate?
6. The TPC's distribution tables show the impact on "tax units". What is a tax unit; is it the same as a family or a household?
7. What is the TPC's preferred measure of the distributional impact of a tax proposal?
8. What taxes are included in the TPC's distribution tables?
9. What incidence assumptions are used in the TPC’s distribution tables?
10. Do the TPC's revenue estimates include behavioral responses to tax changes?
11. Do the TPC's distribution tables include behavioral responses to tax changes?
12. Are the amounts in TPC tables in current or constant dollars?
13. The TPC reports some distribution tables "by percentile". What are percentiles?
14. Is the income classifier in TPC distribution tables adjusted for family size?
15. WWhat are the definitions of the tax terms used in the tables?
16. What is a tax table number?
17. How are the tables organized?


1. What are the TPC model's data sources?

The TPC microsimulation model's primary data source is the 2004 public-use file (PUF) produced by the Internal Revenue Service (IRS). The PUF is a microdata file that contains 150,047 records with detailed information from federal individual income tax returns filed in the 2004 calendar year. Additional information on demographics and sources of income that are not reported on tax returns is obtained through a constrained statistical match with the March 2005 Current Population Survey conducted by the U.S. Census Bureau. Forecasts and projections for future years come from the Congressional Budget Office (CBO), the IRS, and the Census Bureau.

2. The model's primary data source is from 2004. How are these data used to model the impact of policies in years after 2004?

For the years from 2005 to 2019, we “age” the data based on forecasts and projections for the growth in various types of income from CBO, the growth in the number of tax returns from the IRS, and the demographic composition of the population from the Census Bureau. We use actual 2005 and 2006 data when they are available. A two-step process produces a representative sample of the population in years beyond 2004. First, the dollar amounts for income, adjustments, deductions and credits on each record are inflated by their appropriate per capita forecasted growth rates. For the major income sources such as wages, capital gains, and various types of non-wage income such as interest, dividends, social security income and others, we have specific forecasts for per capita growth. Most other items are assumed to grow at CBO's projected per capita personal income growth rate. Second, the weights on each record are adjusted using a linear programming algorithm to ensure that the major income items, adjustments, and deductions match aggregate targets. For years beyond 2004 we do not target distributions for any item; wages and salaries, for example, grow at the same per capita rate regardless of income.

3. Does the TPC model include the effects on the entire population or just those who file federal individual income tax returns?

The TPC's distribution tables show the impact of policies on the entire population: those who file federal individual income tax returns; and "non-filers". After a constrained statistical match between the IRS Public Use File (PUF) and the Current Population Survey (CPS), there are some low-income records in the CPS that are not matched to PUF records. These records are then used to create a sample of non-filers. By combining the dataset of filers from the PUF (augmented by demographic and other information from the CPS) with the dataset of non-filers generated by the statistical match with the CPS, we are able to carry out distribution analysis on the entire population rather than just the subset of the population that files individual income tax returns.

4. Does the TPC model produce analysis at the state level?

No. The TPC does not model the distributional impact of federal tax changes on individual states nor does it model the impact of state tax changes. The PUF – the microdata file that is the primary source for the TPC model – is not representative at the state level and therefore cannot be used to model the impact of policies on individual states. The IRS has not released a microdata file that is representative at the state level since 1988. Despite the data limitations, the TPC is currently exploring ways to develop state-level analyses.

5. How does the TPC decide which proposals and policy options to simulate?

The TPC provides analysis of all major individual income tax bills that reach the tax-writing committees. We also provide analysis of other proposals that are of particular interest or garner substantial attention. TPC scholars also use the model in their own research agendas. For example, we have published information about the looming problem of the alternative minimum tax (AMT), including estimates of the number and distribution of individuals that will be affected by the AMT, and the amount of revenue expected to be raised through the AMT. We have also published extensive analysis of possible estate tax reforms.

6. The TPC's distribution tables show the impact on "tax units". What is a tax unit; is it the same as a family or a household?

A tax unit is an individual, or a married couple who file a tax return jointly, along with all dependents of that individual or married couple. A tax unit is therefore different than a family or a household in certain situations. For example, two persons cohabiting would be considered one household but if they were not legally married, they would file separate tax returns and thus be considered two tax units. A family could consist of a married couple and the wife's elderly mother who lives with them. That family would be considered two tax units since, if the elderly mother had a large enough income, she would be required to file a federal income tax return on her own. Thus the number of tax units will tend to be larger than the number of families or households reported elsewhere.

7. What is the TPC's preferred measure of the distributional impact of a tax proposal?

There is no perfect measure of distributional impact and so the TPC reports several different measures in our tables. The most informative may be the percentage change in after-tax income. A tax cut that gives everyone the same percentage increase in after-tax income leaves the relative distribution of after-tax income unchanged. A tax cut that increases after-tax income proportionately more for lower- than for higher-income taxpayers will make the tax system more progressive (or less regressive). One that increases after-tax income more for higher-income taxpayers than for lower-income taxpayers will make the tax system less progressive (or more regressive). We also report the share of the total tax cut received, the average size of the tax cut in dollars and as a percent of tax paid, and the average tax rate before and after the proposal. See Measuring the Distribution of Tax Changes for more information.

