U.S.InequalityandFiscalProgressivity:AnIntragenerationalAccounting

AlanJ.Auerbach

UniversityofCalifornia,Berkeley

LaurenceJ.KotlikoffBostonUniversityandTheFiscalAnalysisCenter

DarrylKoehler

EconomicSecurityPlanning,Inc.andTheFiscalAnalysisCenter

April2016,RevisedJune2021

We thank the National Center for Policy Analysis, the Searle Family Trust, the SloanFoundation, theGoodman Institute, theRobertD.BurchCenter forTaxPolicyandPublicFinanceattheUniversityofCalifornia,Berkeley,andBostonUniversityforresearchsupport.We also thank Emmanuel Saez, other participants in the October 2015 Boskin Fest atStanford, participants in the June, 2019 Journées Louis-André Gérard-Varet in Aix-en-ProvenceandtheSeptember,2019MaTaxConferenceinMannheim,andfouranonymousrefereesforveryhelpfulcommentsonearlierdrafts.

Abstract

Inequalityisultimatelyaboutdifferencesinspending,notdifferencesinwealthorincomethat can be offset by fiscal policy. This studymeasures inequality in remaining lifetimespending(RLS)bycohort.Cohortspecificitycontrolsforgrowthandlife-cycleeffects.WemeasureRLSandlifetimenettaxratesbyrunningthe2016SurveyofConsumerFinancesdata plus imputed variables through a life-cycle, consumption-smoothing program thatincorporatesborrowingconstraintsandallmajorfederalandstatetax/transferprograms.Our findingsare striking. First, inequality in incomeand, especially,wealthdramaticallyoverstatesRLSinequality. Forexample,therichest1percentoffortyyear-oldsown29.1percent of their cohort’s net wealth, but account for only 11.8 percent of its RLS. Thiscohort’spoorestquintileownsjust0.4percentofthecohort’swealth,butspends6.6percentof cohort RLS. Second,within-cohort inequality differs considerably from across-cohortinequality.Third,theU.S.fiscalsystemishighlyprogressive.Toillustrate,forthebottomquintileoffortyyear-olds,thelifetimenettaxrateisnegative44.4percent.It’s34.7percentfor the top 1 percent. Fourth, current-year net tax rates substantially understate fiscalprogressivityand,asouranalysisofthe2017TaxCutsandJobsActshows,cansignificantlymisstateafiscalreform’sfairness..

I. Introduction

Inequality isa topicof intensenationaland international interest thanks to theapparent

growth in thedispersionof incomeandwealth around theworld andparticularly in the

UnitedStates.Piketty,Saez,andZucman(2018)reportthataveragerealincomeofthetop

10percentofincome-rankedU.S.householdsgrewby113percentbetween1984and2014,

whiletherealincomeofthetop0.1percentgrewby298percent.Bycontrast,theaverage

real income of the poorest 50 percent grew by 21 percent. Auten and Splinter (2019),

though,arguethattheafter-taxtopincomeshareofhigh-incomeAmericanhouseholdshas

remainedconstantovertimeafteronecorrectsfordatabiasesaswellasmissingdata.

Wealthsharesareevenmoredifficulttoestimate.Butthereseemslittledoubtabout

thegeneraldirectionofwealthinequality.TheCongressionalBudgetOffice(2016)estimates

thatthetotalnetworthoffamiliesinthetop10percentofthewealthdistributionroseby

54percentbetween1989and2013,whereasmedianwealth rosebyonly4percent. By

2013,the50percentpoorestAmericans,rankedbynetworth,ownedamere1percentof

totalnetwealth.1Indeed,therichestthreeAmericans–JeffBezos,BillGates,andWarren

Buffett – collectively ownmore wealth than the poorest 50 percent of Americans, who

number160million!2

As documented by Kopczuk, Saez, and Song (2010), wage inequality, while less

pronouncedthanincomeorwealthinequality, isalsosignificantandgrowing. Studiesby

1Notethatthisranksallhouseholdsbywealthratherthanremaininglifetimeresources,therankingmethodweusebelow.Inour2016SCFdata,thepoorest40percentofhouseholdsages20to79,rankedintermsoflifetimeresources,accountforalmost10percentoftotalnetwealth.2 https://www.forbes.com/sites/noahkirsch/2017/11/09/the-3-richest-americans-hold-more-wealth-than-bottom-50-of-country-study-finds/#330015943cf8

2

GoldinandKatz (2008)andAcemogluandAutor (2011) showa steadyanddramatic75

percentincreaseinthecollege/highschoolwagepremiumoverthelastthreedecades,with

typicalcollegegraduatesnowearningtwicethewageofhighschoolgraduates.3

Thesestudiesareimportantandinterestingbut,forunderstandinginequalitytheyall

fallshort.Nonemeasuresinequalityinremaininglifetimespending(RLS),whichisarguably

theultimateconcernwhenassessingeconomic fairness.4Theshortcomingsare two-fold.

First,theyomitthefiscalsystem.Yetasufficientlyprogressivefiscalsystemcantransform

the most unequal distribution of market resources into a more equal distribution of

resourcesavailableforconsumption.Second,individualcomponentsofcurrentresources,

whetherwealthorcurrentincome,provideaninadequatemeasureofahousehold’soverall

capacitytofinanceconsumption.Suchcomponentsignorebothfuturelaborincomeaswell

asfuturetaxesandtransferpayments,theimportanceofwhichvariessystematicallybyage.

This study uses a life-cycle, consumption-smoothing program, called The Fiscal

Analyzer(TFA),toinferremaininglifetimespendingamongrespondentstothe2016Federal

ReserveSurveyofConsumerFinances.TFAdoeslife-cycleconsumption-smoothingacross

all possible survivor paths taking into account survivor-path specific labor earnings,

borrowingconstraints,federalandstatetaxes,andfederalandstatetransferpayments.Our

goal is measuring remaining lifetime spending inequality controlling for preference

differences.I.e.,weseektounderstandtheprogressivityofourfiscalsystem,notresponses

to it. Our assumptionofuniform (acrosshouseholds)Leontief consumptionpreferences

3See,inparticular,Figure1inAcemogluandAutor(2011).4 By RLS we mean the present value of a household’s remaining expected future lifetime expenditures,including imputed rent on ownedhomes and the household’s expected future bequests,where “expected”references averaging over the realized present value of annual spending along each potential householdsurvivalpath.Wedescribethismeasurefurtherbelow.

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withage-specifictime-preferencefactors(assumedidenticalinourbase-casecalculations)

aswell as exogenous labor supply reflects thisobjective. Assuming thatpreferencesare

identical across households controls for preference differences; and the assumption of

Leontief intertemporal consumptionpreferencesandexogenous labor supplyensuresno

preference-dependentchanges incurrentor future laborsupplyorsaving inresponse to

fiscalworkandsavingdisincentives.

TFAsmoothsconsumptionovertime,butalsooversurvivorstatesbydetermining

annuallifeinsuranceamountsthatdecedentsinyeart,weretheytodieinthatyear,needto

providetoensuresurvivorscanafford,tothedollar,thesamefuturelivingstandardasthey

wouldhaveenjoyedabsentthedecedent’sdeath.Lifeinsurancepurchasesareconstrained

tobenon-negative,i.e.,householdsdon’tbuyannuitiesatthemargin.5

Asdescribedbelow,theTFAdoesitsconsumptionsmoothingovertimeandsurvivor

statesinoneintegrated,iterativeprocess,whichsimultaneouslydeterminesthehousehold’s

pathsofnettaxesandlife insurancerequirementsundereachsurvivorpath. Onceithas

generated its survivor path-specific results, TFA determines each household’s actuarial

expected (average across survivor paths) present value of future spending, including

bequests. The difference between expected remaining lifetime spending and expected

remaining lifetime resources is the household’s expected remaining lifetime net tax

payment.Theratioofremaininglifetimenettaxpaymentstoremaininglifetimeresources

providesourmeasureoflifetimeaveragenettaxrates.Weassessfiscalprogressivitywithin

5ThisiswelldocumentedbyBrown,et.al.(2008)andothers.

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a cohort by considering how these average remaining lifetimenet tax rates changewith

remaininglifetimeresources.6

A. TheRemainingLifetimeSpending(RLS)Perspective

Thereareseveralreasonstotakealifetime-ratherthanacurrent-year(basedoncurrent-

yearwealthorincome)perspectiveinmeasuringinequalityandfiscalprogressivity,andto

dososeparatelyfordifferentagecohorts.First,thepatternsofincome,taxes,andtransfer

payments differ significantly and systematically over the life cycle. A current-year

perspectivemayprovideadistortedviewofahousehold’slifetimespendingcapacityaswell

astheprogressivityofthefiscalsystem.Second,annualvariationsinincome,particularly

due to therealizationofcapitalgains,meanthatannual incomemaybeavery imperfect

indicatoroflonger-runspendingcapacity.Finally,householdsatdifferentages,atdifferent

stages of the life cycle, have incomes, taxes, and transfer payments that relate quite

differently to longer-run spending capacity. For example, a retiree who is a year from

collecting their Social Security benefits and starting his or her retirement account

withdrawalsmayhavefarhigherincomeinfutureyears.

Unfortunately,RLSmustbe inferred. Itcan’tbesolicited inasurvey.Thereare,of

course,dataoncurrent-yearconsumption(see,e.g.,MeyerandSullivan,2017). But,even

with consumption smoothing, current consumption may be an inadequate indicator of

6Ourcalculationofaveragenettaxratesisresource-weighted.Thatis,ratherthansimplyformingtheratioT/Rforeachhouseholdwithinacohort-specificresourcepercentilerangeandthenapplyingSCFpopulationweights, we instead apply resource weights. This places smaller weight on outlier households that haveexceptionallylargeorsmallnettaxrates,butwhorepresentarelativelysmallshareoftheresourcedistribution.The resource-weighted average net tax rate for any group is just the group’s population-weighted sumofexpectedremaininglifetimenettaxpaymentsdividedbythepopulation-weightedsumofexpectedremaininglifetimeresources.

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remaininglifetimespending.Borrowingconstraintsofhousehold-specificdurationdepress

many,ifnotmosthouseholds’currentrelativetotheirfutureconsumption.Householdsalso

leavebequests,whichwetreatasaformofconsumption.Whetherintended,accidental,or

involuntary(e.g., trappedhomeequity),bequestscanrendercurrentconsumptionapoor

proxyforfutureconsumptionand,therefore,RLS.

We measure both RLS and fiscal progressivity based on a) estimated lifetime

resources–thehousehold’scurrentnetwealthanditssurvivor-pathcontingentcurrentand

projectedfuturelaborearnings;b)itscalculatedsurvivor-pathcontingentcurrentandfuture

taxesnetofin-cashandin-kindbenefits;andc)assumedlife-cycleconsumption-smoothing

behavior, captured by an assumeduniform, across households, desired longitudinal age-

consumptionprofile(ACP),subjecttoborrowingconstraints. Again,weconsideruniform

intertemporalpreference–thesamedesiredACP–sinceourfocusisonresource-driven,not

behavior-driveninequalityinRLS.

Ouranalysisincorporateseconomiesofsharedlivingandtherelativecostofchildren.

