Taxation and inequality: Active and passive channels.

Area of Science:

• Economics
• Public Finance
• Income Inequality

Background:

• The US federal income tax system's role in household welfare and inequality is not fully understood.
• Existing models may not adequately capture the nuances of tax policy's impact on consumption inequality.

Purpose of the Study:

• To deconstruct the mechanisms through which the federal income tax system influences the transmission of income shocks to consumption.
• To analyze how changes in the tax system affect consumption inequality and household welfare.

Main Methods:

• Linking micro and macro models of income and consumption distribution to changes in the federal income tax system.
• Decomposing the tax system into three key mechanisms to assess its role in consumption insurance.

Main Results:

• Identified significant changes in the types of income shocks consumers are insured against by tax policy.
• Quantified the extent to which tax policy provides insurance against income shocks.
• Demonstrated that without detailed decomposition, the role of tax policy in consumption insurance may be misjudged.

Conclusions:

• Tax policy changes have disproportionately affected different socioeconomic groups, exacerbating inequality.
• A nuanced understanding of tax system mechanisms is essential for accurately assessing its impact on welfare and inequality.