Commentary Type

Equity in the Tax Code

Douglas Holtz-Eakin

Testimony before the House Committee on Ways and Means


Objectives of Tax Policy

Paying the Bills

The central purpose of the tax code is to raise revenue to finance federal outlays. According to the Congressional Budget Office (CBO), for fiscal 2007 total revenues will be nearly 19 percent of GDP-above the average for the past 40 years-yet fall below total federal spending equal to about 20 percent of GDP.1 The resulting unified budget deficit of 1.2 percent of GDP lies well within the range of historical budget outcomes.

Unfortunately, in the years to come mandatory spending programs will grow quite rapidly.2 The rising fiscal pressures emanating from spending on Social Security and health programs, if left unchecked, will threaten the three pillars of US postwar economic success. First, the successful US economic strategy has been to rely largely on the private sector; the mirror image of this approach being a government sector that is relatively small (granted, "small" is in the eye of the beholder) and contained. Growth in spending of the magnitude promised by current laws guarantees a much larger government.

Second, the small US government has been financed by taxes that are relatively low by international standards and interfere relatively little with economic performance. Spending increases of the type currently projected would entail taxes higher by 50 percent or more to unprecedented levels. Such a policy would impair economic growth and reduce living standards for future generations.

Finally, a hallmark of the US economy has been its ability to flexibly respond to new demands and disruptive shocks. In an environment where old-age programs-namely Social Security, Medicare, and Medicaid-potentially consume nearly every budget dollar, to address other policy goals future politicians may resort to mandates, regulations, and the type of economic handcuffs that guarantee lost flexibility.

In sum, the absence of reforms to mandatory spending programs most threaten the ability of the tax code to meet its primary objective. This raises the specter of a generational injustice: bequeathing to our children and grandchildren a rising burden of taxation, a less robust economy, or both. The most pressing issue of fairness cannot be addressed by raising taxes, but rather requires reducing the growth of spending.

Keeping the Burden of Taxes Low

The importance of keeping federal spending contained to national priorities and thus permitting taxes to be as low as possible is straightforward: Taxes directly reduce the ability of families to pay their bills and save for the future. However, even the best tax system impairs market incentives, imposes obstacles for households and firms alike, and undermines economic performance. A goal of tax policy should be to keep such interference and waste as small as possible.3

In this regard, unfortunately, our tax code is in need of a major overhaul. A vivid example of the type of distortion our code presents is provided by health insurance. At present, employer-provided insurance is not treated as part of income so companies offer health insurance coverage as a tax-free benefit instead of higher wages or salaries. Employees and employers alike respond to the tax-based incentives and change compensation packages. The result is less revenue (and the need for higher tax rates elsewhere). The flip side of the coin is demand for more generous insurance, which drives up insurance costs. In some cases, individuals go without insurance as a result. If individuals purchase insurance themselves, they do not receive the same tax treatment as when their employer purchases for them, generating biases in health insurance markets. In short, a poorly designed tax code exacerbates our pressing health insurance issues.

The provision of health insurance is just one of a multitude of economic decisions within our $13 trillion economy. Tax-based distortions permeate our daily economic lives. Decisions on saving, retirement, education, investment, debt, and equity finance are driven by tax-based planning to the detriment of our ability to meet pressing national needs. The tax code is a basic impediment to the United States' ability to grow robustly and compete in global markets.

The loss in economic performance is exacerbated by the sheer cost of complying with an overly complex tax code. According to the President's Advisory Panel on Federal Tax Reform, "If the money spent every year on tax preparation and compliance was collected-about $140 billion each year or over $1,000 per family-it could fund a substantial part of the federal government, including the Department of Homeland Security, the Department of State, NASA, the Department of Housing and Urban Development, the Environmental Protection Agency, the Department of Transportation, the United States Congress, our federal courts, and all of the federal government's foreign aid."4


A final objective is to raise taxes in a fair fashion. Unfortunately, there are two major obstacles to an easy evaluation of the success in meeting this standard. The first is figuring out who really pays a tax.5 For example, in 2006 the federal government raised $354 billion from the corporation income tax. However, corporations did not "pay" the tax in any meaningful sense-they merely sent in the check. In the process of meeting their tax obligation, however, firms could have raised prices, cut back on wages, reduced fringe benefits, slowed replacement of equipment or scaled back expansion plans, cut dividends, or many combinations of their options to alter their revenues and cost structures. The result is that the corporation tax is "paid" by customers, workers, or investors. Indeed, recent evidence suggests that the relatively high rate of the US corporation income tax is ultimately paid by workers in the form of lower wages.6

A second difficulty is the absence of an ethical consensus on distributional fairness. In the absence of such a benchmark, two guidelines prove useful. The first is to note that individuals view market transactions as a "fair deal" when they get back value equal to what they paid. By analogy, a benchmark for judging the tax system is whether a taxpayer's liability is equal to benefits received from the federal budget-a neutral system. If benefits received exceed taxes, the household is a net beneficiary of the tax system and vice versa.