Hence,ACPisshorthandforthelongitudinalageprofileoflivingstandard(consumptionper

equivalentadult).Ourbasecaseconsiders full consumptionsmoothing, i.e.,a flatdesired

ACP,butourresultsarelittlechangedbypositingalternativeACPshapes.Regardlessofthe

ACP targeted, age-living standardprofilesare largelydictatedbyborrowingconstraints.7

Indeed,inourbasecase,theactual,asopposedtotargeted,ACPisupwardsloppingthrough

retirement for the average household. Moreover, actual ACPs differ dramatically across

householdsduetodifferencesintiming,duration,andseverityofborrowingconstraints.

7I.e.,borrowingconstraintsoverrideassumedACPpreferences.

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Onemightquicklyobjectthatconsumptiongrowthratesvarybyhouseholddue,not

just, asmentioned, differences in intertemporal preferences, but also risk.8 We plan, in

futurework, to explore the interplaybetween resource inequality, preferences, risk, and

government policy. But a first step in that process – the one taken here – is examining

spending inequality and fiscal progressivity controlling for differences in intertemporal

preferences,labor-leisurepreferences,andrisk.

To form our measures of RLS and fiscal progressivity, we run the 2016 Federal

ReserveSurveyofConsumerFinances(SCF)samplethroughTheFiscalAnalyzer(TFA).9As

described below, TFA does iterative dynamic program. Specifically, it iterates to

convergenceacrossthreeprograms–aconsumptionsmoothingprogram,alifeinsurance

program,andanettaxprogram.Eachprogrampassesitsresultstotheothertwoprograms,

which take those results as inputs. TFA’s solutions are highly precise and can easily be

verifiedviasevendifferenttestsdiscussedinnote18below.

B. HouseholdRemainingLifetimeBudgetConstraints

Alonganyrealizedsurvivalpath,i,ahousehold’srealizedpresentvalueofremaininglifetime

spending, discretionary plus non-discretionary, is denoted Si. The household’s

intertemporalbudgetrequires

(1) 𝑆! = 𝑅! − 𝑇! ,

8Risksmayalsodifferacrosshouseholds. Thisquestion, too isreservedfor futureresearch.Differences inintertemporalconsumptionpreferencesmayreflectbehavioralfactorsidentifiedbyLaibson(1997)andothers.Whilewe assume uniform retirement ages, our earnings projections are predicated on reported earnings,whichreflectacombinationoflaborsupplychoiceandwagerates.9Thisprojectinitiallyreliedonthe2013SCF,switchingtothe2016SCFwhenitbecameavailable.Theresultsfromthe2013SCFareremarkablysimilartothosereportedhere.

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where Ri and Ti reference, respectively, the realized present values of the household’s

remaining lifetime resourcesand remaining lifetimenet taxesalong survivalpath i. The

realized present value of remaining lifetime resources,Ri, is the sum of the household’s

currentnetwealth,W,andtherealizedpresentvalueofitsfuturelaborearnings,Hi.I.e.,

(2) 𝑅! = 𝑊 +𝐻! .

Theexpectedpresentvalueofremaininglifetimespending,S,resources,R,andnettaxes,T,

satisfy

(3) S=∑ 𝑝!𝑆!! ,

(4) H=∑ 𝑝!𝐻!! ,

(5) T=∑ 𝑝!𝑇!! ,

and

(6) R=∑ 𝑝!𝑅!! ,

wherepiistheprobabilitythehouseholdexperiencessurvivalpathi.Theaboveequations

imply

(7) 𝑅 = 𝑊 +𝐻

and

(8) 𝑆 = 𝑅 − 𝑇.

Again,whileinequalityinRanditstwocomponents,WandH,maybeofindependent

interestandhavebeenthesubjectofconsiderablerecentresearch,ourfocusisonultimate

inequality, i.e., inequality inS. Wewould certainly anticipate thatS, likeR, is extremely

unequallydistributedintheUnitedStates.Thissaid,akeypolicyquestionistheextentto

whichprogressivityinthedistributionofTmitigatesinequalityinthedistributionofS.

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Clearly,wereTproportionaltoR,inequalityinRwouldequalinequalityinS,making

ourmeasurement taskmuch simpler. But that’s not the case due to a range of factors

includingprogressiveexplicitandimplicit(embeddedinbenefitprograms)taxschedules,

householddemographicdifferences,implicitmarriagetaxes,differenttaxtreatmentoflabor

andassetincome,andhouseholddifferencesinactualACPsarisingfromhousehold-specific

borrowing constraints. DeterminingT requires knowing taxable labor and asset income

alongeachsurvivorpath.Asindicated,weprojectlaborincome.Asforasset-incomepaths,

theydepend,inpart,onspendingpaths,which,inturn,depend,inpart,onnettaxpaths.In

short,spendingdependsontaxesandtaxesdependonspending.Anotherkeysimultaneity

involvestheinterdependencybetweenpathsoflifeinsuranceholdingsrequiredtoprotect

survivors and spending paths. The more life insurance the household holds, the more

premiumsitpaysandthelessitcanspendwheninsuredsarealive.Butthelesshouseholds

spend, the less life insurance required to maintain survivors’ living standards when an

insuredindividualdies.TFA’siterativesolutionmethodwasdeveloped,inpart,toresolve

thesechickenandeggproblems.

Allelseequal,oldercohortswillhavesmallervaluesofSsimplybecausetheyhave

feweryearslefttolive.Hence,ourstudymeasuresinequalityinSonacohort-specificbasis,

i.e.,wedo intragenerational accounting.We compare cohort-specific inequality inSwith

cohort-specificinequalityinWandH,anddeterminesthedegreetowhichcohort-specific

inequality in T reduces cohort-specific inequality in S. 10 We also show that fiscal

10Indoingso,wedon’tconsidertheextenttowhichchanges ingovernmentpolicythroughThavegeneralequilibriumeffectsontheelementsofR,aswillbethecaseifgovernmenttaxandtransferprogramsinfluencedecisionstoworkandsave.Thus,ourestimatesoftheimpactofgovernmentpolicyonprogressivityareofapartialequilibriumnature,takingtheunderlyingdistributionofresourcesasgiven.

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progressivitymeasured,within cohort, via the average remaining lifetimenet tax rate,t,

definedinequation(9),candiffermarkedlyfromthestandardfiscal-progressivitymeasure

– current-year grossornet taxesdividedby current-year income,which is generallynot

differentiatedbyage.

(9) 𝜏 = 𝑇𝑅- .

Theterm“nettaxes”referencesallmajorfederalandstatetaxandtransferprograms,

includingthefederalpersonalincometax,theFICApayrolltax,stateincometaxes,statesales

taxes,federalexcisetaxes,thefederalcorporateincometax,thefederalestatetaxes,state-

specificTANFwelfarebenefits,state-specificSNAP(FoodStamps)programs,Supplemental

Security Income, state-specific Obamacare (ACA) healthcare subsidies, Social Security

retirement benefits, Social Security auxiliary benefits, Social Security disability benefits,

state-specificMedicaidbenefits,Medicarebenefits,MedicarePartBpremiums (including

IRMMApremiums),andSection-8housing.11DetailsofTFA’staxandtransfercalculations

areprovidedinouronlineappendix.12

C. ValuationofFutureFlows

Inequality, in our view, primarily concernswho gets to spend the economy’s resources,

where both spending and resources are valued in the present. As discussed below, our

11Wedonotincludestateestatetaxesorlocalpropertytaxes.Section-8housingisrationed.Weincorporatethisfactinourcalculations.12Forexample, inhandlingthefederalpersonalincometax, itfollowsthe1040formonaline-by-linebasistakingintoaccounttheitemizationdecision,theEarnedIncomeTaxCredit,theChildTaxCredit,theAlternativeMinimum Tax, preferential capital gains and dividend taxation, the tax treatment of contributions to andwithdrawalsfrom401(k),standardIRA,Roth,andotherretirementaccounts,thetaxationofSocialSecuritybenefits, and Medicare’s high-income taxation of wages and asset income. For the Social Security benefitcalculation,asanotherexample,TFAincludestheEarlyRetirementBenefitReductions,theDelayedRetirementCredit, theEarningsTest, theAdjustmentof theReductionFactor, theRe-ComputationofBenefits,and thesystem’splethoraofinterconnected,acrossfamilymembers,benefit-eligibilityconditions.

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discountrateistheeconomy’saveragepre-taxrealreturn,whichprovidestheaverageterms

onwhichfutureresourcescanbetradedforcurrentresourcesandfuturespendingcanbe

tradedforcurrentspending.Yet,theintertemporaltermsoftradeavailable,onaverage,to

theeconomyarenotnecessarilythetermsatwhichanyparticularhouseholdscanconvert

future resources into current spending. Cash constrained households likely subjectively

discountfutureresourcesandspendingatanevenhigherratethanthealreadyquite-high

averagerealreturnonnationalwealth.

Since the realized path of pre-tax real returns comes into play in the economy’s and, indeed,

government’s budget constraint, our perspective on inequality is that of the government. This has

the merit of considering the allocation of the economy’s resources in a manner that obeys the

economy’s and government’s intertemporal budget constraints.13 Thissaid,wedotakeupthe

issue of valuation and borrowing constraints in our final section on sensitivity analysis.

Specifically,werecalculateourpresentvaluemeasuresplacing50percentweightonnet

taxes, resource flows,andspending inyearsafter thehouseholdbecomesunconstrained.

Remarkably,ourportraitofinequalityandprogressivityislittlechangedbythisalternative

valuationmethod.14

D. FiscalLabelingIssues

13Theeconomy’s intertemporalbudgetequatesthepresentvaluesofrealizedannualresourcesandannualspendingdiscountedattherealizedannualreturntonationalwealth.Thegovernmentintertemporalbudgetequates the present value of realized annual receipts to the present value of realized annual outlays alsodiscountedattherealizedannualreturntonationalwealth.14Wealsotaketheperspectiveofthegovernment’sbudgetconstraintinvaluingtransferprograms,whethercashorin-kind,atcost,ratherthanattemptingtoscalebytheunobservablevaluesthatindividualsmayplaceonthem.Largedifferencesbetweencostandvaluationwouldcertainlyraisethequestionoftheoptimalityofgovernmentpolicy,whichisbeyondthescopeofouranalysis. Forthesamereason,wedonot includethedeadweightlossassociatedwithtaxandtransferpoliciesinassessingthesepolicies’benefitsorburdenstoindividuals.

