An Isolation of the Effects of Personal Deductions, Tax Credits, and the Tax Rate Schedule on U.S. Individual Income Tax Progressivity and income Inequality.

Scholars suggest that the redistributive property of personal expense deductions and tax credits has important equity Consequences, some positive and some negative. In this study, Statistics of Income (SOl) data for 1989 are used to isolate the precise impacts these deductions and credits have on overall tax progressivity and income inequality. The empirical findings reveal that, except for medicair expenses and casualty losses, itemized deductions reduce the progressivity of the federal individual income tax by up to 17.83 percent. Additionally, they cause the after-tax income distribution to become about 1 percent more unequal than the before-tax income distribution. A simulation model suggests that itemized deductions will continue to be regressive despite their cut-back for high-income taxpayers. Conversely, personal and dependency exemptions and standard deductions together contribute more to overall progressivity and to diminishing income inequality than does the tax rate schedule. Tax credits as a whole make a modest incremental contribution to overall vertical equity.