This perspective differs from two other metrics that are commonly employed-effective tax rates and tax shares. Effective tax rates are the ratio of taxes paid to income-roughly the share of income taken by taxes. A drawback to evaluating fairness using effective tax rates is that the rates may change because of movements in the denominator-families' incomes-that have nothing to do with tax policy. Incomes are influenced by taxes but also are determined by skills, education, effort, risk-taking and innovation, regulations, and other factors. Tax shares-the fraction of the overall taxes that each individual pays-have the drawback that they ignore the spending side of the equation. Given that taxes are necessary only because of spending, this omission is striking.

Viewed from this perspective, the US tax code is highly progressive-lower-income individuals receive much more than they pay in taxes. According to the CBO, the bottom 40 percent of the income distribution paid no federal income tax in 2004.7 Of course there are other taxes. In particular, payroll taxes are the largest tax for a majority of households. But examining the payroll tax is ultimately a reminder of the need for Social Security reform. The progressivity of this program will depend upon the scale of the benefits individuals receive in the future.

A second perspective on fairness stems from the fact that the tax code assigns different tax burdens to taxpayers with the same income, number of children, and other factors.As noted above, taxes will differ depending on whether a family purchases health insurance or receives it as part of an employer compensation package. Two families with the same income will pay different taxes because they reside in different states, and some families receive state-provided services for which they can deduct income and property taxes. A person who saves more of their earnings in taxable accounts will pay more in taxes than a non-saver who has the exact same earnings year by year. Indeed, some inequality may stem from the sheer complexity of the tax code and the inability of individuals to take advantage of tax benefits for which they are eligible. These differences between otherwise similar taxpayers are at odds with basic fairness and undermine faith in the fairness of the tax code.

The most pressing tax fairness issue facing the United States is the potential for dramatic tax increases, slower income growth, and reduced standards of living for future generations if the spending growth profile of the federal government is not reduced. All other fairness issues pale by comparison.

At present, the federal tax system is roughly achieving its goal of providing financing for federal spending. However, there is little else to defend in the current tax code. It is overly complex and burdensome, interferes too much with commerce and economic competitiveness, and is riddled with uneven treatment. Far-reaching reforms are merited; more modest efforts will not succeed in raising federal revenues in a progrowth and fair fashion.

Recent Issues in Tax Policy

In recent years, there have been numerous changes in federal tax laws, which have, in turn, spawned vigorous discussion regarding tax policy.

Recent Trends in Tax Receipts

Table 1 shows total federal revenues and key components over the period 1996-2006. As the table makes clear, federal receipts are currently growing quite rapidly. Total receipts have grown at 14.5 and 11.8 percent in fiscal 2005 and 2006, respectively-a pace that exceeds the celebrated revenue surge of the 1990s that drove the federal budget to balance. Individual income tax receipts are also rising at rates above those from the earlier period, driven in part by growth rates of capital gains receipts equal to 21, 38, and 23 percent in the years 2004-06. Even more striking has been the very rapid increase in corporation income tax receipts, which hit a recent peak growth rate of 47 percent in 2005. Such rapid growth cannot, of course, be sustained indefinitely when the underlying economy is growing at 5 to 6 percent per year. However, the evidence to date suggests that the current tax system is generating adequate revenue growth.

Table 1 Tax receipts, 1996-2006
Individual income taxes
Corporation income taxes
Social insurance taxes
Total revenue
Billions of dollars
Growth (percent)
Billions of dollars
Growth (percent)
Billions of dollars
Growth (percent)
Billions of dollars
Growth (percent)

Tax Policy and Economic Growth

Overall GDP growth fell dramatically in 2001 (0.8 percent) and 2002 (1.6 percent) as the economy suffered a recession and weathered the impact of terrorist attacks, corporate scandals, and higher energy costs. Since that time, annual GDP growth has averaged 3 percent, and solid growth in payroll employment has resumed. Most analysts credit the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) with mitigating the extent of the falloff in economic growth, largely because its passage very nearly coincided with the economic downturn.

