TAX-REFORM 1986 AND MARGINAL WELFARE CHANGES FOR LABOR

During the 1980s in the US, before-tax income shifted away from the poor and toward the upper income groups. Changing the distribution of tax burdens or after-tax income is one way to redress a growing imbalance in before-tax income. In this paper, we use Browning's partial equilibrium framework to examine the influence of the reduction in marginal tax rates from TRA86 on the distribution of welfare gains from labor supply reallocation for males by population decile and for females by population decile and by marital status. The empirical results illustrate how the tax reform affected low-income female household heads, where poverty is so heavily concentrated, as well as other household heads and spouses. The results indicate that TRA86 reduced welfare costs in the economy, but these welfare gains were distributed in a pro-rich manner or they grew as income increased for males and for females regardless of marital status. In the next section of the paper, we review several methods of estimating welfare changes from tax reform. We examine Browning's method and explain why we use it for our analysis. We then turn to the empirical values for key parameters of the model and discuss the micro data simulation file that we use to estimate the welfare gains. The results are reported in a fourth section of the paper and are followed by the conclusions that we draw from our work. -from Authors