The Incidence of the Tax Structure

In appraising the total picture, we are thus left with four patterns, shown in lines (17) and (18) of tables 2 and 3. Which of these is the most meaningful pattern is essentially a matter of judgment. While I see good reasons for thinking in terms of lines (17) and (18) of table 2, some readers may wish to operate with the broader income concept; and others may wish to use an even broader base including, say, an imputed income for the services performed by housewives.

2. Particular Taxes

We now turn to the role of particular taxes in bringing about this overall pattern of incidence.

Personal Income Tax. Turning again to table 2, we find that the Federal personal income tax is the most distinctly progressive element in the tax structure. As shown in line (1), this feature does not only apply to the middle and higher income ranges but also at the lower end of the scale. This, I think, is a factor of paramount importance for Federal tax policy and a strong reason for placing primary emphasis on the personal income tax. The progressivity of State income taxes is more moderate, as shown in line (9). In estimating the incidence of these taxes, we assume in both cases that income-tax payments stay put with the taxpayer.

Estate and Gift Tax.

The estate and gift tax is a highly progressive part of the tax structure. If we assume that the tax falls on the doner, we will not be far off if we allocate the total amount to the top income bracket. If we assume it to fall on the recipient, some of the burden might accrue to the lower brackets, but the amount will be small. While the estate and gift tax is a highly progressive element in the tax structure, its weight in the total picture is very slight.

Corporation Income Tax.

The estimated incidence of the corporation income tax, as shown in lines ( 3 ) and (11), follows a U-shaped pattern. It is more or less proportional or even regressive over the lower to middle range of the income scale and becomes progressive only in the higher brackets. This somewhat surprising result reflects two factors which enter the analysis. One factor is the assumption that two-thirds of the corporation tax is borne by the shareholder while one-third is passed on to the consumer. Thus one-third of the corporation tax is in fact treated as a sales tax, with a correspondingly heavier burden on the lower income groups. While I am not in a position to prove that this is the true ratio, I

believe that theoretical reasoning as well as empirical observation renders this a much more defensible assumption than the standard textbook proposition that the corporation tax cannot be shifted except through its effects on capital formation. A second factor is that the ratio of dividend to other income is higher in the lower than in the middle income brackets, reflecting the importance of retirement income in the low brackets. To the extent that the corporation tax falls on the shareholder, the lower income brackets thus assume a proportionately larger burden than may be expected. Certain other methodological problems of the corporation tax case (in particular, the treatment of retained earnings and tax thereon) were discussed at length in the 1948 study and need not be repeated here.

These results as well as certain other considerations suggest that the corporation tax is not as progressive an element of the tax structure as some people believe it to be. Indeed, the popularity (insofar as taxes can be popular) of the corporation tax may well be due to the fact that its friends consider it to be highly progressive, while those who prefer it to the personal income tax suspect that in fact it is pretty much in the nature of a sales tax. Both can't be right at the same time. The incidence of the corporation tax, unnecessarily to say, is of crucial importance to tax policy. It has immediate bearing on the problem of integration and to me implies a strong argument in favor of the dividend credit (at the corporate level) approach. Also, it is of evident importance to the choice between taxes on consumption and taxes on investment.

Excises and Customs.

The estimated incidence of excise and custom duties, shown in lines (4), (5), and (12) of table 2, is distinctly regressive throughout the income scale. This result is based on the assumption that such taxes are paid for by the consumer and reflects the familiar fact that consumption expenditures decline as a percent of income when moving up the income scale. The assumption that such taxes are paid by the consumer is not beyond dispute, but I believe that it is a rather sensible one.