How should distributional tables be interpreted?
Distributional tables provide important and useful information, but here are six key things to keep in mind to correctly interpret the results.
1. What taxes or tax changes are included in the analysis? If the table covers taxes under current law, note which taxes are included and which aren’t. If the table shows the distributional impact of a tax change, particularly an extensive reform proposal, be sure to note which provisions are included or omitted.
2. What is the baseline for a tax change? Ordinarily, the baseline is current law, but that is not always the case. Before the permanent tax changes in the American Taxpayer Relief Act of 2012 (ATRA), economists were uncertain about what “current law” would look like in the future. As a result, some distribution tables used “current policy” —implicitly assuming that Congress would extend tax provisions set to expire or would allow them to sunset—as the baseline.
3. What is the income measure? Income is used in distributional tables to rank households by their “ability to pay”; it is also used to provide measures of tax burdens such as taxes as a percentage of income by income group. Definitions and measurements of income can significantly affect distributional results, so be sure to note which income measure is used. Also, income used to rank households may be adjusted for family size to provide a better comparison of ability to pay across households.
4. What are the household units? Note whether the table includes the population in households that do not file income tax returns. Some distributional tables that rank by quintiles of income typically place a fifth of all households in each quintile. But some tables—including those produced by the Tax Policy Center—place a fifth of the population in each quintile, altering the count of household units in each quintile.
5. What period is covered? Standard distribution tables cover a single year. But some policy changes may have effects over multiple years, and some may be phased in or phased out over multiple years, or be only temporary. Note the way in which any phase-ins, phaseouts, and temporary provisions are represented.
6. What measures of tax burdens are included? Distribution tables typically show alternative measures of “tax burdens.” However, only the percentage change in after-tax income directly measures the effect of a tax proposal on households’ well-being and therefore is a reliable measure of progressivity.
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.