Revised December 18, 2002

Rapidly Rising Incomes at the Top Lie Behind
Increase in Share of Taxes Paid By High-Income Taxpayers

by Joel Friedman and Isaac Shapiro

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Additional Analyses

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A recent editorial in the Wall Street Journal and Administration comments reported in the Washington Post suggest that those with the highest incomes are now bearing a larger share of the tax burden, and that as a consequence it would make sense to cut the taxes of this group and shift more of the tax burden onto those with lower incomes.[1]  Yet these statements ignore the fundamental reason behind the larger share of taxes paid by those with the highest incomes.  This has resulted primarily because there has been a sharp increase in the concentration of the nation’s income among this high-income group, with this concentration of income reaching historically high levels.

Before-Tax Incomes Rise Rapidly for Top of the Income Spectrum

The new IRS data show that the incomes of those at the top of the income spectrum grew much more rapidly than the incomes of any other income group over the past decade.

Given the growth in the income received by those at the top of the income spectrum, it is not surprising that this group is paying a larger share of federal taxes.  Since they receive a larger percentage of the national income than in the past, they pay a larger percentage of taxes.

After-Tax Incomes Also Rise
More for Those at the Top

The after-tax incomes of those at the top of the income spectrum also have grown much more rapidly than the after-tax incomes of other segments of the population.

Share of Income vs. Share of Taxes

The statements in the Wall Street Journal and the Washington Post suggest that those with the highest incomes pay a grossly disproportionate share of taxes.  Yet an examination of Congressional Budget Office data on incomes and federal taxes — which are considered the most comprehensive data available — yields a different conclusion.  In 1997, the latest year for which data were available for the CBO study, the top one percent received nearly 16 percent of the nation’s income and paid 23 percent of all federal taxes (including income taxes, payroll taxes, corporate taxes, and excise taxes) — a difference of 7 percentage points.  This implies that the overall system of federal taxes is progressive, but only moderately so.  A new analysis by the Citizens for Tax Justice similarly found that the difference between the top one percent’s income and its share of all federal taxes amounted to about seven percentage points in 2001.  Furthermore, the CTJ analysis estimates that by 2010, when all of the tax cuts enacted last year are scheduled to be in effect, this gap will narrow to about five percentage points.*  Finally, these data cover only federal taxes.  When state and local taxes are taken into account, the gap narrows further.
*Citizens for Tax Justice, “White House Reveals Nation’s Biggest Problems:  The Very Rich Don’t Have Enough Money and Workers Don’t Pay Enough Taxes,” December 16, 2002.  Note that the CTJ analysis measures income and tax burdens somewhat differently than the CBO study and covers different years.  It thus presents a slightly different estimate of pre-tax income and federal tax burdens.  Nevertheless, the CTJ and CBO studies show a similar relationship between income and tax shares.  Also note that the 16 percent share of income received by the top one percent in 1997 according to the CBO data is lower than the 21 percent share of income received by the top one percent in 2000 according to the IRS data.  The IRS data show a larger share both because income concentration intensified from 1997 to 2000 and because the IRS data use a different measure of income.

These trends also are confirmed when all federal taxes — rather than just federal income taxes — are taken into account.  Last year, the Congressional Budget Office published an exhaustive analysis of federal tax and income trends, with data through 1997.[5]  The CBO analysis found that the top one percent of the population experienced extraordinary after-tax income gains that vastly exceed the gains in after-tax income that the rest of the population secured.  The CBO data demonstrate that the increase in the percentage of federal taxes that high-income households pay has not squeezed these households.

The CBO data also show that the share of the after-tax national income the top one percent of households received in the late 1990s was at the highest level on record.  (These CBO data go back to 1979.)  When these CBO data are combined with data from the NBER study, it appears that the top one percent of the population is now receiving a larger share of the national after-tax income than at any time since at least 1941.

Taxes As a Share of Income Not at Peak

CBO also found that the percentage of income that the highest-income households pay in federal taxes is not at a recent peak and is lower than in a number of previous years.  At the time that CBO issued its report on tax rates and tax burdens, the data that CBO uses on household incomes were not yet available for years after 1997.  CBO did have information, however, on federal tax law in 2000, and applied 2000 tax law to 1997 income levels.

Need to Look At All Taxes To Understand Full Tax Burden

Some have tried to argue that the federal tax burden on those with the highest incomes is overly burdensome by pointing to the share of federal income taxes paid by this group.  Based on the aforementioned IRS data, the top one percent paid 37.4 percent of federal income taxes in 2000 and the top five percent paid 56.5 percent of the income taxes.  Examining only the percentage of income taxes that the top one percent (or the top five percent) of the population pays, however, overstates the degree to which these individuals are shouldering the overall federal tax load.  CBO found that the top one percent of households paid 23.0 percent of all federal taxes in 1997, including payroll, excise and other federal taxes; the top five percent paid 39.1 percent of total federal taxes.  This is substantially lower than the percentage of federal income taxes that these groups pay; the differences reflect, in large part, the impact of the payroll tax, which falls more heavily on lower- and middle-income households than income taxes do.  The top one percent of the population, for instance, pays only 4.2 percent of the payroll taxes.

The Washington Post story also reported that some Administration officials are suggesting that payroll taxes be excluded from tax burden calculations.  To exclude these taxes from a distributional analysis would reflect a dramatic departure from accepted practice.  Although payroll taxes are dedicated to particular programs, such as Social Security, Medicare, and unemployment insurance, all of the official institutions that measure tax burdens — the Treasury Department, the Congressional Budget Office, and the Joint Committee on Taxation — have always included these taxes as part of their estimates of federal tax burdens.  Ignoring certain taxes because of their link to spending would significantly distort any tax analysis.  As conservative economist William Beach of the Heritage Foundation noted in the Post story, "Do I allow defense spending to offset my income taxes since I like to be defended?  Do I allow road taxes to offset my profits taxes because I use the roads?  If you start down that road, it’s hard to see anything as taxes."[6]

Finally, all of these analyses take into account only the federal tax burden.  Taxes are paid to all levels of government — federal, state, and local.  State and local governments rely much more on regressive taxes, such as sales taxes and excises taxes (on cigarettes and alcohol, for instance).  The burden of these taxes falls more heavily on those with lower incomes; that is, these taxes represent a larger share of the incomes of those with low and moderate incomes than of those with high incomes.  Including the impact of state and local taxes in an overall assessment of the tax burdens on different income groups would more accurately reflect the relative tax burdens that different income groups face.  As the nationally renowned tax expert Joseph Pechman showed nearly two decades ago, when state and local taxes are included, the gap between the percentage of the national income that high income individuals receive and the percentage of the taxes that they pay narrows further.

End Notes:

[1] See for instance, "The Non-Taxpaying Class," The Wall Street Journal, November 20, 2002, and Jonathan Weisman, "New Tax Plan May Bring Shift in Burden, Poor Could Pay A Bigger Share," The Washington Post, December 16, 2002.

[2] The IRS 2002 data are available at <>.

[3] Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1918-1998," NBER Working Paer 8467, September 2001, Tables A1 and A3.

[4] The incomes of the top five percent — the top one percent plus the next highest four percent — grew by 54 percent between 1989 and 2000.

[5] Congressional Budget Office, "Effective Federal Tax Rates, 1979-1997," October 2001.

[6] Jonathan Weisman, "New Tax Plan May Bring Shift in Burden, Poor Could Pay A Bigger Share," The Washington Post, December 16, 2002.