Wage Income Taxation
The wage-income tax structure has four elements: 1) a progressive marginal rate structure derived from a quadratic approximation to the 1996 federal statutory tax rates for individuals, 2) a standard deduction of $4000 and exemptions of $5660 (which assumes 1.2 children per agent, consistent with the model’s population growth assumption), 3) Itemized deductions—applied only when they exceed the amount of the standard deduction—that are a positive linear function of income estimated from data reported in the Statistics of Income,s and 4) Eamings-ability profiles that are scaled up to incorporate pension and non-pension components of labor compensation.
The model’s initial economy-wide average marginal tax rate on wage income is about 21 percent, about the figure obtained from the NBER’s TAXSIM model reported in Auerbach (1996). The average wage-income tax rate equals 12.1 percent. For all individuals in the highest lifetime income class (group 12), the average effective marginal tax rate on labor income is 28.6 percent. The highest realized effective marginal tax rate is 34 percent. For lifetime income class 6—whose members have peak labor earnings of about $35,000—the average tax rate and average marginal tax rate are 10.6 and 20.0 percent, respectively. For the poorest class (group 1), the corresponding rates are zero and 5.5 percent.
Capital Income Taxation
Following Auerbach (1996), we assume that income from residential capital and non-residential capital are taxed at flat rates of 6 percent and 26 percent, respectively. Given the roughly equal amounts of these two forms of capital, the effective federal marginal tax rate on total capital income is 16 percent. However, this rate applies only to new capital Existing capital faces a higher tax rate which, given depreciation schedules, is estimated to be 20 percent. We model this gap by assuming that all capital income faces a 20 percent tax, but that 20 percent of new capital may be expensed, thereby generating a 16 percent effective rate on new capital.
State Income Taxation
In addition to the federal taxation, both capital and wage income are subject to a proportional state income tax of 3.7 percent. This value corresponds to the amount of revenue generated by state income taxes in 1996 divided by national income. no checking account payday loans