Public Expenditures, Taxes, and the Distribution of Income. The United States, 1950, 1961, 1970

150 Pages·1977·2.384 MB·English

by  Morgan Reynolds and Eugene Smolensky (Auth.)

This is a volume in the
Institute for Research on Poverty Monograph Series
A complete list of titles in this series appears at the end of this volume.
Public Expenditures,
Taxes, and the
Distribution of Income
THE UNITED STATES, 1950, 1961, 1970
MORGAN REYNOLDS
Texas A & M University
College Station, Texas
EUGENE SMOLENSKY
University of Wisconsin
Madison, Wisconsin
ACADEMIC PRESS New York San Francisco London
A Subsidiary of Harcourt Brace Jovanovich, Publishers
This book is one of a series sponsored by the Institute for Research on
Poverty of the University of Wisconsin pursuant to the provisions of the
Economic Opportunity Act of 1964.
Copyright © 1977 by the Regents of the University of Wisconsin System
on behalf of the Institute for Research on Poverty
All Rights Reserved
No portion of this book may be reproduced in any form by print,
microfilm, or any other means without permission from Academic Press
ACADEMIC PRESS, INC.
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United Kingdom Edition published by
ACADEMIC PRESS, INC. (LONDON) LTD.
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Library of Congress Cataloging in Publication Data
Reynolds, Morgan.
Public expenditures, taxes, and the distribution of
income.
(Institute for Research on Poverty monograph series)
Bibliography: p.
1. Income distribution-United States. . 2. United
States-Appropriations and expenditures. 3. Taxation-
United States. I. Smolensky, Eugene, joint author.
II. Title. III. Series: Wisconsin. University-
Madison. Institute for Research on Poverty. Monograph
series.
HC110.I5R49 339.2 Vo973 76-50402
ISBN 0-12-586550-3
PRINTED IN THE UNITED STATES OF AMERICA
79 80 81 82 9 8 7 6 5 4 3 2
Institute for Research on Poverty
The Institute for Research on Poverty is a national center for research
established at the University of Wisconsin in 1966 by a grant from the
Office of Economic Opportunity. Its primary objective is to foster basic,
multidisciplinary research into the nature and causes of poverty and means
to combat it.
In addition to increasing the basic knowledge from which policies aimed
at the elimination of poverty can be shaped, the Institute strives to carry
analysis beyond the formulation and testing of fundamental generalizations
to the development and assessment of relevant policy alternatives.
The Institute endeavors to bring together scholars of the highest caliber
whose primary research efforts are focused on the problem of poverty, the
distribution of income, and the analysis and evaluation of social policy,
offering staff members wide opportunity for interchange of ideas, maximum
freedom for research into basic questions about poverty and social policy,
and dissemination of their findings.
To SU ZI Ε and NA TA LI Ε,
resident experts in the
distribution of welfare
List of Figures
3.1 Time Series of the 1RS and CPS Gini Coefficient and the NBER Reference
Cycles, 1947-1973 42
4.1 Expenditure, Taxes, and Net Benefit Regressions with Factor Income, Standard
Incidence, 1950, 1961, 1970 (Current Dollars) 55
4.2 Expenditure and Tax Regressions with Factor Income, Standard Incidence,
1950, 1970 (Current Dollars) 60
5.1 Lorenz Curve Comparisons, Factor Income, Standard Incidence, Pre- and Post-
Fisc, 1950 68
5.2 Lorenz Curve Comparisons, Factor Income, Standard Incidence, Pre- and Post-
Fisc, 1961 69
5.3 Lorenz Curve Comparisons, Factor Income, Standard Incidence, Pre- and Post-
Fisc, 1970 70
5.4 Lorenz Curve Comparisons, Factor Income, Standard Incidence, Post-Fisc,
1950,1961,1970 71
6.1 Lorenz Curve Comparisons, Personal Income Tax 1950, 1961, 1970 86
6.2 Hypothetical Alternative Trends in Income Inequality, 1900-1970 89
List of Tables
3.1 Comparison of Distribution of Households by Income, Various Sources, 1959
and 1961 33
3.2 Gini Concentration Ratios from Various Sources, Selected Years, 1950-1973 35
3.3 Selected Expenditures and Taxes as a Percentage of NNP, Selected Years 43
4.1 Standard Incidence Assumptions 49
4.2 Expenditures and Taxes as a Percentage of Factor Income, Standard Incidence,
1950, 1961, and 1970 51
4.3 Expenditures as a Percentage of Factor Income, General Expenditures
Distributed by Factor Income, 1950, 1961, and 1970 53
4.4 Tax and Expenditure Regressions with Factor Income, Standard Incidence
(Current Dollars) 55
4.5 Tax and Expenditure Regressions with Factor Income, Standard Incidence
(Constant 1967 Dollars) 58
4.6 Tax and Expenditure Regressions with Factor Income, Standard Incidence
Except General Expenditures by Income (Current Dollars) 59
4.7 Tax and Expenditure Regressions with Factor Income, Regressive Incidence
(Current Dollars) 61
4.8 Tax and Expenditure Regressions with Factor Income, Progressive Incidence
(Current Dollars) 62
4.9 Tax and Expenditure Regressions with Money Income, Standard Incidence
(Current Dollars) 63
4.10 Elasticities for Standard Post-Fisc, Factor and Money Income 63
5.1 Gini Coefficients for Selected Experiments, 1950, 1961, and 1970, Factor NNP 67
5.2 Gini Coefficients for Selected Experiments, 1950, 1961, 1970, Money NNP 71
5.3 Lorenz Estimation Results, 1950-1970 73
5.4 Predicted Share of Income, Quintiles, 1950, 1961, and 1970 74
5.5 Chow Tests for Significant Differences in β Coefficients 74
6.1 Ratio of Total Taxes to NNP, Selected Years, 1902-1970 78
6.2 Gini Concentration Ratios for Post-Fisc Counterbudgets, Standard Case,