It is best, however, to view this timing as fortuitous and not as a signal that future Congresses should attempt to engage in fiscal "fine-tuning" that attempts to counter the inevitable business cycles of the future. Instead, it would be preferable for tax policy to focus on promoting robust, long-term economic growth. What would such a tax code look like?

Consumption-Based Taxation8

A consumption tax is just what it sounds like: a tax applied to consumption spending. However, under that deceptively simple umbrella resides a vast array of potential variants. Consumption taxes can be flat or contain multiple rates; can be applied to households, firms, or both; and can be viewed as "direct" or "indirect" taxes.

For purposes of my remarks today, let me focus on a few identities that give the flavor of the issues. For a household-or the country as a whole-all income (Y) is either consumed (C) or saved (S): Y = C + S. This suggests two broad strategies for taxing consumption. One is to tax consumption (C) as in a national sales tax. The alternative is to tax it "indirectly" by levying the tax on "consumed income"-income after deducting saving or investment: (Y - S). This is the strategy taken by a value-added tax (VAT), the Hall-Rabushka flat tax, or the "X-tax", a more progressive variant of the Hall-Rabushka tax developed by the late David Bradford.

Interest in a US consumption tax is not new. Advocates have touted the potential benefits from moving to a consumption tax for many years. However, I wish to separate my support from some of the more overreaching arguments. In particular, my support for a consumption-based tax reform is not about:

  1. Simplicity. Some consumption taxes-notably the original Hall-Rabushka flat tax-have been publicized on the basis of their "simplicity." Who can forget (admittedly tax economists have a limited reservoir of thrills) the first time they saw the Hall-Rabushka postcard tax return? Similar simplicity arguments have been made about a national retail sales tax, where advocates tend to argue that there is little to do except piggyback on existing state efforts.

    But this really misses the point for three reasons. First, no tax system will be that simple. For any household, the goal is to legally minimize its tax liability. The innate craftiness of the American populace will dictate that any tax system will acquire a growth of rulemaking that delimits the boundaries of acceptable behavior. That is, a certain amount of complex rule-making will be necessary. A common complaint of income-tax defenders is that consumption tax folks compare an ideal consumption tax with the actual income tax. This is truly unfair and no way to decide between the two. Second, as noted above, for many there is nothing simpler than the current income tax-they don't pay it. As is becoming more widely appreciated, the current income tax is not your father's income tax. Complexity of the income tax is the curse of those who pay it. Third, postcards are obsolete. Today your taxes are "done"-that is computed-by tax-preparation software and filed on-line.

  2. Making taxes more or less visible. A common argument supporting a national sales tax is that it would make more visible the cost of government. Perhaps, but the ultimate measure of the size of government is its spending. Once the dollars have been committed, the taxpayer will pay one way or the other. Either taxes will be levied to match the spending, or there will be borrowing to cover the federal deficit. It may be important to raise the visibility of congressional decisions, but putting taxes on your register receipt does not display spending. Indeed, if a national sales tax did produce pressure to keep taxes low, it may do nothing to address the tsunami of future Medicare spending and lead to larger deficits.
  3. Raising the national saving rate. A consumption tax would remove the tax-bias in favor of current consumption, and many believe that this would raise the private saving rate. If so, then good. The main idea is to eliminate tax-based financial decisions and have households choose based more on the economic fundamentals. However, I suspect that the scope for dramatic changes is somewhat limited. Instead, the most rapid improvement in the national saving rate will come from controlling federal spending and thus reducing government borrowing.

Instead, a consumption tax meets the following needs of the tax system:

  1. The philosophical foundation of the tax code. Public policies should mean something. As I have stressed, the tax code exists for a single purpose: to finance the costs of public programs. The powerful behavioral effects of taxation are real, and a tribute to the power of market incentives as the mechanism by which taxes influence behavior is to change prices. Since the purpose of the tax code is to raise revenue, its core mission is to reduce the resources of some households. The central question is why choose those who consume over those with income. Consumption is the spending that extracts resources from the economy. In contrast, saving is economic activity necessary to contribute to a growing economy. Recall the identity: Y = C + S. An income tax treats identically those high-income individuals who live frugally and plow their resources back into the economy and those that spend every night drinking champagne in a limousine while hopping from club to club. Taxing consumption reduces the burden on the former, while focusing it on the latter.
  2. Economic efficiency. A consumption tax would reduce the extent to which economic activity is dictated strictly by reducing taxes (an unproductive use of time and money). First, it broadens the tax base to include all consumption. The essential recipe in any tax reform is to broaden the tax base and lower tax rates. Specifically, the base would include the consumption of employer-provided health insurance (currently entirely untaxed) thereby correcting a major inefficiency that feeds health spending pressures. In addition, it would eliminate the current deduction for state and local taxes, thereby including consumption provided by subfederal governments. Thus, it would improve the allocation of consumption spending across sectors.

