November 19, 1996
1) Different incomes pay at different rates — taxes are not flat.
Therefore, it matters whether "people" means "all people" or just "some people."
2) Which people?
| Median Income | |
| All American Households? | $35,500* |
| Households with children? | $47,500* |
| Two-worker families with children | $52,500** |
* Source: Congressional Budget Office
** Tax Foundation (they called this "a typical American family")
3) Which "average:" Mean or Median?
Table 1: Hypothetical Example: | |||
| Household | Income | Taxes | Tax Rate |
| #1 | $ 20,000 | $ 2,000 | 10% |
| #2 | $ 22,000 | $ 2,420 | 11% |
| #3 | $ 24,000 | $ 2,880 | 12% - Median |
| #4 | $ 26,000 | $ 3,380 | 13% |
| #5 | $108,000 | $31,000 | 29% |
| Total | $200,000 | $43,000 | 21% |
| Average | $ 40,000 | $ 8,400 | 21% - Mean or Avg. |
Suppose taxes on household #5 were increased by $10,000 (from $31,320 to $41,320). Total
taxes would also increase $10,000 so average taxes would increase $2,000 per household. The
new mean would be $10,400 in taxes and the new mean tax rate would be 26%.
Their story: "Taxes on the average household increased $2,000, from 21% to 26% of
income."
Reality: Only the rich paid more taxes; median taxes were unchanged.
Center on Budget and Policy Priorities uses "Average" for "Mean"
Center on Budget and Policy Priorities uses "Typical" for "Median"
For federal and state taxes combined, the median tax rate is about 3 percentage points lower than
the average tax rate, because federal taxes are progressive.
4) Which taxes?
Reality: Table 2 shows taxes typically paid in 1996 by a household of median income. Note that
the federal individual income tax is about one-fifth of taxes paid by median households. 72% of
households pay more payroll taxes than federal income taxes. The median household pays about
$3,700 in state and local taxes.
Table 2: Median Household (1996 data, approx.) | |||
| Taxes | Share | Source | |
| Federal income tax | $ 2,150 | 20% | CBO |
| Federal payroll tax* | $ 3,600 | 34% | CBO |
| All other federal taxes** | $ 1,250 | 12% | CBO |
| State and local taxes | $ 3,700 | 34% | ITEP*** |
| TOTAL | $10,700 | 100% | |
* This includes the employer share, since that tax is passed on to employees.
** This includes direct and indirect business taxes, attributed to households.
*** CBPP estimate from data by the Institute on Taxation and Economic Policy (ITEP).
5) What income?
Calculations based on IRS and Census samples measure less total income than really exists. Those
samples miss imputed income (e.g. tax-free employer-provided health insurance) because
respondents don't know they have it. Further, the Census doesn't collect income data for the
super-rich. Also, respondents sometimes knowingly under-report income. Hence, calculations
based on survey data overstate tax rates.
Note that Table 2 implies a 30% tax rate for a median income household ($10,700 in total taxes;
$35,500 in household income). Because of missed income, I estimate the median tax rate at
25% - 27%.
6) How about the rich?
The richest 1% of households ($650,000 in income, says CBO):
| Federal tax rate | 32.7% - (CBO) |
| State and Local tax rate | 5.8% - (ITEP) |
| TOTAL | 38.5%* |
* Because of missed income, this total should be 32% - 35%.
For these households, the federal personal income tax represents about 63% of the total tax bill.
Contrast this with the 20% share for median households.
What Does the Typical
Family Pay in Taxes - 3/11/98
The Final Tax Bill: Assessing the Long-Term Costs
and the Distribution of Tax Benefits - 8/1/97
Looking at the Details in the New Budget
Legislation - 8/12/97
Behind the Numbers: An Analysis of the Tax
Foundation's Tax Day Report - 4/14/97
Twisted Tales: Overstating
the Taxes the Typical Household Pays - 9/4/96
Taxes: The Highest in History? - 8/5/96
The Center's archive of
federal tax policy analyses