November 19, 1996

## What Do People Pay In Taxes?by Richard Kogan

1) Different incomes pay at different rates — taxes are not flat.

• Federal taxes are progressive, despite payroll and excise taxes.
• State and local taxes are regressive.

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?

• The median household is the one in the middle — half richer, half poorer.
• The mean household has average income, i.e. total national income divided by total number of households.
 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?

• The right-wing agenda is to repeal the progressive income tax.
• Hence, their discussions will imply that the federal income tax is at issue. E.g., someone will pick April 15th to complain about the total level of taxation.

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%.