Revised April 10, 2003

Income Taxes for Median Family of Four at Lowest Level Since 1957
by Isaac Shapiro and Andrew Lee

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As the April 15th filing date for income taxes approaches, and as the domestic budget discussion is dominated by the issue of tax cuts, it is timely to assess federal tax burdens. This assessment finds that the percentage of income that most families pay in federal taxes (referred to here as their "tax rate" or "tax burden") has been falling in recent years rather than rising, a trend established even before the 2001 tax cut and before considering the effects of tax cuts now under discussion in Congress. Specifically, this analysis, based on updates of Congressional Budget Office data on overall federal tax burdens from 1979 to 2000 and Treasury data on income tax burdens from 1955 to 1999, reaches the following conclusions:

Figure 1

Figure 2

Since actual income data are available only through 2001 the main focus of this analysis is to extend the CBO and Treasury series through that year. Assuming incomes grow at the same rate as inflation in 2002 and 2003, however, tax burdens are slightly less now than in 2001. The slight drop reflects the fact that the initial round of rate cuts incorporated into the 2001 tax cut package were not in effect for all of 2001 but will be in full effect for all of 2002 and 2003. We estimate that the middle fifth of taxpayers will pay 15.8 percent of their income in taxes in 2003, down slightly from the 16.0 percent figure estimated for 2001.

Taxes as a share of income are not at the lowest point in the period examined for the top fifth of the population. But this does not mean high-income households have been unduly burdened by federal taxes. To the contrary, by 2000, the latest year for which actual income data for the very top of the population are available, income before taxes was more concentrated at the top of the income spectrum than at any time since the Great Depression. In addition, CBO data show that in 1997, the latest year for which these data are available, the share of the national income that high-income households received even after federal taxes are taken into account was at the highest level on record. (These CBO data, as well, go back to 1979.) The CBO data also show that increases in after-tax income during the 1980s and 1990s were far larger among high-income households than among middle- and lower-income households.


Recent Trends in Income Tax Burdens

In 1998, the Treasury Department issued an analysis examining changes over time in the income tax rates paid by families of four with two dependents.(1) The Treasury projected that in 1999, the percentage of income the median family of four with two children would pay in income tax would be at its lowest level since the mid-1960s. (The median-income family is the family exactly in the middle of the income spectrum; half of families have income higher than the median family does, while the other half of families have income lower than the median family.) The Treasury's methodology is easy to replicate; this analysis does so and extends the data in the Treasury analysis through 2001, the latest year for which median family income information is available. The results show:


Trends in Total Federal Tax Burdens

The best data on trends in overall federal tax burdens come from the Congressional Budget Office.(2) These CBO data provide extensive information for the years from 1979 through 1997 and some data through 2000. This analysis updates these data through 2001.

In 2001, the middle fifth of households will pay an estimated average of 16.0 percent of income in federal taxes. This is the lowest percentage on record for the period from 1979 to the present.


Increased Concentration of Taxes among High-income Households Not a Sound Justification for Reducing Their Taxes

Some have noted the increased concentration of taxes among high-income individuals as shown by Internal Revenue Service data through 2000 — emphasizing the increased concentration among the top one percent of the population — and contend that this means their taxes need to be reduced sharply. Recent income and tax trends do not support this contention.(5)

Finally, the percentage of income that the top one percent of taxpayers pays in federal taxes does not appear to be at unusually high levels. It appears to be lower today than it was during most of the 1990s and the late 1970s. It is above the levels of the 1980s, when the budget was marked by large deficits and the national debt grew rapidly.

End Notes:

1. "Average and Marginal Federal Income, Social Security and Medicare, and Combined Tax Rates for Four-Person Families at the Same Relative Positions in the Income Distribution, 1955-1999," Office of Tax Analysis, Department of the Treasury, January 15, 1998.

2. Effective Federal Tax Rates, 1979-1997, Congressional Budget Office, October 2001.

3. When CBO issued its latest report, the data that CBO compiles on household incomes were not yet available for years after 1997. CBO did have information, however, about federal tax law in 2000. CBO applied 2000 tax law to 1997 income levels and estimated that the middle fifth of households would pay an average of 16.7 percent of income in federal taxes in 2000. Actual income levels in 2000 were higher than they had been in 1997. Due to the progressivity of the tax code, this means that average tax burdens in 2000 were higher than CBO estimated when it applied 2000 tax law to 1997 income levels. Applying a "linear interpolation" method to the tax rates paid by households at different income levels in 1997 under 2000 law, this analysis estimates that the middle fifth of households paid an average of 17.2 percent of income in federal taxes in 2000.

4. Congress' Joint Committee on Taxation found that for taxpayers with incomes between $30,000 and $40,000 (which translates to taxpayers with incomes between the 43rd and 55th percentiles of the income distribution), the average percentage of income paid in federal taxes in 2001 would have been 16.1 percent without the tax cut and will be 15.1 percent when the tax cut is taken into account. These households' average tax rate will fall further, to 14.8 percent, in 2002. The Joint Tax Committee data show modestly lower overall federal tax burdens than CBO does due to methodological differences; the Joint Tax Committee data, for instance, do not account for corporate income taxes, while the CBO data do.

5. For a more in-depth discussion of this contention see Joel Friedman and Isaac Shapiro, "Are Taxes Too Concentrated at the Top? Rapidly Rising Incomes at the Top Lie Behind Increase in Share of Taxes Paid by High-Income Taxpayers," Center on Budget and Policy Priorities, revised December 18, 2002.

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

7. CBO, op. cit.