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Aswe emphasized inpriorwork (e.g., Kotlikoff, 1984 and1988,Auerbach andKotlikoff,

1987, Auerbach, Gokhale, and Kotlikoff, 1991, Kotlikoff, 2002, and Green and Kotlikoff,

2006), many macro measures, like GDP and consumption, are well-defined. But others,

whichdependonarbitraryfiscallabelingconventions,includingtaxes,transferpayments,

and deficits, are not. 15 Forward-looking measures such as those considered here

substantiallylessentheproblem;thiswasoneoftheimportantmotivationsforourprevious

workdevelopinggenerationalaccounting.Forexample,achangesimplyinfuturelabeling

ofsocialsecuritytransactions,fromthetaxesandtransfersundera“public”systemtothe

purchaseofgovernmentbondsandfuturedebtserviceundera“private”system,wouldhave

no impacton remaining lifetimespending, even though itwouldchangeannual reported

flowsoftaxesandtransfersandputSocialSecurity’sunfundedliabilityonthebooks.Still,

some types of government policy interventionswould affect ourmeasures aswell. For

example, a policy equivalent to raising the minimum wage could be constructed using

governmenttaxesonemploymentandnon-employmentrelatedtransferstoworkers;our

approach would not yield the same average tax rate calculations for these equivalent

policies,becausewetakemarketwagesasgiven.Giventhelabelingproblem,weneedtobe

preciseastowhatourremaininglifetimenettaxratestellus.Theytellusthepercentage

reduction in the present value of remaining lifetime spending relative to the lifetime

spending that would arise were government taxes and transfer payments, as currently

labeled/definedbygovernment,totallyeliminated.16

15Different,butequallyvalidfiscallabelingconventionswillchangeWandTbyequalabsoluteamounts.Hence,asdescribedbelow,averagenettaxratesdependonthespecificconventionsused.16The labellingproblemisarguably lessproblematic for theyoungestcohort, those20-29,since theyhavespent lesstimeunderthe fiscalsystemand, thus, lesstimehavingtheirpaymentstoandreceipts fromthegovernmentlabeledarbitrarily.Thequalitativeresultsforthiscohortarethesameasfortheoldercohorts.

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E. PreviewofFindings

Ourfindingsarestriking.Undercurrentlaw(includingtheprovisionsoftheTaxCutsand

Jobs Act of 2017, and assuming those provisions are permanent), the distribution of

remaininglifetimespending,whilehighlyunequal,isconsiderablymoreequalthaneither

netwealthorcurrentincome.Forexample,thetop1percentof40-49year-oldsrankedby

resourcesaccountfor29.1percentoftotalcohortnetwealth,butonly11.8percentoftotal

cohort remaining lifetime spending. As for the lowest-resource quintile, it has just 0.4

percentofthecohort’snetwealth,but6.6percentofitstotalspendingpower.

Partoftheexplanationisthatspendingdepends,inpart,onhumanwealth,whichis

farismoreequallydistributedthanisnetwealth.Thetop1percentofthiscohortaccount

for10.0percentofthecohort’shumanwealth,whichisroughlyathirdofitsnetwealthshare.

Thebottom20percenthave4.3percentoftotal-cohorthumanwealth–roughlytentimes

itsnetwealthshare.Theotherreasonwhyspendinginequalityisfarlessseverethanwealth

inequality is the fiscal system. The average remaining lifetime net tax rate of the top 1

percentof40year-oldsis36.0percent.It’s-44.4percentamongthoseinthelowestquintile.

Which factor – greater equality in the distribution of human wealth or our

progressivefiscalsystem–makesthedistributionofremaininglifetimespendingsomuch

moreequalthanthatofnetwealth?Theanswerdepends.Withnofiscalsystem,therichest

1percentof40-49year-oldswouldaccountfor13.8percentofRLS(theirresourceshare),

whichisfarbelowtheir29.1percentofnetwealthandclosetotheir11.8percentshareof

RLStakingtaxesandtransfersintoaccount.Hence,thelessunequaldistributionofhuman

wealthplaysthekeyroleinlimitingthespendingshareofthetop1percent.Forthepoorest

20percent,withjust0.4percentoftotalcohortnetwealth,theirshareofcohortpre-fiscal

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resources is 3.5 percent comparedwith a 6.6 percent share of total cohort spending.17

Hence, themoreequaldistributionofhumanwealthand fiscalpolicyplay roughlyequal

rolesinraisingtheRLSshareofthepoorestquintile.

Ourresultsarequalitatively,ifnotquantitativelysimilaracrosscohorts.Withineach

cohort, those with the lowest resources face significantly negative average remaining

lifetimenettaxrates,andthosewiththehighestresourcesfacesignificantlypositiveaverage

remaininglifetimenettaxrates.Consider,again,thecohortaged40to49.Eachdollarof

remainingpre-taxlifetimeresourcesofthoseinthetop1percentoftheresourcedistribution

istaxed,onaverage,ata34.7percentnetrate.Forthoseinthetopquintiletheaveragenet

taxrateis30.7percent.Butforthoseinthebottomquintile,everydollarofpre-taxresources

is,torepeat,matchedbya44.4percentnetsubsidy.Nowconsiderthoseaged60-69inthe

top1percentoftheircohort’sresourcedistribution.Theirremaininglifetimenettaxrateis

25.7percent.Incontrast,thoseinthelowestquintilefaceanegativeaverageremainingnet

tax rateof -601.2percent, reflecting theirproximity to receivingwhat for this groupare

vitallyimportantSocialSecurity,Medicare,andMedicaidbenefits.

Interestingly, longevity plays a relatively small role in determining fiscal

progressivity.Averagenettaxratesofthoseinthepoorestquintileineachcohortwouldbe

lower,butnotmuchlower,weretheytoliveaslongasthoseinthetopquintileand,thereby,

collectfarmorebenefits.Takethelowestquintileof40-49year-olds.Theirnegativeaverage

nettaxratewouldfallto–48.1percentfrom–44.4percent.

F. OrganizationofPaper

17Thisisslightlylowerthantheir4.3percentshareofhumanwealth.

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ThepaperproceedsinSectionIIwithashortliteraturereview.SectionIIIdiscussesTFA’s

methodology. Section IVpresentsourdataandprojections.SectionVprovidesourmain

results,firstforthe40-49year-oldcohortandthen,inlessdetail,forothercohorts.Section

VIprovidesanillustrationofthemodel’scapacitytoevaluatechangesintaxpolicy,usingthe

2017 Tax Cuts and Jobs Act, and compares our findings to those based on traditional

approaches.SectionVIIdiscusses thesensitivityofourresults toparticularassumptions.

Finally,SectionVIIIconcludeswithareviewofourkeyfindingsandtheirimplications.

II. PriorStudiesofFiscalProgressivity

SincetheclassicworkofPechmanandOkner(1974),thestandardapproachtocalculating

thedistributionaleffectsoffederaltax,orfederaltaxandtransferpolicyhasbeentoclassify

individualsorhouseholdsbypre-tax income,possiblyadjusting for familysize,and then,

usingparticular assumptionsabout tax incidence (whobears theultimateburdenof any

particulartax),toassigntaxesandtransferstodifferenthouseholds.ThePechman-Okner

methodology has been retained, with refinements, notably in the continuing series of

analysesbytheCongressionalBudgetOffice(CBO;mostrecentlyinCBO,2014).Suchstudies

generallyfindtheU.S.fiscalsystemtobeprogressive,withthepersonalincometax(inclusive

ofsuchelementsastheEarnedIncomeTaxCredit)playinganimportantrole.

Economists have long suggested that current consumption, which is a proxy for lifetime

net of net-tax resources, rather than current income was more appropriate in distinguishing the

permanently rich from the permanently poor. Poterba (1989), for example, compares the

progressivity of excise taxes based on classifying households by annual income with that based on

classifying households by annual consumption. He shows that the first approach makes excise

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taxes look much more regressive than the second. Meyer and Sullivan (2017) find that the trend

in increasing U.S. inequality based on income, even when accounting for taxes and transfers, is

much less evident when one looks at household consumption, not only because of consumption

smoothing but also because of the difficulties of measuring certain sources of income.

Fullerton and Rogers (1993) build on Poterba’s insight, considering the lifetime

incidenceoftaxsystemsmoregenerally.Altig,etal.(2001)carrythisapproachfurtherby

performingsuchanalysiswithinageneralequilibriummodelwithrational,forward-looking

households making lifetime planning decisions with respect to consumption and labor

supply.Thesestudies,however,consideronlyasubsetofU.S.programsandmodelthemin

broad,ratherthanfinedetail.

Favreault,Smith,andJohnson(2015)’smajorimprovementstotheUrbanInstitute’s

classicmicro-simulation DynasimModel provide a powerful tool for assessing the fiscal

system’simpactonhouseholdsnotjustinthepresent,butthroughtime.Theirmodelgrows

its sample demographically and stochastically, tracing likely socioeconomic and fiscal

impactsarisingfrompredictableandunpredictablechangesthroughtime.Theirframework

hasimportantadvantagesoveroursinconsideringtheinterplaybetweenbehaviorandfiscal

outcomes.However,Dynasimprojectsoutcomesusingreduced-formbehavioralfunctions,

whereas with borrowing constraints, one needs to solve for behavior using dynamic

programming,i.e.,workingbackwards.Thismakesthemicrosimulationinappropriatefor

achievingourgoal,namelyaddressinginequalityandthefiscalsystemholdingconstantthe

reactiontothefiscalsystem.

Somerecentanalyseshaveconsideredtheimpactsofparticularcomponentsofthe

fiscalsystemonprogressivity,attemptingtoincorporatethefullrangeofprogramdetailsin

16

theiranalysis.Forexample,Goda,Shoven,andSlavov(2011)estimatetheprogressivityof

the U.S. Social Security system within particular age cohorts, taking careful account of

programprovisions aswell as the projectedmortality of individuals in different lifetime

income groups. Longevity is an important consideration, because Social Security is an

annuity-based transfer program. This is the type of analysiswe performhere. But our

actuarialanalysisisoftheentireU.S.fiscalsystem,ratherthanofaparticularcomponent.

Whilestudyingindividualfiscalcomponentsisinterestinginitsownright,ourfocusison

the fiscal system’s overall effects. This requires considering all major fiscal-system

componentsatthestateaswellasfederallevels.

ArecentpaperbyBengtsson,Holmlund,andWaldenstrom(2016)comesclosestto

ours in focusing on lifetime fiscal progressivity and comparing lifetime with annual

progressivity.TheauthorsuseofficialSwedishdatatotrackindividualsovertheyears1968

through2009.Theirmainfindingisthatfiscalprogressivityisgreateronacurrent-yearthan

onalifetimebasis.Wefindtheopposite,butourresultsarehardlycomparablegivenkey

measurementandmethodologicaldifferencesaswellastheirfocusonSweden,whichhasa

verydifferentfiscalsystemthantheU.S.18

18First,theSwedishgovernmentappearstobemuchmoregenerousthantheU.S.tothemiddleclass.Second,we incorporate all transfer programs, including in-kind transfers, such as healthcare. Third, we includeadditionaltaxes,includingcorporateandfederalestatetaxes.Fourth,weexaminethefiscalsystematapointintime,ratherthanlookingatfiscalrealizationsthroughtime–realizationsthatreflectbehavioralresponsesandoutcomesparticulartotheirsampleperiod.Fifth,theymeasurelifetimeincomeasthediscountedsumofrealizedpre-orpostnet-taxincomereceivedthroughtime,notthesumofhumanplusnon-humanwealthatapointintime.Thetwomeasurescandifferdramaticallyduetodifferencesinconsumptionbehavior.Sixth,theyusea3percentrealdiscountratetoformpresentvalues,whereasweuseapre-all-taxrealreturnof6.37percent.Seventh,ourfocusisevaluatingfiscalprogressivityex-ante,notex-postafterthesystemhasadjustedto exigencies over time, including business-cycle fluctuations, changes in fiscal policies, and changes inhouseholdbehavior.Eighth,theyuseadifferentmeasureoffiscalprogressivity,whereaswesimplyfocusonhowaveragelifetimenettaxratesvarybylevelsoflifetimeresources.