    A consumption tax would not distort household choices in the timing of consumption-after all you would pay the tax either now or later. In contrast, under an income tax households pay at both times if they choose to save and consume later. A consumption tax would equalize the tax treatment of investments in physical capital, human capital, and intangible capital. At present, the firm purchases of the latter two types of investment are "expensed" (immediately deducted), while physical capital expenditures are depreciated. Moreover, by eliminating the deduction for mortgage interest, the allocation of physical capital would be improved as business investments would compete on a level playing field with the construction of housing.9

    A desirable feature that is difficult to quantify is the impact on entrepreneurs. Entrepreneurial forces are widely acknowledged to be important to the success of the United States, but tax policy is rarely formulated with an eye to their incentives. For example, entrepreneurial ventures develop a scale and financial structure dictated by market conditions. In contrast, the tax code interferes with these incentives-extracting a double tax on equity in "C corporations," subsidizing leverage, and thus distorting the choices of business form and financing. The flat business-level tax does not depend on financial structure-it is focused on "real" business transactions-and yields the same liability regardless of legal organization.

  3. Acknowledgment of reality. Our current income tax is an exercise in fantasy. An important part of its administration is the taxation of the return to capital. To be successful, this requires that capital income-interest, dividends, capital gains, rents, and royalties-be comprehensively measured and adjusted for depreciation and inflation. There is no reason to believe that the United States is even moderately successful in this effort or that the continuing maturation of global financial markets will make it anything but less successful in the future. A consumption tax focuses the tax base on real economic activity-not financial transactions. This is an important difference in a world in which global financial markets have made it virtually impossible to tax capital income, and an excessive regulatory and enforcement regime has grown around attempts to do so. Instead, the consumption tax focuses on "taxing at the source" before business income enters into financial markets and ultimately is paid to investors.

    Specifically, the X-tax (along with the VAT or flat tax) would impose a single-rate business-level tax on a base that consisted of total receipts minus the sum of purchases from other firms and employee compensation. Implicit in those receipts is the contribution of capital, which is taxed prior to distributions in the form of dividends or interest.

  4. Fairness. Because a consumption tax is neutral regarding the timing of consumption, it does not penalize those patient households that save their income for a greater lifestyle later in life. That is, two households with the same lifetime income will pay the same lifetime taxes. More generally, consumption taxes may be designed to achieve conventional distributional goals. To begin, under the X-tax, households are taxed on the basis of comprehensive employee compensation. However, such a system would include a generous exemption for a basic standard of consumption and a progressive rate structure.

    A concern often raised is that taxing compensation permits high-income individuals to "avoid" tax on their capital income. However, an appropriately designed consumption tax includes the vast majority of such earnings in its base. In the X-tax, saving and investment are immediately tax-deductible or expensed, but all principal and interest is taxed in the form of revenues at the entity level. Mechanically, this differs from an income tax only by the fact that under an income tax the saving and investment would be depreciated and not expensed. That is, the two approaches differ only by the timing of tax receipts to the US Treasury-less up front for the consumption tax because of expensing, but more in later years because there is no ongoing stream of depreciation. Accordingly, the two tax bases differ only by the return to Treasury securities-the least risky and lowest rate of return. All additional returns-accruing from risk, monopoly power, luck, and other sources-are included in the tax base of both tax systems. Since these types of capital returns are responsible for the largest differences in incomes and consumption tax would capture these in the base, the distributional consequences of such a consumption tax would be in accord with US tradition.

JGTRRA and Progrowth Taxation

Viewed from this perspective, the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) is an important step. Reduced taxation of corporate equity returns reduces the bias toward debt finance, lowers the misallocation of capital in the economy, and combined with partial expensing of some investments represents a step toward a more efficient tax code. An impediment to fully realizing the potential of this improved tax policy, however, is the fundamental uncertainty over the future of the tax code. Eliminating this uncertainty, keeping taxes low and efficient, would benefit overall economic performance.

