The incidence of personal income taxation: Evidence from the tax reform act of 1986

This paper studies the short-run incidence of personal income taxation in the US by examining how the wage structure shifted after the Tax Reform Act of 1986. I calculate the marginal tax rate for the median worker of each occupation during the 1980s to determine the professions whose workers were most affected by the tax change. When controlling for trends over time in the wage structure by occupation, I find that individuals in occupations that experienced large decreases in their median marginal tax rates received lower pre-tax wages after 1986 as the number of workers and the hours worked in those professions increased. The results suggest that consideration of the wage effects of tax reforms is important when using these reforms to identify behavioral parameters and evaluating their distributional consequences.