Government transfers and federal taxes significantly affect the distribution of economic resources available to U.S. households. Conclusions about the redistributive characteristics of the transfer and tax systems, however, depend on the framework used to analyze their effects. In particular, the measure of income used as the basis for ranking households and as the denominator in calculations of average transfer and tax rates significantly affects the conclusions one may draw from a distributional analysis.
This paper presents a new framework CBO will use in its analysis of the distributional effects of government transfers and federal taxes. This framework will rely on a new measure of income: income before transfers and taxes, or market income plus social insurance benefits. In that income measure, transfers are limited to means-tested transfers and taxes are limited to federal taxes. The new income measure will be used as the basis for ranking households and as the denominator in the calculation of average federal tax rates and average mean-tested transfer rates—a new metric in CBO’s distributional analyses.
This working paper defines CBO’s new income measure and distributional framework and analyzes how several common metrics used in CBO’s distributional analyses compare between the new framework and the previous framework. By removing means-tested transfers from the base income measure, the new framework allows means-tested transfer rates and federal tax rates to be analyzed on a similar basis—that is, relative to income before transfers and taxes. This paper examines those metrics using data from 1979 through 2013.