The Alternative Minimum Tax

The alternative minimum tax (AMT) has attracted attention in recent years because a growing number of taxpayers are projected to become liable for the AMT because of the effects of inflation and because the most affluent of taxpayers are no longer exclusively the payers of the AMT. Thus, in the narrow the major tax policy issue is the failure of Congress to index the AMT for inflation.

Viewed from a broader perspective, however, the AMT raises larger issues. To begin, although some argue that the AMT is a better tax because it has a broader base (achieved by disallowing exemptions and deductions) and only two relatively low statutory rates, this is misleading. From an equity standpoint, there is a long history of acknowledging the impact of family size on tax liability, which the AMT does not. From an economic efficiency standpoint, the key issue is that the AMT's effective marginal rates are not always lower than the regular tax's marginal rates; sometimes, they are actually higher. A large portion of the AMT's lower rates reflects the tax-free threshold's zero rate. Once the AMT kicks in, the marginal rate jumps to 26 percent, well above the regular system's 10 to 15 percent. The highest marginal rate under each system is the same-35 percent.

The more general problem is that the very presence of the AMT is an indictment of the basic tax code. It should be the case that a single tax code can be designed to raise needed revenues, while meeting sensible criteria for simplicity, fairness, and economic growth and competitiveness. Attempts to "fix" the AMT by modifying tax brackets, rates, or deductions will not address this fundamental problem. A more desirable approach would be to eliminate the AMT entirely but in the context of a broader revamping of the tax code.

Tax Policy and the Distribution of Economic Well-Being

While recent US GDP growth has been robust and payroll employment growth sustained, concern has arisen that growth is not translating into acceptable increases in standards of living for too many American households. This has generated a further concern that progrowth tax policy per se is responsible. The facts, however, suggest otherwise. The dominant source of change in the income distribution is a long-term trend in the wage structure in the United States, and not recent changes in tax policy. To the extent that policymakers wish to address this issue, the most fruitful approaches involve improving K-12 educational outcomes, thereby equipping future workers with better skills and the ability to be successful in college.

A large literature in labor economics documents a substantial widening of the US wage structure during the 1980s.10 Wage differentials by education, by occupation, and by age and experience group all rose substantially. The growth of wage inequality was reinforced by changes in nonwage compensation leading to a large increase in total compensation inequality. These wage structure changes translated into a rise in household income inequality. The trend to wage inequality in the 1990s was considerably slower than in the 1980s, with the key feature being that the highest earners (the 90th percentile of the wage and earnings distribution) continuing to grow faster than the median but no noticeable decline for low earners. The more recent labor-market data suggests a continuation of this pattern.11

Low-Income Features of the Tax Code

In 2007 the Treasury projects that the share of individual income taxes paid by low-income taxpayers will fall, while the share of taxes paid by high-income taxpayers will rise. At the same time, the share of taxes paid by the bottom 50 percent of taxpayers will fall from 3.8 to 3.4 percent. Since there has not been a dramatic change in the distribution of spending, this indicates that the impact is becoming more progressive. At the very highest levels of income, this is especially true, as the share of taxes paid by the top 5 percent of taxpayers is projected to rise from 55.3 to 56.5 percent.

As these figures indicate, a great many Americans pay no income tax at all. In 2007 a married couple with two children will have no tax liability until their income reaches $42,850. For those low-incomes families near the poverty level, refundable tax credits like the child tax credit and the earned income tax credit (EITC) provide payments from the Treasury to those families. A single parent with one child and $14,257 of income (i.e., the estimated 2007 poverty level for a two-person family) will receive $3,410 back from the federal government in 2007.

Taxation of Carried Interests

Recent discussions and legislative initiatives have raised the possibility of taxing so-called "carried interests" as ordinary income instead of capital gains. By itself, such a change would not improve the performance of the tax code. As noted earlier, a fundamental unfairness of the current tax code is that similar taxpayers are taxed differently. Under such a proposal, investments in real estate (for example) would face different effective tax rates depending upon whether they are undertaken by an individual, through a real estate investment trust, or via a limited partnership. This inequity would carry with it an efficiency cost as the higher tax would discriminate against a particular organizational form-the partnership-that was previously preferred by investors. Moreover, as noted above the a benchmark for efficient, progrowth tax policy allows a deduction from the tax base for all saving and investment, while taxing at a common rate all cash flows. The proposed tax change imposes the latter taxation, without the corresponding deduction. In short, it is a move in the wrong direction for the tax code.