17

III. TFA’sAlgorithm

Asindicated,ratherthansolveitsdeterministicprobleminasingledynamicprogram,TFA

usesthreesuchprogramsthatiteratewithoneanother,witheachprogramtakingtheoutput

oftheothertwoprogramsasgiven.Thefirstprogramdoesconsumptionsmoothingsubject

toborrowingconstraints,takingthetimepathsoflifeinsurancepremiumsandnettaxesas

given.Theseconddeterminesthelifeinsuranceneededbyeachspouse/partnerateachdate

toensuresurvivorsexperiencenodeclineintheirlivingstandard,wherethelivingstandard

pathisdeterminedinthefirstprogram.19Thethirdprogramcalculates,foreachyear,the

household’s payments to and receipts from each of the different tax and cash benefit

programsitfaces.Oncethethreeprogramsconverge,TFAaddstwothingstothecalculation

ofthepresentexpectedvalueofspending.Thefirstisthepresentexpectedvalueofin-kind

benefits calculated separately for each survivor path. The second is the value of the

respondent-household’shome.TFAassumeshomesaren’tsold.Hence,thevalueofahome

isalsotheexpectedpresentvalueof imputedrentplustheexpectedpresentvalueof the

bequestofthehome.20

The firstprogramconsiders themaximumsurvivalpath– thepath inwhicheach

spouselivestohisorhermaximumageoflife.Theprogram’sgoalissimple–achievethe

highestaffordablepathofhouseholdlivingstandardpereffectivememberthataccordswith

apre-specified, targetedage-consumptionprofile (ACP) subject to thehousehold’snever

incurring additional debt. This formof consumption smoothing is consistentwith time-

19Thisroutinecalculatesnettaxesalongeachpossiblesurvivorpath.20Remainingbalancesonmortgageswhen the last survivordiesarenettedagainsthousevalue inhelpingdeterminethehousehold’ssurvivor-pathspecificbequest.

18

separableLeontiefpreferenceswithtime-preferencefactorsdeterminingthetargetedACP.

Thesecondprogramdetermineshowmuchlifeinsurancethehouseholdheadand,ifpresent,

thespouse/partnerneedeachyeartoensurethemaintenanceofsurvivors’livingstandards

(throughtheirmaximumagesoflifeandthroughage19,inthecaseofchildren21)atannual

levelsatleastashighasthosethatwouldarisewerenoonetodieprematurely.Theoutput

of this second program is the non-negative life insurance premiums used by the first

program.Thissecondroutinemustanddoescalculatethenettaxesandnon-discretionary

spendingarisingundereachsurvivorpath inwhichahouseholdheadorspouse/partner

doesn’t live to theirmaximumageof life. The thirdprogramcalculates thenet taxes the

householdwillpayalongthemaximumsurvivalpath.Itdoessowhiletakingintoaccount

the path of total spending calculated in the first program as well as the life insurance

premiumscalculatedinthesecondprogram.Ineachiteration,TFAupdatesitsguessesabout

paths of spending, life insurance premium, and net taxes. TFA solves each observation’s

probleminlessthanonesecondtoaveryhighdegreeofaccuracy.22

Asstated,ourbase-caseACPistargetedtobeflat.But,asAppendixfigure1indicates,

borrowing constraints preclude such an outcome and, instead, imply upward-sloping

averageage-consumptionprofiles.Thefigureshows,for25year-olds,45year-olds,and65

21Unfortunately,theSCFdoesn’treportwhetherchildreninthehomearedisabled.Hence,weareforcedtoassumeallleaveatage19.22TherearesevenwaystoverifythatTFA'scalculationsarepreciselycorrect.First,thethree-partiterationprocessconvergestoseveraldecimalpoints.Second,allsurvivor-pathspecificlifetimebudgetconstraintsaresatisfiedinpresentvaluetothedollar.Third,savingcalculatedasaflowequalsannualdifferencesinthestockofregularassetstothedollar.Fourth,whenlifeinsuranceispositive,survivorshavesufficientresources,tothedollar, tomaintain their former livingstandardpath. Fifth,when life insurance iszero,survivorshavehigher living standards. This is implied by the zero-annuitization constraint. Sixth, when a household isborrowingconstraineditspends,tothedollar,allcashonhandtheyearbeforetheconstraintislifted.Seventh,apartfromchangesinlivingstandardassociatedwithahouseholdbeingrelievedofitsborrowingconstraint,TFA'scomputedlivingstandardsareidenticaltothedollarthroughtime.

19

year-olds,theaverageprojectedlivingstandardundertheoptimalpath,conditionalupon

survival.23 For 25 year-olds, there is a considerable upward slope until roughly age 40,

indicatingthatborrowingconstraintsleadtospendingthattracksrisinglaborincome.The

growthofspendingslowsthereafter,butremainspositive.24For65-year-olds,theaverage

age-consumptionprofileisclosetoflat.

IV. DataandProjections

Asmentioned,ourprimarydatacomefromthe2016SurveyofConsumerFinances(SCF)-a

cross-sectionsurveythatoversampleswealthyhouseholdsintheprocessofcollectingdata

from some 6,500 American households. Our online appendix25 details sample selection,

imputations,andbenchmarkingofthe2016SCFdata.Thesurveyincludesdataonassets,

liabilities,income,demographics,andahostofothersocio-economicvariables.

RunningtheTFArequiresadditionalinformationnotprovidedbytheSCF.First,it

needscoveredearningshistoriesaswellasprojectedfuturecoveredearningstocalculate

future Social Security benefits. As described below, we use past waves of the Current

PopulationSurvey(CPS)toimputepastandfutureSocialSecuritycoveredearnings.Second,

23Livingstandardisdefinedhereasthehousehold’sdiscretionaryspendingperadultwithadjustmentsforeconomiesinsharedlivingandtherelativecostofchildren.Discretionaryspendingreferencesallspendingapart from housing expenses and other off-the-top expenditures. The assumed relationship betweendiscretionaryspending,C,andlivingstandardperequivalentadult,c,isgivenbyC=c(N+.7K).6781,whereNis thenumberofadults in thehouseholdandKthenumberofchildren.Theconstants .7and .6781reflect,respectively,ourassumptionsthatchildrenare70percentasexpensiveasadultsandthattwoadultscanliveascheaplytogetheras1.6separately.24Thelargejumpsatage70for25and45year-oldsreflectourassumptionthatindividualswhoindicatethattheyplantoworkatleastuntilage70orwhoexpressnoplantoretirebegincollectingSocialSecuritybenefitsand beginmaking retirement account withdrawals at age 70, as is consistent with themaximum age forclaimingSocialSecuritybenefitsandforcommencingretirementaccountwithdrawals.Ouronlineappendixdiscussesourproceduresinmoredetail.25Postedathttps://kotlikoff.net/wp-content/uploads/2019/03/Online-appendix-6-5-19-.pdf.

20

TFA needs state identifiers to calculate state-specific taxes and benefit payments.

Unfortunately,thepublic-useSCFreleasedoesn’tprovidethem.26Consequently,weusethe

2016AmericanCommunitySurveytoallocatestate-specificweightstoeachSCFhousehold.

Specifically, we statistically match the 2016 SCF households with the U.S. Census’ 2016

AmericanCommunitySurvey. OurmethodassignseachSCFhouseholdtoeachof the51

states(includingD.C.)inappropriateproportionsuchthatthesumofeachhousehold’sstate-

specific weight equals its original SCF weight. We take 2019 as our initial year,

benchmarkingtheSCFdatatothatyearandusing2019provisionsforallfederalandstate

taxandbenefitprograms.

A. ForecastingandBackcastingLaborIncome

Ourmethodologyrequires, foreach individual,a trajectoryof lifetimelaborearnings,not

justtocalculateSocialSecuritybenefitsbutalsotodeterminethevalueofhumanwealth,H,

akeycomponentofremaininglifetimeresources.WeusetheCPStostatisticallymatchSCF

householdsforthispurpose.Inparticular,wedefinecellsineachwaveoftheCPSbyage,

sex,andeducation27andusesuccessivewavestoestimateannualearningsgrowthratesby

ageandyearforindividualsineachsexandeducationcell.Thesecellgrowthratesareused

to“backcast”eachindividual’searningshistory,whichisneededtohelpestimatetheirfuture

SocialSecuritybenefits.Wealsoprojectfutureearningsforeachparticularcelldefinedby

ageanddemographicgroupthroughage67(whenweassumeindividualsclaimretirement

benefits)byusingaveragehistoricalgrowthratesbyage,netofaverageoverallearnings

26ThefullSCF,availabletoFederalReserveresearchers,includesstateidentifiers,butdoesn’tincludestate-specificweights.Hence,theiravailabilitywouldn’thelpproduceproperlyweightednationalresults.27Incaseswherecellshavefewerthan25observations,wemergecellsforadjoiningagesandassumethataveragegrowthratesforthesemergedcellsholdforallincludedages.

21

growthandplusanassumedfutureannualeconomy-wideaveragerealwagegrowthrateof

1percent.

These past and future growth rate estimates are for cell aggregates and do not

accountforearningsheterogeneitywithincells.Todealwithsuchheterogeneity,weassume

thatobservedindividualdeviationsinearningsfromcellmeansarepartiallypermanentand

partially transitory, based on an underlying earnings process in which the permanent

component(relativetogrouptrendgrowth)evolvesasarandomwalkandthetransitory

component is serially uncorrelated. We also assume that suchwithin-cell heterogeneity

beginsinthefirstyearoflaborforceparticipation.

In particular, suppose that, at each age, for group i, earnings for each individual j

evolve(relativetothechangeintheaverageforthegroup)accordingtoashockthatincludes

apermanentcomponent,p,andaniidtemporarycomponent,e.Then,atagea(normalized

sothatage0isthefirstyearoflaborforceparticipation),thewithin-groupvariancewillbe

𝑎𝜎"# + 𝜎$# . Hence, our estimate of the fraction of the observed deviation of individual

earningsfromgroupearnings,0𝑦!%& − 𝑦2!&3,whichispermanentis&'!"

&'!"('#". Thissharegrows

withage, aspermanent shocksaccumulate. Using thisestimate,we form thepermanent

componentofcurrentearningsforindividualj,𝑦4!%& ,

(10) 𝑦4!%& = 𝑦2!& +&'!"

&'!"('#"0𝑦!%& − 𝑦2!&3 =

&'!"

&'!"('#"𝑦!%& +

'#"

&'!"('#"𝑦2!&

andassumethatfutureearningsgrowatthegroupaveragegrowthrate.28Further,guided

by the literature (e.g.,GottschalkandMoffitt,1995,andMeghirandPistaferri,2011),we

28 Becausewe ignore earningsuncertainty in our calculations,we set all futurepermanent and temporaryshockstozero.

22

makethesimplifyingassumptionthatthepermanentandtemporaryearningsshockshave

thesamevariance,reducing(10)to:

(10’) 𝑦4!%& =&

&()𝑦!%& +

)&()

𝑦2!&

Forbackcasting,weassumethatearningsforindividualjwereatthegroupmeanatage0

(i.e.,theyearoflaborforceentry),anddivergedsmoothlyfromthisgroupmeanovertime,

sothattheindividual’sestimatedearningstyearspriortothecurrentageaare:

(11) 𝑦2!&*+ +&*+&0𝑦4!%& − 𝑦2!&3

,-$%&'

,-$% = +

&𝑦2!&*+ +

&*+&𝑦4!%&

,-$%&'

,-$%

That is, for each age, we use a weighted average of the estimate of current permanent

earnings,deflatedbygeneralwagegrowthforgroupi,andtheestimatedage-agroup-imean

alsodeflatedbygeneralwagegrowthforgroup i,withtheweightsconverginglinearlyso

thataswegobackintime,weweightthegroupmeanmoreandmoreheavily,withaweight

of1attheinitialage,whichweassumeisage20.

