Podcast: Federal Income Taxes at Historic Low
April 15, 2010
In this podcast, we'll discuss how the levels of federal income taxes on middle-income families have changed over time. I'm Michelle Bazie and I'm joined by Chuck Marr, the Center's Director of Federal Tax Policy.
1. Chuck, at tax time, many taxpayers reflect not only on how their tax dollars are used to provide needed public services (like Social Security, Medicaid and Medicare), but also on changes to their tax rate. How are middle-income families faring in this regard?
Michelle, federal income tax obligations have actually declined significantly in recent decades. In fact, effective federal tax rates are near historically low levels for middle-income Americans. That is true for both their federal income taxes and for their overall federal taxes. A new study by the Urban Institute-Brookings Institution Tax Policy Center shows that a family of four in the exact middle of the income spectrum will pay only 4.6 percent of its income in federal income taxes this year. This will be the second-lowest percentage since 1955.
2. You also mentioned an effective tax rate. What do you mean by that?
An effective tax rate is the bottom line percentage of taxes that a family actually pays as a share of their income.
3. Chuck, you're talking about middle-income families. What income level are we really discussing here?
Michelle, we're talking about the median family of four. So in the United States in 2009 that's a family of four making about $76,000 a year.
4. You also mentioned that total federal taxes are at historic low levels. What's in this total category?
Total federal taxes include income taxes as well as excise taxes and most importantly, payroll taxes - which support Social Security and Medicare. The latest data from the Congressional Budget Office shows that, because of these lower income tax obligations, the overall federal tax obligation of middle class Americans is also at or near their lowest levels in decades.
5. Why are taxes so low right now?
Over the last three decades, there have been a series of middle-class income tax cuts. Ranging from the creation of the child tax credit, to reductions in the marginal tax rates, that all have combined to lead to lower income tax obligation for middle-class families.
6. What's happened recently? How has the 2009 Recovery Act affected tax rates for middle-income families?
Michelle, this year, the Making Work Pay tax credit, which President Obama and Congress enacted as part of the Recovery Act, is providing a tax credit of $800 to married couples and $400 to single filers. This tax credit reduces a middle-income family's effective tax rate.
7. It's April 15, the day when taxes are due. What should people keep in mind today?
So Michelle obviously on April 15th people focus on the fact that they're paying taxes. And to a certain extent nobody likes paying taxes. But I think if people step back and think about where their tax money is going they'll feel much better about it. Their tax dollars go to providing protective gear for soldiers, to providing a college education to a kid whose no one in his family has ever gone to college. Their tax dollars go towards major breakthroughs in scientific research and health research attacking diabetes, cancer, heart disease. I mean these are societal priorities.
8. Chuck, what's the bottom line?
Michelle, what is so surprising to me is this misimpression about how high taxes are. The bottom line right now for the typical American middle-class family of four - the effective tax rate they pay this year and last year are the lowest they've been in 55 years.
Thanks for joining me, Chuck. For more information, go to the Federal Tax section of centeronbudget.org.