Treasury Distributional Analysis Compared

How the ITEP Analysis of the Congressional 1997 Tax Plans Compares to Treasury's Analysis

Both the U.S. Treasury Department and the Institute on Taxation and Economic Policy have performed computer microsimulation analyses of the tax bills currently pending in Congress. (Treasury's findings are labeled "very preliminary.") Both tax models are based on similar databases and use similar basic methodologies. But they differ somewhat in presentation, taxes analyzed and time frames. As a result, while both analyses show the congressional tax-writing committees tax cuts's concentrated in the top fifth of the income scale, there may seem at first glance to be some significant differences in detail. Those differences are, however, rather easily explained:

1. Estate taxes: ITEP's analysis includes the bill's estate tax cuts. Treasury's ("very preliminary") analysis does not. Treasury's approach of leaving out the estate tax cuts significantly reduces the size of the tax cuts at the very top of the income scale.

2. Excise taxes: ITEP's analysis includes the proposed increase in airline ticket taxes. Treasury's analysis does not. Treasury's approach of leaving out the excise tax increases makes the net tax changes look less regressive.

3. Capital gains: ITEP's analysis includes the tax cuts from indexing capital gains for inflation after indexing is fully effective (at today's income levels). In Treasury's analysis, indexing is shown after it is only about half effective. In addition, Treasury's definition of income for grouping tax units includes accrued capital gains (whether realized or not), while ITEP's includes only realized capital gains. As a result of these two differences, Treasury shows both (a) a considerably lower total capital gains tax cut and (b) a modestly different distribution of the capital gains tax benefits it does take into account.⁽¹⁾

4. Overall: When these differences are accounted for, ITEP and Treasury's analyses are very similar. For example, with regard to Senate Finance Committee Chairman William Roth's tax plan (which does not include capital gains indexing):

Treasury's analysis shows about two-thirds of the Roth tax breaks going to the top fifth.
ITEP's analysis, without the estate tax cuts and excise tax hikes that Treasury excludes, shows about 70% of the Roth tax breaks going to the top fifth, virtually the same as Treasury's analysis. (Including Roth's estate and excise tax changes, ITEP's analysis shows 79% of the tax breaks going to the top fifth.)

Institute on Taxation and Economic Policy, June 19, 1997

1. To be precise, Treasury's income classifier moves some of the capital gains tax benefits away from the top 1% compared to the ITEP approach, but does keep those benefits in the top fifth. For purposes of grouping tax units by income, ITEP defines income as essentially total cash income. (This is very similar to the income definition used by the congressional Joint Committee on Taxation and the Congressional Budget Office.) Treasury's income definition adds fringe benefits and imputed rent on owner-occupied homes to total cash income, and rather than including realized capital gains and pension benefits received, includes accrued capital gains (whether realized or not) and inside build-up on pensions (along with inside build-up on life insurance, IRAs and Keoghs).