B. MeasuringCapitalIncome

Akeycomponentofourcalculationsinvolvingsavingandwealthisthebefore-taxrateof

returnonnationalwealth. Forthis,weusetheaveragereturnonnationalwealthforthe

period1948-2015basedondatafromtheNationalIncomeandProduct(NIPA)accountsand

theFederalReserve’sFlowofFundsdata.Thenumeratorforeachyearequalstheshareof

national income not going to wages and salaries (including the portion of proprietors’

incomewe impute to labor). Thedenominator is nationalwealth,which is the total net

wealthofthehouseholdsectorplusfinancialwealth(negativeifanetliability)ofthefederal,

23

stateandlocalgovernmentsectors.Theresultingaveragerealbefore-taxrateofreturnis

6.371percent.Tocalculatenominalratesofreturn,weassumeaninflationrateof2percent.

C. ProjectingMortality

Animportantelementofourcalculationsisuncertainlifetimes,basedonassumedmortality

probabilitiesthatvarybyage,sexand,ofparticularrelevanceforourcalculations,thelevel

ofresources. Weutilizeestimates fromtherecentstudybyAuerbach,etal. (2017),who

modelmortalityasafunctionofage,sex,birthyear,andincomequintile.Inthisanalysis,

income ismeasuredusinga truncatedSocialSecurityAverage IndexedMonthlyEarnings

(AIME)calculationbasedonearningsbetweenages40and50andtheAIMEvariable for

couplesismeasuredasthesumofspouses’truncatedAIMEdividedbythesquarerootof2.29

Wefollowthesameproceduretosorthouseholdstodeterminetheirquintileforpurposes

ofassigningmortalityprofiles,exceptthatweuseafullAIMEmeasure,imputedtoage60in

caseswhereindividualshaveonlypartialearningsrecords.Mortalityisassumedtobegin

startingatage55.30

D. CurrentIncomeasanInaccurateProxyforLifetimeResources

Proxying lifetime spending inequality with current-year, pre-tax income inequality is

questionable not just because that latter measure ignores net taxes, but also because

householdswithlowcurrentincomedon’tallhavelowlifetimeresources.Table1,which

29WearegratefultoBryanTysingerforprovidingthecodeforthesecalculations.30 Note that the resourcedefinitionused forassigningmortalityprofiles isdifferent from thatused inouranalysisbelow,forexamplenotincludingwealthandbeingbasedonaverageearningsuntilage60,ratherthanresourcesasoftheindividual’scurrentage.However,thereshouldbeconsiderableoverlapbetweenthetwomethodsofclassification.

24

focuseson40-49year-olds,pointsoutthedifficultyofusingcurrentincomeasaproxyfor

lifetime resources. To understand the table, consider the second poorest quintile of

householdsinthiscohortwhenrankedbasedonlifetimeresources.Only75.0percentofthe

quintile’shouseholdswouldberankedinthesecondquintilebasedoncurrentincome.I.e.,

current incomewouldmisclassify one fourth of suchhouseholds,with9.2percent being

rankedinthebottomquintileand15.24percentbeingrankedinthethirdquintile.Forother

lifetime-resourcespercentiles,theresultsarealsotroubling.Some8percentofthoseinthe

bottom quintile of lifetime resources are misclassified in higher quintiles when current

incomeisused. Amongthose inthethird lifetimeresourcequintile,current-year income

misclassifiesover31percent.Forthoseinthefourthlifetimeresourcequintile,24percent

aremisclassified. Andforthetopquintile,almost5percentareclassifiedasrankingina

lower quintile. Among the remaining lifetime richest top 5 and top 1 percentiles, the

mistakesaresmaller–lessthan4percentandlessthan3percent.

V. MainResults

Thissectionpresentsourmainfindingsconcerningthedistributionsofremaininglifetime

spending,netwealth,andhumanwealthaswellasourmeasuresofremaininglifetimenet

taxrates.Insodoing,wehighlighttheimportanceoflookingseparatelyatdifferentcohorts

andoffocusingonhouseholdtrajectoriesofremainingresourcesandnettaxes,ratherthan

simplyonincome,whetherpre-orpost-nettax,inthecurrentyear.Appendixfigures2-4

show, for a young, amiddle aged, and an older cohort, the per capita values of the key

variablesunderlyingtheresultsbelow.

25

A. Inequality

Fortheadultsstudiedhere–thoseage20-79,wealth isdistributedhighlyunequally. As

Figure1shows,thetop1percentofthepopulationholdsjustover37percentoftotalnet

wealth.ThisshareisonlyslightlylowerthantheestimatesinSaezandZucman(2013).The

remainderofthedistributionisalsoconsistentwiththeseearlierestimates.Buttheseresults

varyconsiderablybyagecohort.For20-29year-olds,thetop1percentholds73.1percent

of allwealth, and the bottom two quintiles have substantially negative netwealth. The

wealthdistributiongenerallybecomes lessunequalwith increases inage,with the top1

percentaccountingfor37.0,32.6,31.3,31.7,and33.5percentforten-yearagecohorts30-

39through70-79,respectively.

Ourmeasureddistributionofpre-taxincomeis,intheaggregate,alsoconsistentwith

otherestimatesof inequality. Figure2showsthedistributionofcurrent-year,before-tax

incomeamongthoseage20-79,withtheshareofthetop1percent,at19.2percent,inline

with that estimated by Piketty, Saez, and Zucman (2018) even though we are ranking

households,inthisfigure,basedonlifetimeresources.31Again,theresultsdifferwhenone

considersspecificagecohorts,butwithadifferentpatternthanwealth.Whereasthetop1

percentwealth share generally fallswith age, the top1percent shareof current income

generallyrises.Movingfromtheage20-29cohortthroughtheage70-79cohort,theshare

ofcurrentincomeofthoseinthetop1percentoftheincomedistributionis12.5,11.4,13.2,

20.5,22.4,and29.0percent,respectively.

31The figure also shows thedistributionof remaining lifetime resources across this population, indicatingsomewhatgreaterinequality.However,thismeasureisnotascomparableacrosscohortshavingdifferentlifeexpectancies.

26

Inshort,aggregatemeasuresofinequalityformedbypoolingobservationsacrossall

cohorts mask striking differences across cohorts in the degree of inequality and in the

sourcesofinequality.32Thisisilluminatinginitself,butalsoprovidesastrongrationalefor

lookingseparatelyatdifferentcohortswhenconsideringtheimpactoffiscalpolicyonthe

distribution of resources. Moreover, as income, taxes, transfers, and, indeed, mortality

follow different trajectories for different groups, there is an equally strong rationale to

consider progressivity from a remaining lifetime perspective, rather than simply on a

current-yearbasis.

B. FiscalProgressivity

Findingsforthe40-49Year-OldCohort

The results for the 40-49 year-olds are qualitatively broadly similar to those for other

cohorts and represent something of a balance, with a shorter horizon than the younger

cohortsbutstillsubstantialfuturelaborearnings,unlikeoldercohorts.Hence,wediscuss

findingsforthiscohortfirstbeforeexaminingdifferencesacrosscohorts.But,asindicated

below, for thisandallothercohorts, theU.S. fiscalsystemishighlyprogressive,with the

32Asathoughtexperiment,considerastationaryeconomyinwhichthelifetimesofallagentsareidenticalinallrespects–theyallearn(inwagesandassetincome),paynettaxes,consumptionandsavethesameamountsatagivenageregardlessoftheiryearofbirth.Thiseconomywould,byconstruction,befullyegalitarian.Butifonecomparestheoldwiththeyoung,theoldwhohavehadmoretimetosavewillappearrichandtheyoungpoor. Onacurrent incomebasis, theyoung,whoarestillworking,willappearrich,while theoldwhoareretired,willappearpoor.Bypoolingtogetherdifferent-agedhouseholds,onewillinferinequalityinwealthandincomewhenthereisnointrinsicinequalitywhatsoever.

27

lowestquintileineachcohortfacing,onaverage,asignificantremaininglifetimenetsubsidy

rateandthetopquintilefacing,onaverage,asignificantremaininglifetimenettaxrate.

For the cohort age 40 to 49 in 2019, figure 3 shows that each dollar of pre-tax

remaining lifetimeresourcesof those in the top1percentof the resourcedistribution is

taxed,onaverage,ata34.7percentrate.Forthoseinthetopquintiletheaveragenettax

rateis30.7percentrate.Forthoseinthebottomquintile,everydollarofpre-taxresources

ismatchedbya44.4percentnetsubsidy.The figurealsoshows,asdiscussedbelow, the

inability of current-year net tax rates to even roughly capture fiscal progressivity at the

bottomendoftheresourcedistribution.

Figure4showstheimpactonRLSofthisprogressivepatternofnettaxrates. The

figure compares the average level of spending (the present value of remaining lifetime

spending,bothdiscretionaryandnon-discretionary)withineachquintilewithandwithout

fiscalpolicy.Althoughspendingremainshighlyunequalevenwiththeapplicationoffiscal

policy,it’ssignificantlylessunequalasaresultoffiscalpolicy,inaccordancewithfigure3’s

findings.Forexample,RLSamongthetop1percentisreducedbyoveronethirdbytheU.S.

fiscalsystem.Asthefigureshows,thisstillleavesmassiveinequalityinaverageremaining

lifetime spending between, say, the bottom quintile and the top 1 percent. But this

differentialwouldbefargreaterabsentfiscalpolicy.

Figure5translatestheremaininglifetimespendinglevelsinfigure4intosharesof

overallspendingbygroup,and juxtaposestheseshareswiththecorrespondingsharesof

wealthforthesegroups.Spendingismuchmoreequallydistributedthaniswealth.Thetop

1,5,and20percentofthe40-49year-oldcohortown29.1percent,50.0,and77.9percentof

allwealth(financialassetsplushousingandotherrealestateequitylessfinancialliabilities),

28

respectively. But these threegroupsaccount foronly11.8,24.4,and49.8percentof the

cohort’s spending power asmeasured by remaining lifetime resources net of remaining

lifetimenettaxes.Thoseinthelowestquintilehave,torepeat,only0.4percentofwealthbut

6.6percentoftheircohort’stotalspendingpower.Thenextthreequintilesalsoeachaccount

formuchmoreofthecohort’sspendingpowerthanofitswealthholdings.

WhyIsProjectedSpendingLessUnequalThanWealth?

Wealth is only one of four determinants of remaining lifetime spending. The others are

remaining lifetime labor earnings, remaining lifetime gross taxes, and remaining lifetime

gross transferpayments. Wealth iscertainlyveryunequallydistributed. But,as figure6

shows,remainingthedistributionoflifetimeearningsismuchlessunequal.Whilethosein

the top 1 percent hold 29.1 percent of all wealth, they account for just 10.0 percent of

remaining lifetimeearnings. Surprisingly, transferpaymentsarealsoskewedtowardthe

rich,albeitfarlessdramatically:thetop1percentof40-49year-oldsaccountfor1.2percent

offuturetransferpaymentsreceived.Theremainingspendingcomponent,albeitanegative

component–remaininglifetimetaxpayments–isheavilyskewedagainsttherich.Thetop

1percentaccountsfor15.0percentofalltaxpayments.

