NPC Working Paper #05-16

September 2005

How Do Tax Policies Affect Low Income Workers?

Kevin A. Hassett, The American Enterprise Institute and Anne Moore, University of California, Berkeley

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The study of the incidence of the U.S. tax system has a long and impressive history that has proceeded along many different complementary paths. Arnold Harberger (1962) laid the groundwork for distributing the burden of taxes. Beginning with the pioneering work of Joseph Pechman and Benjamin Okner (1974), scholars have explored the impact of a wide array of taxes on the distribution of income. Theoretical work has subsequently incorporated distributive objectives into optimal tax design (see Auerbach 1985). Other work has explored the direct and indirect impacts of various tax reform proposals and also identified the effects that different tax reforms have on the distribution of income across income classes (See Carasso and Steuerle 2003; Burman and Saleem 2004; Gale and Orzag 2004; and Devarajan, Fullerton, and Musgrave 1980).

While the existing literature presents interesting snapshots of the impact of the U.S. tax system on low-income individuals, these snapshots are difficult to assemble into a complete view, something that was last done exhaustively in Pechman (1985). While ample data exist documenting changes in federal tax policy over time, information on state and local taxes, especially sales and property taxes, is less abundant. However, studies of state taxes have been done recently by both the Institute on Taxation and Economic Policy (2003) and the Center on Budget and Policy Priorities (2004)...