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This chapter examines reasons for the rise in the share of taxes paid by upper-income individuals following the passage of the Economic Recovery Tax Act (ERTA) in 1981. It extends this analysis to estimate the potential revenue consequences of behavioral responses by taxpayers to the Tax Reform Act of 1986 (TRA86). Our major findings are as follows: 1. Wage, salary, and professional income constitute an increasingly large share of the income of upper-income taxpayers. 2. Lower tax rates on earnings and capital gains explain most of the redistribution of tax shares following ERTA. 3. Upper-income individuals received a declining share of dividend and interest income in spite of macroeconomic reasons to expect the opposite. 4. Higher tax revenues due to greater wage, salary, and professional income may increase expected tax revenues by as much as $15 billion annually under TRA86. 5. Potential declines in capital gains realizations may lower expected tax revenues by as much as $30 billion annually under TRA86, relative to a nonbehavioral estimation. 6. The combined effect of all responses to TRA86 implies a decline in the share of taxes paid by upper-income taxpayers rather than an increased share expected under nonbehavioral assumptions.

Did Erta Raise the Share of Taxes Paid by Upper-Income Taxpayers? Will TRA86 Be a Repeat?