Factor Income 80
6.3 Sources of Absolute Declines in Inequality, Normal Incidence, 1950, 1961,
1970, Factor NNP 83
6.4 The Tax Structure in 1950, 1961, and 1970 85
7.1 Pechman-Minarek and Reynolds-Smolensky Compared, 1970 93
A.l Final Income, Primary Income, and Redistribution Specified 99
B.l Distributors by Income Class, 1950 104
B.2 Distributors by Income Class, 1961 106
xiii
xiv List of Tables
B.3 Distributors by Income Class, 1970 108
Cl Household Income Bases, 1950 112
C.2 Household Income Bases, 1961 113
C.3 Household Income Bases, 1970 114
D.l Federal Taxes by Income Class, 1950 116
D.2 Federal Taxes by Income Class, 1961 117
D.3 Federal Taxes by Income Class, 1970 118
D.4 State and Local Taxes by Income Class, 1950 119
D.5 State and Local Taxes by Income Class, 1961 120
D.6 State and Local Taxes by Income Class, 1970 121
E.l Federal Expenditures by Income Class, 1950 124
E.2 Federal Expenditures by Income Class, 1961 126
E.3 Federal Expenditures by Income Class, 1970 128
E.4 State and Local Expenditures by Income Class, 1950 130
E.5 State and Local Expenditures by Income Class, 1961 131
E.6 State and Local Expenditures by Income Class, 1970 132
Foreword
Since 1964, the elimination of poverty has been an explicit government
objective. When a country has established a national objective, its citizens
and leaders are understandably interested in knowing how much progress
has been made toward its achievement. For many reasons, however, assess-
ing our progress against poverty is not straightforward.
Assessing progress against poverty is difficult because the well-being of
the poorest members of our society depends not only upon how poor they
are in absolute terms, but also upon how much poorer they are than the
average American. The well-being of the poor (and the nonpoor too) also
depends upon not only their gross money incomes but upon the taxes they
pay to the government and the benefits they receive from it. To the extent
that poverty is a relative phenomenon, and to the extent that taxes are not
assessed and government services are not distributed among our people in
the same proportion as is money income, ascertaining the degree of
progress against poverty requires that we know whether the poor's share has
increased. In this book, Morgan Reynolds and Eugene Smolensky attempt
to ascertain whether incomes minus taxes plus government services—what
they call the post-fisc distribution of income—is distributed more equally in
1970 than in 1960 or in 1950. Do the poor get a bigger share in 1970 than
they did in 1950?
As the authors point out, this is not a simple question to answer. First,
accurate data on the distribution of all taxes and government services, by
income class and for both years, is required. But the distributional effects of
many taxes and government services is still a matter of such theoretical and
empirical debate that even which data to collect is not a settled issue. Con-
sequently, Reynolds and Smolensky employ a number of alternative
assumptions about the incidence of various taxes and government services.
One of the strengths of the book is their presentation of alternative assump-
tions and the data with which to test them, so that the reader can see how
sensitive their conclusions are to these alternative assumptions.
One of the most striking findings of the book is that, on the one hand, the
distribution of income before subtracting taxes or adding government
benefits—the pre-fisc distribution—was substantially less equal in each year
than the post-fisc distribution of income; but, on the other hand, the post-
fisc distribution of income changed very little between 1950 and 1970,
XV
xvi Foreword
despite the large growth in taxes and government services during these
years. Taxes and government expenditures thus appear to equalize the dis-
tribution of well-being in any given year, leading one to think that the
substantial growth of taxes and government services would have produced a
substantial reduction in post-fisc inequality over time. Reynolds and
Smolensky do not, however, find a substantial reduction.
One possible interpretation is that the pre-fisc distribution of income has
become more unequal over time. Just like Alice, the government has had to
run faster (tax and spend more) to keep up. Alternatively, it is possible that
increases in government taxes and services have led to increases in
measured pre-fisc inequality. For example, increased Social Security
benefits may have led the aged to work and earn less, and to be more able
to maintain separate households (rather than living with their children). To
the extent that this is the case, progress against poverty over time is
underestimated whether the comparison is pre- or post-fisc inequality. An
old person who is able to afford to maintain a separate household by virtue
of higher Social Security payments is better off than he would be in their
absence—but he is counted as worse off because, as a result of the higher
Social Security benefits, he is a separate household with low income rather
than part of his children's household.
To what extent the fisc is compensating for or causing greater measured
pre-fisc inequality is an important question that will be addressed by the
next round of research on inequality. If it did nothing else—and it does
much more very well—the Reynolds-Smolensky volume would be an
important contribution because it sets the stage for this next round of
research.
IRWIN GARFINKEL
Director, Institute for Research on Poverty