Abstract The history of the maximum tax on earned income makes it clear that Congress had two goals in enacting it as part of the 1969 Tax Reform Act - to promote horizontal equity among high-income taxpayers and to motivate taxpayers toward "economically productive" activities. An analysis of tax return data from the 1976 Individual Tax Model file provides evidence that the maximum tax did contribute to horizontal equity, especially at AGI levels above 100, 000. Simulated results for 1975, 1977, and 1979 (representative of the various changes in the maximum tax) show that the maximum tax continued to contribute to horizontal equity throughout the eleven years it was in effect. The 1976 data also provide indirect evidence that maximum tax beneficiaries were less likely to have engaged in tax sheltering activities than other taxpayers in their AGl class. Following the Economic Recovery Tax Act of 1981, the absence of the maximum tax as part of the rate structure may reduce horizontal tax equity among high-income taxpayers.
Madeo et al. (Thu,) studied this question.