Taxes remain highly skewed further down the resource distribution. The top 5

percentof40-49year-oldsaccountfor30.4percentofallremaininglifetimetaxpayments,

andthetop20percentfor58.4percent.Consistentwiththishighshareoftaxesatthetop

(andtherelativeunimportanceoftransfersintermsofredistribution),eachofthebottom

fourquintileshasashareofspendingthatexceedsitsshareofresources.Thiscanbeseen

bycomparingfindingsinFigures3and5.Tobeprecise,thelowestquintilehas3.5percent

oftheresources,butdoes6.6percentofthespending.Thesecondquintilehas8.5percent

29

oftheresources,butdoes9.8percentofthespending.Thethirdquintilehas13.3percentof

theresources,but14.0percentofthespending.Andthefourthquintilehas19.7percentof

bothresourcesandspending.

Fromthisperspective,thetopquintileisredistributingtothethreelowestquintiles

viathetaxandtransfersystem.Theresultisatop-quintilespendingshareof49.8percent

comparedtoaresourceshareof55.1percent.Theabsolutegapisalsolargeforthetop5

percent,whoaccountfor28.1percentofallresources,butjust24.4percentofallspending.

Thetop1percenthas13.8percentofallresources,butaccountsforonly11.8percentofall

spending.

Differencesamongresource,wealth,andspendinginequalitycanvarydramatically

bycohort.Thetop1percentof20-29year-oldsaccountfor11.2percentoftheircohort’s

resources, 68.2 percent of their cohort’s wealth, but only 9.7 percent of their cohort’s

spending. For 40-49 year-olds, the corresponding three shares are 13.8 percent, 29.1

percent,and11.8percent.Andfor60-69year-olds,thethreesharesare25.8percent,31.6

percent,and19.1percent.

Clearly the U.S. fiscal system is highly progressive. Whether it is sufficiently

progressiveoroverlyprogressiveisajudgmentthatcanbemadeonlybyweighingthesocial

valueofsuchredistributionagainstitsefficiencycosts. Butwhateveronemakesofthese

findings, one thing is clear: assessing economically relevant inequality – inequality in

spendingpower–requiresunderstandingalltheelementsdeterminingspending.Focusing

exclusivelyorevenprimarilyon inequality inwealthorcurrent-year income,or, for that

matter, on inequality in some other component of spending power, such as claims to

Medicaid,canpresentaveryincompleteand,hence,distortedpictureofoverallinequality.

30

TheInadequacyofCurrent-YearNetTaxRates

Figure3comparescurrent-yearaveragetaxratestolifetimenettaxratesfor40-49year-

olds.33Clearly,current-yearaveragenettaxratesunderstatethedegreeofprogressivityin

theU.S.fiscalsystem(therateofascentofthebarsinthefigure)aswellastheaveragelevels

ofnettaxationoftherichand,especially,netsubsidizationofthepoor.Thelowestquintile’s

lifetimeresourcesaresubsidized,onaverage,ata44.4percentrate.Butitsaveragecurrent-

yearnetsubsidyrateisonly25.6percent.Fortheremainingquintiles,theaveragecurrent-

yearnettaxratesarehigherthantheaveragelifetimenettaxrate,butthedifferencedeclines

steadilyasonemovesuptheresourcedistribution.

ComponentsofTaxesandTransfers

ThefiscalprogressivityoftheU.S.federalsystemreflectsacombinationofdifferenttaxand

transfercomponents.Figure7showsthecontributionofeachcomponenttotheoverallnet

taxesofthe40-49year-oldcohort.Forthetopquintile,thefederalincometaxaccountsfor

morethanhalfofalltaxpayments,whereasforthethreelowestquintiles,thepayrolltaxis

thelargesttaxcomponent.Thisregressivityofthepayrolltaxis,ofcourse,balancedbythe

progressivepatternofpayroll-taxfundedSocialSecurityandMedicarebenefits.WhileSocial

Security benefits grow in size across income quintiles, they do so at a slower rate than

lifetime resources. This is particularly true ofMedicare,which increases across lifetime

resources groups at a slower rate (the increase due, in part, to the greater longevity of

higher-income individuals). However, substantial progressivity is provided by the other

transfers associated with health care, namely Medicaid and the subsidies under the

33 Current-year net tax rates equal current-year taxes net of transfers divided by current-year income,measuredascurrent-yearlaborincomeplustheimputedrateofreturnonassetsmultipliedbyassets.

31

AffordableCareAct (Obamacare),which are large in size andhighly concentrated in the

bottomquintileofthelifetimeresourcedistribution.

FindingsforOtherCohorts

Figures8and9showcurrent-yearandlifetimetaxratesforthoseinothercohorts,aged20-

29and60-69.Fortheyoungercohort,infigure8,lifetimenettaxratesarehigher,primarily

becauseofthelongerlaguntilthereceiptoflargetransferpaymentsinoldage. Also,the

progressivityoflifetimenettaxratesisgenerallylower,intermsofthegradientoftaxrates

withrespecttoresourcegroup,thanisthecaseforcurrenttaxrates.Thisislikelyduetothe

factthatthereisamuchlowerrankcorrelationinthiscohortbetweenlifetimeresources

andcurrentincome–manyofthoseatthetopofthecurrentincomedistributionwillnotbe

nearthetopofthelifetimeresourcedistributionand,therefore,arelesssubjecttohigher

taxes.Thislowerrankcorrelationrelatestothelongerremaininghorizonforlaborearnings

aswellastherelativelygreaterimportanceofwealthindetermininginequalityamongthe

young.Thisambiguitydisappearswhenonelooksatthesametax-ratecomparisonfor60-

69year-olds, in figure9. Here,current-yearnettaxratesare lowbecauseof lower labor

force participation, and remaining lifetime net tax rates are lower still because of the

impending receipt of substantial old-age transfer payments. These payments, taking all

programstogether,aresubstantiallyprogressiveforthisagecohort,makingthedeclinein

nettaxratesasonemovesfromrighttoleftinthefigurefargreaterforthelifetimenettax

rateseriesthanforthecurrent-yearnettaxrate.

32

VI. EvaluatingtheImpactoftheTaxCutsandJobsAct(TCJA)

TheTCJA,enactedinlate2017,wasthemostsignificantchangeinthefederalincometax

since the Tax Reform Act of 1986. Among its key provisions were a reduction in the

corporate tax rate from 35 percent to 21 percent, a reduction in individual tax rates,

increasing the standard deduction, capping of the itemized deduction for state and local

taxes,eliminatingthecorporateAlternativeMinimumTax(AMT),scalingbacktheindividual

AMT,andanewreducedtaxrateonqualifyingnon-corporatebusinesses.

ManyofTCJA’staxprovisionsbecomelessfavorabletotaxpayersoverthecourseof

the10-yearbudgetperiod.Inaddition,manyofitsindividualtaxcutprovisionsaresetto

expirebytheendofthedecade.Thesefeaturesappeartohavebeenincludedsimplytomeet

arbitrary budget targets within the budget period and to limit the growth in projected

deficitsbeyondthebudgetperiod.Meetingthebudgettargetsandlimitingfutureprojected

deficitswere needed to permit passage of the bill with a simplemajority in the Senate.

However,therewasnocoherentpolicyreasonofferedforsuchtemporaryprovisions,nor

are we aware of any. Consequently, in this analysis, we assume TCJA’s provisions are

permanent.Thisassumptionisimportanttokeepinmindwheninterpretingourresultsand

comparingthemwiththoseofotherstudiesthatadherestrictlytotheletterofTCJA’slaw.

InmodelingtheTCJA,wereducedourcorporatetaxrateby12.4percent.Thisisthe

average,overthenextfiveyears,duetoTCJA,intheJointCommitteeonTaxation’sprojected

corporatetaxrevenuelossdividedbythe2017NIPAestimateofcorporatetaxrevenue.34

Oneusefulcheckofourbenchmarkingprocedureistocompareourresultswiththoseofthe

34https://www.jct.gov/publications.html?func=startdown&id=5053

33

JointCommitteeonTaxation,whicharebasedontaxreturndata,albeitfor2013.Table2

showsaveragecurrent-yeargrosstaxratesfor2019underoldlaw,undertheTCJA,andthe

changebetweenthetwo,frombothJCT(2017)andourcalculations,whereweadhereas

closelyaspossibletoJCT’sincomeclassificationandincomeandtaxdefinitions.35Asthe

tableshows,ourgrosstaxratemeasuresarerelativelyclosetoJCT’s.Indeed,thecorrelation

coefficientbetweenourTCJAaverageratesandtheJCT’sacrosstheincomecategoriesinthe

tableis96.9percent.Moreover,likeJCT,wefindanincreaseinpercentagetaxcutsasincome

increases,withtheexceptionofthehighestincomegroup,althoughtheupwardtrendisless

pronouncedinouranalysis.ThefactthatweareabletocomereasonablyclosetotheJCT’s

analysisofprogressivitywith theSCFdata suggests that it isnotdifferences indata,but

differencesinmethodologythatunderlieourdifferentfindingsaboutfiscalprogressivityand

inequality.

Figure10showsaverageremaininglifetimeandcurrent-yearnettaxratesfortheage

40-49cohortunderold law,which canbe compared to figure3 to see thedistributional

impactof theTCJAbasedon these twomeasures.The lifetimenet taxratereductionsby

quintile,inpercentagepoints,are1.1,1.5,1.5,1.3,and1.1,withreductionsforthetop5and

top1percentof0.8and0.2percentagepoints,respectively.Thecurrent-yearnettaxrate

35 https://www.jct.gov/publications.html?func=startdown&id=5054. We are unable to include certaincomponents of JCT’s expanded incomemeasure, includingworker’s compensation, alternateminimum taxpreferenceitems,individualshareofbusinesstaxes,andexcludedincomeofU.S.citizenslivingabroad.TheJCTisalsousing2013IRSdata,whichisthelatestsuchdataavailable,whereasourSCFdatareferenceeither2015or2016.Ourapproachand the JCT’sbothassume that the incidenceof thecorporate income tax falls100percentonownersofcapital. TheJCTalsoassumesthatnearly10percentofcorporate incomeaccruestoforeignowners,whoseburdenisexcludedfromtheircalculation(JCT,2013).Wemakenoadjustmentinouranalysisforforeignownership.

34

reductionsforthesamegroupsare1.4,1.5,1.4,1.3,1.3,1.1,and0.5.36Hence,thepatterns

aregenerallysimilar,althoughthenettaxcutsareloweronaremaininglifetimebasisthan

forthecurrentyearatboththebottomandtopoftheresourcedistribution.

Notethatfocusingonnetratherthangrosstaxrates,holdingagefixedwithinarange,

andpartitioningbyresource-percentilegroupproduces,inthiscase,adifferentassessment

ofTCJA’sprogressivitythanthatsuggestedbyeithertheJCT’sanalysisorourversionofthe

JCT’s analysis. On a current-year net tax rate basis, the reform, for forty year-olds, is

progressive.Onaremaining-lifetimenettaxratebasis,itfavorsthemiddleclassoverthe

poorandtherich.

