November 19, 1996

What Do People Pay In Taxes?
by Richard Kogan

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

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?

Table 1: Hypothetical Example:

HouseholdIncomeTaxesTax Rate
#1$ 20,000$ 2,00010%
#2$ 22,000$ 2,42011%
#3$ 24,000$ 2,88012% - Median
#4$ 26,000$ 3,38013%
Average$ 40,000$ 8,40021% - 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?

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.)

Federal income tax$ 2,15020%CBO
Federal payroll tax*$ 3,60034%CBO
All other federal taxes**$ 1,25012%CBO
State and local taxes$ 3,70034%ITEP***

* 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%.

6) How about the rich?

The richest 1% of households ($650,000 in income, says CBO):

Federal tax rate32.7% - (CBO)
State and Local tax rate5.8% - (ITEP)

* Because of missed income, this total should be 32% - 35%.

For these households, the federal personal income tax represents about 63% of the total tax bill. Contrast this with the 20% share for median households.

For further information about taxes paid by Americans, see:

What Does the Typical Family Pay in Taxes - 3/11/98
The Final Tax Bill: Assessing the Long-Term Costs and the Distribution of Tax Benefits - 8/1/97
Looking at the Details in the New Budget Legislation - 8/12/97
Behind the Numbers: An Analysis of the Tax Foundation's Tax Day Report - 4/14/97
Twisted Tales: Overstating the Taxes the Typical Household Pays - 9/4/96
Taxes: The Highest in History? - 8/5/96
The Center's archive of federal tax policy analyses