Revised April 19, 2004

New Data Show Federal Tax Burdens Have Fallen to Lowest Levels in Decades,
Casting Fresh Doubt on Wisdom of More Tax Cuts In the Face of a Looming Fiscal Train Wreck

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Large federal tax cuts have been sold in part in recent years on the grounds that tax burdens have risen to excessive levels and Americans are overtaxed.  New data and analysis suggest otherwise.  The percentage of income that most categories of taxpayers pay in federal taxes had declined even before the 2001 tax cuts were enacted and has now fallen to the lowest level in decades.

Figure 1

As these data indicate, the recent income tax cuts reduced taxes for middle-income families.  Even so, the bulk of the benefits from those tax cuts have accrued to high-income households.


Tax Cuts and Deficits

The 2001 and 2003 tax cuts are a major reason why federal revenues have fallen sharply in recent years, as a share of the economy, and contributed to an explosion of the deficit.  Federal revenues will fall this year to their lowest level, as a share of the economy, since 1950.  Even after the economy recovers, federal revenues, as a share of the economy, are expected to remain below their average levels for the 1960s, 1970s, 1980s, and 1990s, if the 2001 and 2003 tax cuts are extended.  This weakening of the federal revenue base has been a major contributor to the stunning fiscal deterioration of the past few years — and to the widespread projection that the nation will face persistent large deficits as far as the eye can see that ultimately may do significant damage to the economy, lead us into fiscal crisis, and threaten the ability of the federal government to perform basic functions adequately.

The data presented here on reductions in tax liabilities suggest that policymakers should stop using claims of excessive federal tax burdens on middle-income taxpayers to promote costly tax cuts that predominately benefit the well-off or to promote new middle-class tax cuts that are not paid for.

End Notes:

[1] Congressional Budget Office, Effective Federal Tax Rates, 1979-2001, April 2004.

[2] Office of Tax Analysis, Department of the Treasury, “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,” January 15, 1998.  The median-income family of four has an income that places it exactly in the middle of the income spectrum: half of all families of four have higher incomes than this family, while the other half of such families have lower incomes.