A similar relative pattern is present for other cohorts. For 20-29 year-olds, for

example, the lifetime net tax rate reductions, from the lowest quintile to the highest

percentile,are1.6,1.7,1.9,1.6,0.8,0.4,and0.0percentagepoints,whereasthereductionsin

current-yearnettaxratesforthesamerespectivegroupsare2.1,2.0,2.2,1.9,1.2,0.6,and

0.3percentagepoints.Again,thenettaxratereductionishigheratthebottomandatthetop

forcurrent-yearnettaxrates,although,inthiscase,thereductionisalsohigherinthemiddle

ofthedistribution.Hence,among20-29yearolds,bothsetsofnettaxratereductionsappear

progressive in terms of the relative net tax rate reductions for low- and high-resource

individuals. Still,thedifferencesbetweenthetwosetsofnettax-ratereductionmeasures

couldwell suffice to alter policy decisionswere policymakers to focus onwhatwe have

arguedistheconceptuallymoreappropriatenettax-ratemeasurement.

36Note that thedecline innet taxratereductionsbeginning in the topquintile isnot inconsistentwith theresultsinTable2,giventhatthetopquintileincludesthoseinthehighestincomegroup,whoexperiencealowertaxratereduction.

35

VII. SensitivityAnalysis

Ourresults relyonmanyassumptions,and it isuseful toconsider their influenceonour

findings.37

A. DifferentialMortality

Auerbachetal.(2017),onwhichourmortalityassumptionsarebased,focusesonthedecline

inprogressivityofold-agetransferpaymentswiththeincreasingincome-longevitylink.As

old-age transfer payments are survival-based, higher mortality translates into lower

benefits,inpresentvalue,evenincases,suchasSocialSecurity,wheretheunderlyingannual

payments are progressive, delivering a higher replacement rate for retirees with lower

lifetimeincomes.However,mortalityaffectsnotonlythereceiptoftransferpayments,but

alsothepaymentoftaxes.

Togaugetheimpactoftheseeffects,wesimulateoutcomesundertheassumptionthat

allindividualsofeachage,genderandcohorthavethesamelifeexpectancyasthoseinthe

top resource quintile (where, as discussed above, resources are based on an AIME

calculation,inlinewiththegroupingsusedinderivingthemortalityestimates).Figure11

displaystheresultsofthissimulationforthe40-49year-oldcohort,whichmaybecompared

totheresultsinFigure3,whichdifferonlywithrespecttothemortalityassumption.For

thiscohort,thelifetimenettaxratefallsforthoseinthefourlowestresourcequintilesand

37Somemightviewtheassumptionsasheroicsincewearestartingwithasingle,cross-sectionstudyanda)imputingpastcoveredearnings,b)imputingfutureearnings,c)allocatinghouseholdsproportionallybystate.ButwehavehighlyreliabledatacoveringdecadesofU.S. labor-marketexperiencetobackcastandforecastlaborearningsandhaveamassiveCensusstudyforimputingrepresentativestateresidencyratesforeachSCFhouseholdrespondent.Anyanalysisofanation’sfiscalfairnessandinequalityatagivenpointintimerequires,weargue,projectinglifetimespending.This,inturn,requirestheseformsofestimates,which,weviewashighlyrealistic.

36

isunchangedforthoseinthetopquintileandabove,forwhommortalityassumptionshave

roughlynotchanged.38Thisindicatesthatthevalueofincreasedfuturebenefitsoutweighs

theincreasedfuturetaxes.Asforcurrent-yeartaxrates,thereareveryminorchangesatthe

bottomendoftheresourcedistribution.Theyreflectchangesinlifeinsurancepremia,which

TFAcalculatesinlinewithprevailinglifeinsurancerates,aswellasslightchangesincohort-

specificquintilecompositions.Tosummarize,highermortalityamongthepoorappearsto

playaminorroleinimpactingRLSinequalityorfiscalprogressivity.

B. LowerFutureRatesofReturnonSavings

Therateofreturnbeforealltaxes(includingcorporatetaxes)usedinourresultsisbasedon

the historical return to U.S. national wealth, as discussed above. However, many have

suggestedthatfutureratesofreturnmaybelower,forexamplebecauseofthedemographic

transitionleading,atleastinthedevelopedworld,toincreasesincapital-laborratios.Also,

totheextentthatthemeasuredreturnincludesreturnstoriskandeconomicrents,wemight

wishtoexcludethesecomponentsfromouranalysis.Toconsiderthepotentialimpacton

ourfindings,werepeatouranalysisundertheassumptionthatthereal,before-taxreturnto

savingsis4percent,ratherthan6.371percent.

Figure 12 shows net tax rates faced by 40-49 year-olds under this alternative

assumption. Comparedwith the base-case results in figure 3, current-year tax rates are

higherforthoseinthetopresourcegroups,becauseasmallershareofthesegroups’current

incomeisnowaccountedforbycapitalincome,whichfacesaloweraveragecurrent-yeartax

38WesayroughlyherebecausetheunchangedmortalityassumptionappliestothetopquintilebasedontheAIMEcalculation,ratherthanremaininglifetimeresources.However,thedifferencesaresufficientlysmallthattheydonotshowupatthelevelofprecisionreportedinthefigure.

37

ratethandoeslaborincome. Theimpactsoncurrent-yeartaxratesatthelowendofthe

resourcedistributionaresmall.Onalifetimebasis,however,thepatternisdifferent.While

thetop1percentstillfaceahigheraveragetaxrate,therearemonotonicallylargerdeclines

intheaveragenettaxrateasonemovesdowntheremainingresourcedistribution.Thisis

duetothefactthatapplyingalowerdiscountrateincreasesthepresentvalueoffutureold-

agetransferpayments,therebyreducingthepresentvalueoflifetimenettaxes.Thishappens

the more so as one moves down the resource distribution because of the increasing

magnitudeoffuturebenefitsrelativetofuturetaxes,whichalsoincreaseinpresentvalue.

Thus, from the remaining lifetime perspective, assuming a lower rate of return strongly

increasestheprogressivityofthefiscalsystem.

C. VoluntaryBequests

Ourconsumptionsmoothingalgorithmassumesthathouseholdsseekthehighest levelof

consumption possible given their resources and assumed borrowing constraints. This

meansthatbequestsoccurasaconsequenceofdyingbeforethemaximumage,totheextent

thatassetsarenotannuitized.Butthealgorithmdoesnotprovideforintentionalbequests.

While there isconsiderableuncertaintyabout themotivations forobservedbequests,we

considertheimpactofintroducingavoluntarybequestmotive.Asimplewaytodothisisto

assumeaceilingontheannualamountofspendingthatahouseholdwillundertakesothat

wealthyhouseholds,whounder theconsumption-smoothingalgorithmwouldexceed the

ceiling,simplyrollassetsforward.Thisresultsinintentionalbequestsamongthosewealthy

enoughtohittheceiling.

Simulationsunderthisalternativeassumption,forthecaseofanannualceilingonthe

standardof livingof$5million,hasaminorimpactonestimatedlifetimeaveragenettax

38

rates,althoughthechangesareconsistentwithwhatonewouldexpect.Among40-49year-

olds,thoseinthetop1percentofresourcesexperienceasmallincrease(0.5percent)intheir

lifetimenettaxrates.Thisresultsfromthefactthatgreaterassetaccumulationentailsmore

capitalincomeandestatetaxation.Theresultismorepronouncedfor60-69year-olds(an

increaseof1.7percentintheremaininglifetimetaxrate),asthehigherestatetaxpayments

loomcloserinthefuture.Hereagain,thismodificationofourassumptionsresultsingreater

progressivityinthefiscalsystemfromaremaining-lifetimeperspective.

D. CheaperConsumptioninRetirementandDifferentTimePreferenceRates

Wealsoconsideredandfoundnoimportantdifferencesinourfindingsfromtheassumptions

thathouseholdswishtohavetheirlivingstandardspereffectiveadultriseorfallannually

by2percentor thathouseholdsplan for theirconsumptionoutlays todrop,other things

equal, by 20 percent once they reach retirement, reflecting the potential of lower

consumptioncostinretirementraisedbyAguiarandHurst(2005).Asonewouldexpect,

smaller(larger)consumptiongrowthorsmallerretirementconsumptionexpendituresleads

tolower(higher)lifetimetaxratesbecauseofchangesinsavingratesandcapital income

taxes.However,thepatternsacrossresourcegroupsseeninourbaselinesimulationsare

unaffected.ThisisevidentinAppendixfigure5,whichshowsthelifetimeandcurrent-year

average tax rates for 40-49 year-olds for the case of a 20 percent lower retirement

consumption,whichmay be comparedwith the baseline results in figure 3. Part of the

reasonthedesiredshapeoftheACPmakeslittledifferencetomeasuredprogressivityisthat

TFA’senforcementofborrowingconstraintstakesprecedenceandlargelydeterminesTFA’s-

generatedACPregardlessofpreferences.

39

E. SubjectiveDiscounting

Figure13showsthe40-49year-oldaveragenettaxratesbyquintileifweplacea50percent

weightonthepresentvalueofallannualresourceflowsandspendingthatarise inyears

beyondthehouseholdsinitialconstrainedperiod,i.e.,inyearsafterthehousehold’sliving

standardfirstincreasesif,indeed,thatoccurs.

Asacomparisonoffigures13and3makesclear,devaluingbyeven50percentall

futureresourcesandspendingthatcan’t,atthemargin,beaccessedinthepresentmakes

verylittlenodifferencetothemeasuredprogressivityoftheU.S.fiscalsystem.Thesefigures

pertaintothe40-49year-oldcohort.Butthelevelandpatternofremaininglifetimenettax

ratesare little changed forotheragegroups. This is tobeexpected for those in the top

quintile,mostofwhomaren’tconstrained. For lowerquintiles, it’ssomewhatsurprising.

Butoneneedsbearinmindthatboththedenominator–remaininglifetimeresources–and

thenumerator–remaininglifetimenettaxes–arebeingreducedinthisexercise,sinceboth

includeflowsbeyondtheperiodthehouseholdisinitiallyconstrained.

VIII. Conclusion

This paper provides a new and comprehensive analysis of U.S. inequality and fiscal

progressivity.ItappliesTheFiscalAnalyzer(TFA)tothe2016FederalReserve’sSurveyof

Consumer Finances (SCF). TFA is a life-cycle consumption-smoothing program specially

designedtoincorporateallmajorfederalandstatefiscaltaxandbenefitprograms.TFA’s

consumptionsmoothingincorporatesborrowingconstraints,economiesinsharedliving,the

household’scurrentandfuturedemographics,andtherelativecostsofchildren.The2016

SCF data, which we benchmark to 2019 aggregates, provide TFA with the resource

40

informationneeded todetermine thehousehold’spresentexpected (over survivalpaths)

remaining lifetime spending. We statistically match the SCF and the Census’ American

CommunitySurveytoallocateeachSCFobservationinappropriateproportiontoeachstate.

Ourfindingsclearlyindicatethat,whilecohort-specificremaininglifetimespending

is highly unequal, it is far less unequal than onewould presume from looking atwealth

inequalityor evenannual income inequality, either acrossorwithin cohorts. Across all

cohorts,thetop1percent(orderedbylifetimeresources)owns34.1percentofallnetworth,

accounts for 19.2 percent of all income, receives 18.0 percent of all remaining lifetime

resources,butendsupwithonly15.7percentofallremaininglifetimespending.

