income and by source. As in the recent past, economic developments—financial booms and busts, technological innovations—will result in differences from these projections in unforeseeable ways. Still, both the distributional findings for tax structures and the various scenarios are based on the same set of economic projections.


35. For a given scenario—such as high—the differences in the distribution of combined taxes between the current and simplified taxes very likely would reflect the different structures of the personal income tax. The differences in the distribution do not reflect the payroll tax, because the current and simplified taxes for a given scenario include the same payroll taxes (see Table 8-1). Another point refers only to the high scenario. With the current tax structure only, this scenario includes a VAT that would rise from 8.1 percent in 2050 to 14.6 percent in 2080. The rising VAT likely explains why—for the top 5 percent—the difference in after-tax income between the current and simplified tax structures is 7.5 percentage points in 2050, but narrows somewhat to 5.9 percentage points in 2080.


36. Whatever the tax structure, increasing the gap between the marginal tax rates for capital gains and ordinary income expands the incentive to shelter income as capital gains. Such sheltering (i.e., tax avoidance) is both inequitable and inefficient. The current gap between the top statutory rate on ordinary income (35 percent) and the 15 percent rate on capital gains is 20 percentage points. Under the current tax structure for the intermediate-2 scenario in 2050, these percentage rates are 40.9 and 17.5 respectively, which increases the gap, to 23.4 percentage points. For the same scenario under a simplified tax structure, rates of 22.2 and 13.3 mean a smaller gap than at present, of 8.9 percentage points. The gap in the tax rates for ordinary income and capital gains can be reduced by taxing capital gains more heavily, but that risks curtailing investment and international competitiveness.


37. This appears in the disaggregated findings for the top quintile—not shown here—into the 80-90, 90-95, and 95-99 percentile groups, as well as the top 1 percent and 0.l percent groups. Although, in absolute terms, those findings are very sensitive to the projected income distribution, they do show the high-end effects of tax structure, given the income projection.


38. Historically, lower maximum tax rates have led upper-income taxpayers to exert less effort converting their taxable incomes into nontaxable forms because there is less financial incentive for them to do so.


39. However, this comparison of relative tax burdens under three of the scenarios (not the low one) shows that taxes increase for all taxpayer groups in all years.

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