Measuring U.S. inequality and progressivity the right way

This study, joint with Alan Auerbach and Darryl Koehler, marries ESPlanner — a commercial, life-cycle financial planning program —with the Survey of Consumer Finance data from the Federal Reserve Bank to a) assess lifetime spending inequality, b) contrast lifetime spending inequality with wealth inequality, c) calculate cohort-specific lifetime net tax rates, d) assess the degree to which the fiscal system mitigates spending inequality, and e) calculate total effective marginal net tax rates.  The study is comprehensive.  This study incorporates the more than roughly 20 major U.S. tax-transfer programs including the Earned Income Tax Credit as well as Social Security, Medicare and Medicaid.  Our findings are striking and suggest strong policy responses. Despite popular beliefs, the U.S. fiscal system appears to be highly progressive. It is dramatically reducing the inequality in spending. This said, U.S. spending inequality remains extreme. The picture contrasts markedly with conventional analysis which compares current net taxes with current income.  This framework bears no real connection to economic theory and provides a distorted picture of the efficacy of our fiscal institutions. For example, conventional studies of inequality don’t consider tax credits. Nor do they consider the phase-out of itemized deductions, the taxation of social security benefits, or the progressivity of state income taxation. The paper also shows that wealth inequality is a very poor proxy for true economic inequality, namely inequality in spending power. Finally the study shows remarkably high marginal tax rates for the majority of the population with enormous variation across households with similar means.  America's tax-transfer system confronts the vast majority of American households with either high, very high, or astronomically high total effective marginal tax rates on labor supply and saving.