8. What taxes are included in the TPC's distribution tables?

Most of our tables now include federal individual and corporate income taxes, payroll taxes for Social Security and Medicare, and the estate tax. Before March 2004, our tables generally included only the individual income tax.

9. What incidence assumptions are used in the TPC’s distribution tables?

A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translates into lower wages and is thus ultimately borne by workers. There is not a consensus, however, on the economic incidence of other taxes, such as the corporate income tax.

The Tax Policy Center’s incidence assumptions follow those adopted by the Congressional Budget Office and the Department of the Treasury. In particular, our tables assume the following: the individual income tax is borne directly by individual income taxpayers; both the employee and employer share of payroll taxes are borne by the employee; the corporate income tax is borne by recipients of capital income (interest, dividends, capital gains, and rents); and the estate tax is borne by decedents.

10. Do the TPC's revenue estimates include behavioral responses to tax changes?

In almost all cases, the answer is no. Our revenue estimates are static impacts on tax liability. This means that in the case of certain policy proposals, our revenue estimates cannot be directly compared with those of the Joint Committee on Taxation (JCT). For example, JCT assumes that an increase in the top marginal tax rate will shift income away from wages and salaries and toward untaxed benefits and thus would raise a smaller amount of revenue than a static analysis would suggest. In a few instances, we have incorporated behavioral response in our revenue figures using estimates of elasticities of taxable income from the academic literature.

11. Do the TPC's distribution tables include behavioral responses to tax changes?

No. By convention, only the static impacts of tax changes are distributed. Whether or not to include behavioral responses to tax changes is particularly important when dealing with changes to tax rates on realized capital gains. A reduction in the marginal rate on capital gains causes increased realizations and could lead to higher taxes being paid. But the increase in taxes paid because of the voluntary increase in realizations is not an actual increase in tax burden. Because of this, TPC distributes only the change in taxes paid on the realizations that would have occurred without the rate change.

12. Are the amounts in TPC tables in current or constant dollars?

To be consistent with the revenue estimators at the Joint Committee on Taxation, Treasury, and CBO, TPC reports revenue estimates in current dollars. The average tax cut in our distribution tables is also reported in current dollars, unless otherwise noted. The income classifier in distribution tables produced by the latest version of our tax model is in 2008 dollars, however. The use of constant dollars for our classifier ensures that the tax units in the $40,000 - $50,000 income range in a 2010 distribution table, for example, can be more directly compared to those in that same income class in a 2008 distribution table.

13. The TPC reports some distribution tables "by percentile". What are percentiles?

In its distribution tables, the TPC groups tax units into categories by either their dollar income (for example, all tax units with incomes between $30,000 and $40,000) or by where their income ranks relative to the income of all other tax units. For example, tax units in the "Top 1 Percent" have incomes that are higher than at least 99 percent of the population. In the tables that rank tax units by percentiles, we sort the tax units by their income from lowest to highest, determine the number of people in each tax unit, and then split the population into five equal groups or "quintiles". Each quintile thus contains 20 percent of the total number of people. For example, the "Lowest Quintile" contains the tax units consisting of the 20 percent of the population with the lowest incomes. Note that before May of 2008, we placed equal numbers of tax units, rather than people, in each quintile. We also provide a further breakdown within the top income quintile: those in the 80th to 90th percentile; those in the 90th to 95th percentile; those in the 95th to 99th percentile; those in the top 1 percent; and those in the top one-tenth of one percent (i.e. the richest 1 in 1,000).

14. Is the income classifier in TPC distribution tables adjusted for family size?

In the tables in which the classifier is dollar income level (for example, all tax units with incomes between $30,000 and $40,000), that classifier is not adjusted for family size. In the tables in which the classifier is income percentile, we produce both adjusted and unadjusted tables. The standard percentile table on our website is not adjusted for family size. The associated Excel and PDF files contain tables in which the classifier is adjusted. When adjusting for family size, we use the same methodology as CBO and divide the income of the tax unit by the square root of the number of members of the tax unit. Thus, a married couple with two children and income of $100,000 is classified the same as a single individual with no dependents and an income of $50,000.

15. What are the definitions of the tax terms used in the tables?

The Urban Institute's Policy Decoder provides a glossary of important tax and policy terms.

16. What is a tax table number?

Every TPC estimate is assigned a tax table number. All analysis begins with a T, followed by the year and the four-digit number assigned chronologically to the table. For example, the first table of 2008 is T08-0001. The same system is used for descriptions of proposals, but these table numbers begin with a D. This section also includes JCT tables, listed with the number assigned by JCT.

17. How are the tables organized?

Tables are divided into six types: Distribution tables are grouped by dollar income level, income percentile, and the size of tax cut for a tax unit. The table displayed on our website shows a summary of the distributional effect of the proposal for all tax units. The associated Excel and PDF files contain that table as well as several others that provide additional information. These extra tables provide supplementary distributional information as well as information about the baseline. The Excel and PDF files also include the distributional impact on subgroups of the population including a separate table for each filing status, as well as for tax units with children and the elderly. In addition to our distribution tables, we post revenue and other tables, and descriptions of major bills and proposals. The tables are organized by laws, bills, and proposals (e.g. EGTRRA, each stage of the 2003 Tax Cut), by tax topics (e.g. alternative minimum tax, estate tax), and by the year of impact. Tables can be searched by any of these criteria.