Moreover,whetheronelooksatfiscalprogressivityortheunderlyinginequalityin

the distribution of resources, comparisonsmixing the oldwith the young can be highly

misleading,incontrasttotheintragenerationalaccountingpresentedhere,whichcompares

remaininglifetimespendingandfiscalredistributionwithincohorts.Forexample,thetop1

percent(byresources)of40-49year-oldsown29.1percentoftheircohort’stotalnetworth,

but account for (includingonbequests) only11.8percent of the cohort’s total spending.

Thesefiguresaren’tthatdifferentfromthoseforallcohortscombined. Butamong20-29

year-olds,theresource-richest1percentown68.2percentofnetworth,butgettodoonly

9.7percentofthecohort’sspending.

Assessing inequality and fiscal progressivitybasedon current incomeandnet, let

alonegross taxrates is likely tomisstatebothandverysignificantly. Thedistributionof

current incomediffers fromthatof remaining lifetimespendingandcurrent-yearnet tax

ratesgenerallyunderstatethedegreeofprogressivityofthetaxandtransfersystem.Thisis

trueeven ifoneconsidersnet tax rateswithingenerations. Onecanalsoreachdifferent

41

conclusionsabouttheprogressivityoftaxreforms,asouranalysisoftheTaxCutsandJobs

Actshows.

Therearemanydirectionsforfutureresearch,includingunderstandingchangesover

timeinspendinginequalityandfiscalprogressivityandcomparingspendinginequalityand

fiscalprogressivityacrosscountries.Also,ouranalysisappliestothecurrentfiscalsystem,

projectedforwardundercurrentpolicy,eventhoughthereisageneralconsensusthatmajor

changeswillbeneededtosustainfiscalbalance.Howfiscalbalanceisrestoredwillhavean

impact on ourmeasures, depending on the distribution of fiscal adjustmentswithin and

acrossgenerations.

Thisstudy’sbottomlines,however,willremain.Inequalityisaboutspending,future

aswell as current. And remaining lifetime spending can’t be proxied by poorly related

current-incomeorwealthmeasuresthatignorecurrentandfuturenettaxburdens.Asfor

fiscalprogressivity.itshouldn’tbestudiedprogrambyprogramoronacurrent-yearbasis.

Finally,neitherinequalitynorfiscalprogressivitycanbeaccuratelyassessedbycombining

verydifferentagecohortsinthesameanalysis.

42

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Table1ComparingLifetime-ResourceandCurrent-IncomeDistributions,Ages40–49

ShareinEachCurrentIncomePercentileLifetimeResource

Percentile Lowest Second Third Fourth Highest Top5% Top1%

Lowest 92.1% 7.3% 0.6% 0.0% 0.0% 0.0% 0.0%

Second 9.2% 75.0% 15.2% 0.5% 0.0% 0.0% 0.0%

Third 0.6% 17.0% 68.4% 13.9% 0.0% 0.0% 0.0%

Fourth 0.6% 0.9% 14.3% 76.3% 7.9% 0.0% 0.0%

Highest 0.0% 0.0% 0.0% 4.9% 95.1% 45.3% 21.5%

Top5% 0.0% 0.0% 0.0% 0.0% 100.0% 96.4% 46.7%

Top1% 0.0% 0.0% 0.0% 0.0% 100.0% 100.0% 97.3%

*Highestpercentageineachrowisgreen.

Table2DistributionalEffectsoftheTaxCutsandJobsAct

TFAEstimates

JCT(2017a)Estimates

IncomeCategory

Avg.TaxRateUnderPresentLaw

Avg.TaxRateUnderTJCA

Difference

Avg.TaxRateUnderPresentLaw

Avg.TaxRateUnderTJCA

Difference

Lessthan10,000 14.84 14.81% -0.02% 9.10 8.60% -0.50%10,000to20,000 1.69 1.34% -0.35% -0.70 -1.20% -0.50%20,000to30,000 2.13 1.35% -0.78% 3.90 3.40% -0.50%30,000to40,000 6.67 5.32% -1.35% 7.90 7.00% -0.90%40,000to50,000 9.77 8.53% -1.24% 10.90 9.90% -1.00%50,000to75,000 12.48 11.10% -1.39% 14.80 13.50% -1.30%75,000to100,000 15.03 13.55% -1.49% 17.00 15.60% -1.40%100,000to200,000 19.29 17.67% -1.62% 20.90 19.40% -1.50%200,000to500,000 25.33 23.51% -1.82% 26.40 23.90% -2.50%500,000to1,000,000 32.63 30.89% -1.73% 30.90 27.80% -3.10%1,000,000andover 37.79 37.29% -0.49% 32.50 30.20% -2.30%

JCTestimatesareforcalendaryear2019.

Figure1

Figure2

-0.7% 0.4% 2.6%8.7%

89.0%

65.0%

37.2%

Lowest Second Third Fourth Highest Top5% Top1%

ShareofNetWealthbyNetWealthPercentile,Ages20- 79

1.7%6.1%

11.0%

18.9%

62.3%

35.9%

18.9%

2.6%7.3%

12.1%

18.6%

59.4%

35.0%

19.2%

Lowest Second Third Fourth Highest Top5% Top1%

LifetimeResourcesandCurrentIncomebyResourcePercentile,Ages20-79

ShareofLifetimeResources ShareofCurrentIncome

Figure3

Thischartpresentsremaininglifetimenettaxrates–theratioofthesumofallremaininglifetimenettaxpaymentsof all (population-weighted) households in the specified percentile resource range divided by the sum of theresourcesofall(population-weighted)householdsinthatrange.“Resources”referstohouseholdnetfinancialassetsplusequityofhomesandrealestateholdingsplusthepresentvalueofprojectedfuturelaborearnings.Thecurrent-yearnettaxrateiscalculatedastheratioofthesumofall(populationweighted)ofthehousehold’scurrent-yearnettaxesdividedbythesumofall(populationweighted)householdincome(laborincomeplus,apartfromthecorporateincometax,prenet-taxassetincome).

Figure4

Thechartdisplaysaveragespendinglevelsbyquintilesandtop5percentandtop1percentoftheresourceholdersintheabsenceandpresenceoffiscalpolicy.

-44.4%

11.5%18.9%

23.4%30.7% 33.4% 34.7%

-25.6%

21.5%26.0% 28.5%

32.1% 34.0% 36.0%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages40- 49

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

Lowest Second Third Fourth Highest Top5% Top1%-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

AverageLifetimeSpendingbyResourcePercentile,Ages40- 49

AverageLifetimeSpendingPre-fiscalPolicy

AverageLifetimeSpendingw/FiscalPolicy

Figure5

Thechartdisplaysassetandspendingsharesofthoseinthefivequintilesofthedistributionofresourcesaswellasthoseinthetop5percentandtop1percent.

Figure6

0.4% 2.5%6.4%

12.7%

77.9%

50.0%

29.1%

6.6%9.8%

14.0%19.7%

49.8%

24.4%

11.8%

Lowest Second Third Fourth Highest Top5% Top1%

ShareofNetWealthandLifetimeSpendingbyResourcePercentile,Ages40- 49

ShareofNetWealth ShareofLifetimeSpending

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

Lowest Second Third Fourth Highest Top5% Top1%

ShareofWealth,LifetimeLaborIncome,LifetimeTransfers,andLifetimeTaxesbyResourcePercentile,Ages40- 49

ShareofNetWealth ShareofLifetimeIncome

ShareofLifetimeTransferPayments ShareofLifetimeTaxes

Figure7

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

Lowest

Second

Third

Fourth

Highest

AverageRemainingLifetimeTaxesbyResourcePercentile,Ages40- 49

FederalTax StateTax FICATax SalesTax CorporateTax MedicareBPremiums

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000

Lowest

Second

Third

Fourth

Highest

AverageRemainingLifetimeTransferPaymentsbyResourcePercentile,Ages40- 49

SocialSecurityBenefits Medicare Medicaid SSDI SSI TANF FoodStamps ACA

Figure8

Figure9

-2.6%

23.4%27.4%

31.0%37.2% 39.0% 39.7%

-34.0%

16.5%22.8%

27.5%33.7% 36.1% 38.5%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages20- 29

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

-601.2%

-112.9%-46.5%

-13.3%

16.9% 22.0% 25.7%

-346.8%

-45.5%-3.5%

16.5% 26.2% 27.9% 29.3%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages60- 69

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

Figure10

Figure11

-43.3%

13.0%20.4%

24.7%31.8% 34.2% 34.9%

-24.2%

23.0%27.4% 29.8%

33.4% 35.1% 36.5%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages40- 49(priorlaw)

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

-56.4%

7.8%17.1%

22.8%30.7% 33.4% 34.7%

-24.7%

21.3% 26.0% 28.5% 32.1% 34.0% 36.0%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages40- 49(high-incomemortality)

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

Figure12

Figure13

-60.6%

2.0%11.7%

16.9%28.3% 33.1% 35.9%

-24.9%

21.3% 25.9% 28.5% 32.6% 35.0% 37.8%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages40- 49(lowerrateofreturn)

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

-47.1%

13.9%19.1% 21.6%

28.5% 31.6% 33.6%

-25.6%

21.5%26.0% 28.5% 32.1% 34.0% 36.0%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRates,HalfWeightingafterConstraintisLifted,byResourcePercentile,Ages40- 49

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate

AppendixFigure1

AppendixFigure2

0

10

20

30

40

50

60

70

80Age 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99

ThousandsofDollars

AverageStandardofLivingProfilesbyRespondentStartingAge

Age25 Age45 Age65

(5,000,000)

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Lowest Second Third Fourth Highest Top5% Top1%

PerCapitaPresentValueofWealth,LifetimeLaborIncome,LifetimeNetTaxes,andLifetimeSpendingbyResourcePercentile,

Ages20- 29

Wealth PVofLaborIncome PVofNetTaxes PVofLifetimeSpending

AppendixFigure3

AppendixFigure4

(5,000,000)

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Lowest Second Third Fourth Highest Top5% Top1%

PerCapitaPresentValueofWealth,LifetimeLaborIncome,LifetimeNetTaxes,andLifetimeSpendingbyResourcePercentile,

Ages40- 49

Wealth PVofLaborIncome PVofNetTaxes PVofLifetimeSpending

(10,000,000)

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

Lowest Second Third Fourth Highest Top5% Top1%

PerCapitaPresentValueofWealth,LifetimeLaborIncome,LifetimeNetTaxes,andLifetimeSpendingbyResourcePercentile,

Ages60- 69

Wealth PVofLaborIncome PVofNetTaxes PVofLifetimeSpending

AppendixFigure5

-45.5%

11.2%18.6%

23.1%30.4% 33.0% 34.1%

-25.5%

21.6%26.0% 28.6%

32.2% 34.2% 36.2%

Lowest Second Third Fourth Highest Top5% Top1%

AverageLifetimeandCurrentYearNetTaxRatesbyResourcePercentile,Ages40- 49(20percentdropinretirement

consumption)

AverageLifetimeNetTaxRate AverageCurrentYearNetTaxRate