In the absence of broad reform, there appears to be little merit to changing the tax treatment. As noted in a recent analysis by Michael Knoll, taxing the cash equivalent of the carried interest will raise modest amounts of revenue.12 In reaching this conclusion, he computes the cash value of an option contract that mimics carried interest for general partners and calculates the additional taxes that would be collected by taxing this cash grant as ordinary income. In his analysis, this represents the additional payments that limited partners would be required to offer in order to retain sufficient inducement to attract general partnership talent. Another perspective on this analysis, however, is to note that he employs a conventional formula for valuation that assumes independent freedom to exercise the option and deep, liquid markets for the underlying asset. In the context of some investments, these likely overstate the reality and thus the value of the option. At present, the tax code treats the grant of the carried interest as of low and hard to quantify value, assumes reinvestment of the grant, and taxes the result as a capital gain. While imperfect from the perspective of investment and growth, it is preferable to the proposed alternatives.

Taxation of Publicly Traded Partnerships

A related initiative is a proposal to subject certain publicly traded partnerships to the corporation income tax. As noted earlier, good tax policy imposes a single layer of tax and achieves investment neutrality by integrating the corporation and individual income taxes. Increasing the double taxation of saving and investment is a step in the wrong direction. Doing so in a discriminatory, nonuniform fashion increases distortions and represents unsound tax policy.


1. Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2007, p. xi.

2. Congressional Budget Office, The Long-Term Budget Outlook, December 2005.

3. This loss is sometimes referred to as the "efficiency cost," "deadweight loss," or "excess burden" of the tax system and captures the reality that there is a loss to households above and beyond the amount of tax revenue collected.

4. See the final report at

5. This is referred to as determining the economic incidence of a tax.

6. Hassett, Kevin, and Aparna Mathur, Taxes and Wages, AEI Working Paper 128, 2006.

7. Congressional Budget Office, Historical Effective Tax Rates: 1979 to 2004, December 2006.

8. This section draws on Douglas Holtz-Eakin, "The Case for a Consumption Tax," Tax Notes, October 23, 2006.

9. For estimates of the long-run impact on economic growth, see Altig, David, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. Smetters, and Jan Walliser, "Simulating Fundamental Tax Reform in the United States," American Economic Review 91, no. 3 (June 2001): 574-95.

10. See, for example, Attanasio, Orazio and Steven J. Davis, "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy 104 (December 1996): 1227-62; Autor, David H., Lawrence F. Katz, and Melissa S. Kearney, Trends in U.S. Wage Inequality: Re-assessing the Revisionists, NBER Working Paper 11627, September 2005; Autor, David H., Frank Levy, and Richard J. Murnane, "The Skill Content of Recent Technological Change: An Empirical Investigation," Quarterly Journal of Economics 118 (November 2003): 1279-33; Cutler, David M., and Lawrence F. Katz, 1991, "Macroeconomic Performance and the Disadvantaged," Brookings Papers on Economic Activity 1991: 2: 1-74; Cutler, David M., and Lawrence F. Katz, "Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980s," American Economic Review 82 (May 1992): 546-51; Goos, Maarten, and Alan Manning, "Lousy and Lovely Jobs: The Rising Polarization of Work in Britain," Center for Economic Performance, London School of Economics, September 2003 (photocopy); Hamermesh, Daniel S., "Changing Inequality in Markets for Workplace Amenities," Quarterly Journal of Economics 114, no. 4 (November 1999): 1085-123; Karoly, Lynn, and Gary Burtless, 1995, "Demographic Change, Rising Earnings Inequality, and the Distribution of Well-Being, 1959-1989," Demography 32: 379-405; and Piketty, Thomas, and Emmanuel Saez, "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics 118 (February 2003): 1-39.

11. Another set of concerns relates to inadequacies in the measurement of earnings, income, and standards of living more generally. For example, (1) real wages have grown more slowly than real compensation because benefits are a rising portion of total compensation; (2) standard price indexes overstate inflation, causing an understatement of real compensation gains; and (3) traditional poverty measures failure to adequately reflect redistributive taxes and transfers.

12. Knoll, Michael, "The Taxation of Private Equity Carried Interests: Estimating the Revenue Effects of Taxing Profit Interests as Ordinary Income," University of Pennsylvania, August 2007.

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