The federal income tax has been under attack by the economics profession for more than a decade. The attack comes from two directions: supply-siders who believe that progressive income taxation impairs economic incentives,' and more traditional economists who would substitute a progressive expenditure tax for the income tax.2 At one time, support for the expenditure tax was confined to a few members of our profession, including such distinguished names as John Stuart Mill, Irving Fisher, Nicholas Kaldor, and James Meade. Today, it is fair to say that many, if not most, economists favor the expenditure tax or a flat rate income tax. This group has joined the opponents of progressive taxation in the attack on the income tax. Despite an incessant barrage from both groups, no country in the world is planning to abandon the income tax or is even considering a personal expenditure tax. A wave of tax reform, beginning with the U.S. reform in 1986, has been sweeping the world, aimed at improving the income tax, not at eliminating it. Tax preferences formerly regarded as sacrosanct are being removed and there is a distinct movement toward comprehensive income taxation.3 However, individual income tax rates are being cut, tax progressivity has been declining almost everywhere, and reliance on the income tax has been diminishing. It will come as no surprise to this audience that I approve of the base-broadening feature of the current tax reform movement, but I believe that the reduction in the redistributive effect of the income tax has gone too far. In this paper, I shall show that the progressivity of the U.S. tax system-never very pronounced, except during and immediately after the two world wars-has been declining for more than two decades and that the Tax Reform Act of 1986 reversed this decline, but only slightly. Consequently, we have a long way to go to improve the equity of the tax system. I believe this can be done without punitive tax rates that will hurt economic incentives. I begin with a brief review of recent changes in the U.S. distribution of income and follow this with an analysis of the effect of taxes on the income distribution. I next examine arguments for and against the income tax, with particular emphasis on its effects on economic incentives and its merits when compared with the expenditure tax. I then evaluate the income tax as it emerged from the 1986 tax reform and conclude with tJoseph Pechman passed away on August 19, 1989. His Presidential address was delivered at the onehundred second meeting of the American Economic Association, December 29, 1989, Atlanta, Georgia. *Joseph A. Pechman, Economic Studies Program, The Brookings Institution, 1775 Massachusetts Avenue NW, Washington, DC 20036. I have benefited from the comments and suggestions on an earlier draft of this paper by Henry J. Aaron, Richard Goode, Jane G. Gravelle, Robert W. Hartman, Donald W. Kiefer, Herbert E. Klarman, Robert D. Reischauer, Clifford M. Winston, and H. Peyton Young, but they should not be held responsible for the views expressed in this paper. I am indebted to Richard Kasten for various simulations. I am also grateful to Stephen J. Kastenberg for research assistance and to Diane A. Shugart, Valerie M. Owens, and Sara C. Hufham for secretarial assistance. 'Some of the more extreme supply siders argued that large tax cuts pay for themselves (see, for example, Laffer, 1981), but I believe it is fair to say that this view has been totally discredited. For a more reasonable supply-side view, see the Economic Report of the President 1982. 2See, for example, Michael J. Boskin (1978), David E. Bradford (1980), Charles L. Ballard, Don Fullerton, John Shoven and John Whalley (1985), Paul Courant and Edward Gramlich (1982), Martin Feldstein (1978), Robert Hall and Alvin Rabushka (1985), John Kay and Mervyn King (1983), Charles McLure (1987), Mieszkowski (1980), and Lawrence Summers (1981). It is interesting that the recent popularity of the expenditure tax among economists was stimulated by a tax lawyer, William D. Andrews (1974). 3See Pechman (1988).

I am indebted to Edgar Browning for calling attention to some peculiarities of the data underlying the estimates in my 1985 study. He is quite right that the ratios of transfer payments to income in the files for 1975 and later years are inconsistent with the corresponding ratios in the 1966 and 1970 files and in the Consumer Population Surveys, particularly in the lower part of the income distribution. I do not believe, however, that the baby should be thrown out with the bathwater, as Browning seems to suggest. I made available to him detailed data on the tax burdens of labor income, capital income, and consumption by income classes which provided a basis for revising my calculations for 1975 and later years. Instead, he chose to draw inferences about the progressivity of U.S. taxes since 1966 on the basis of changes in the relative importance of the various taxes, which is not appropriate for this purpose. These inferences would be correct only if there were no changes in the structure of each tax and in the composition of income in the various income classes during the period studied (for example, if there were no changes in the progressivity of the individual income tax or in the distribution of dividends by income classes).' It is straightforward to improve on this procedure. Where in the income distribution the share of transfer payments in total income is too low in 1975 and later years, the shares of labor and capital income are correspondingly high, and vice versa. To arrive at more realistic estimates of the shares for labor, capital, and transfer income, I first applied the 1970 shares to adjusted family income in each income decile in 1975, 1980, and 1985, and then made proportional adjustments in the columns and the rows alternately until they added to the correct totals.2 The incidence calculations for 1980 based on the revised weights are given in table 1 of my study, which shows the effective rates of the major taxes by deciles.3 These calculations are based on the most progressive set of assumptions (variant lc) presented in my study. Variant Ic assumes that the corporation income and property taxes are borne by capital in general, the payroll tax by labor, consumption taxes by consumers, and the individual income tax by those who pay it. I believe that this variant more nearly reflects the present state of incidence theory than any of the other variants.4

Joseph A. Pechman, Distribution of Federal and State Income Taxes by Income Classes, The Journal of Finance, Vol. 27, No. 2, Papers and Proceedings of the Thirtieth Annual Meeting of the American Finance Association, New Orleans, Louisiana, December 27-29, 1971 (May, 1972), pp. 179-191