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The Congressional Budget Office (CBO) has compiled data from a number of sources to provide estimates of federal tax liabilities by income group and family type. The estimates include effective tax rates and the percentage of taxes paid by different income groups for federal income, payroll, and excise taxes, and for those taxes combined. The estimates were prepared for the House and Senate Committees on the Budget at the request of Congressman John M. Spratt, Jr., and Senator Frank R. Lautenberg, Ranking Minority Members, and for the House Committee on Ways and Means and the Senate Committee on Finance at the request of Congressman Charles B. Rangel and Senator Daniel Patrick Moynihan, Ranking Minority Members. In keeping with the mandate of the Congressional Budget Office, this memorandum contains no recommendations.

Richard Kasten, Frank Sammartino, and David Weiner of CBO's Tax Analysis Division prepared the estimates. Melissa Burman edited the manuscript, Sherry Snyder edited the tables, and Chris Spoor proofread the final copy. Simone Thomas prepared the manuscript for publication, and Laurie Brown prepared the electronic version for CBO's World Wide Web site (http://www.cbo.gov).
 
 

INTRODUCTION

HIGHLIGHTS OF THE ANALYSIS

DETAILED TAX TABLES

• Income Tax Return Data for 1989 Through 1996
• Comprehensive Family Income and Tax Data for 1995 and 1999
• Quintiles of Cash Income

APPENDIX: DATA ON ADJUSTED FAMILY INCOME
 

TABLES
1.	Total Tax Returns, Adjusted Gross Income, and Federal Individual Income Taxes, 1989-1996
2.	Percentage of Tax Returns, Adjusted Gross Income, and Federal Individual Income Taxes, 1989-1996
3.	Federal Individual Income Taxes Net of EITC Refunds as a Percentage of Adjusted Gross Income, 1989-1996
4.	Effective Tax Rates by Cash Income and Family Type, 1995
5.	Percentage of Taxes by Cash Income and Family Type, 1995
6.	Effective Tax Rates by Cash Income and Family Type, Projections for 1999
7.	Percentage of Taxes by Cash Income and Family Type, Projections for 1999
8.	Percentage of Individuals and Families Whose Payroll Taxes Exceed Their Income Taxes, by Cash Income, 1995 and 1999
9.	Effective Tax Rates by Quintiles of Cash Income and Family Type, 1995
10.	Percentage of Taxes by Quintiles of Cash Income and Family Type, 1995
11.	Effective Tax Rates by Quintiles of Cash Income and Family Type, Projections for 1999
12.	Percentage of Taxes by Quintiles of Cash Income and Family Type, Projections for 1999
13.	Percentage of Individuals and Families Whose Payroll Taxes Exceed Their Income Taxes, by Quintiles of Cash Income, 1995 and 1999
14.	Maximum Cash Income for Individuals and Families by Income Percentile, 1995 and 1999
A-1.	Effective Tax Rates by Quintiles of Adjusted Family Income and Family Type, 1995
A-2.	Percentage of Taxes by Quintiles of Adjusted Family Income and Family Type, 1995
A-3.	Effective Tax Rates by Quintiles of Adjusted Family Income and Family Type, Projections for 1999
A-4.	Percentage of Taxes by Quintiles of Adjusted Family Income and Family Type, Projections for 1999
A-5.	Percentage of Individuals and Families Whose Payroll Taxes Exceed Their Income Taxes, by Quintiles of Adjusted Family Income, 1995 and 1999
A-6.	Maximum Income by Income Percentile and Family Size, 1995 and 1999
FIGURES
1.	Individual Income Taxes as a Percentage of Adjusted Gross Income, for All Tax Filing Units, 1989-1996
2.	High-Income Taxpayers' Share of Total Income and Income Tax Liabilities, 1989-1996
3.	Effective Federal Tax Rates by Tax Source, 1995 and 1999
4.	Effective Total Federal Tax Rates by Family Type, 1995 and 1999

 
 

INTRODUCTION

For several years, the Congressional Budget Office (CBO) has produced estimates of average pretax incomes, effective tax rates, and shares of taxes paid by income-related population groups at different income levels. Those estimates convey information about the current tax system and allow comparisons with tax laws in place in earlier years.

Measuring the relationship between income and taxes is complex and can be controversial. The analysis of that relationship depends on conceptual issues such as the measurement of income and taxes and the definition of the taxpaying unit. The availability of data also can have a significant effect on the practical implementation of those concepts.⁽¹⁾

This memorandum presents two sets of distributional estimates, displayed as figures in this section and as tables in a later section. The first set of estimates is a consistent series of historical estimates for individual income taxes from 1989 through 1996, using data from the Internal Revenue Service's Statistics of Income (SOI). Those data are based on actual income tax records and give a more accurate measure of the relationship between income and taxes. However, the SOI data have several limitations: they refer only to individual income taxes; they report taxes and incomes for filing units that only loosely correspond to families; and they measure income narrowly, including only the sources of income reported on tax forms.

The second set of estimates looks at a more comprehensive definition of both federal taxes and income and presents the results for families and individuals by certain key characteristics, such as the presence of children and the age of the householder. Those estimates are constructed by merging data from the Bureau of the Census's Current Population Survey (CPS) and the Bureau of Labor Statistics' Consumer Expenditure Survey (CEX) with data from the SOI, and by imputing or assigning information where actual observations are not given. Although 1995 is the latest year for which such estimates can be made, this memorandum projects the estimates to 1999 so that the effects of the 1997 tax legislation can be observed. CBO analysts are constructing a consistent series of historical estimates for the 1980s and 1990s using merged data sets for those years. Work is also under way to improve the inclusiveness and quality of the income and tax measures, particularly where information must be combined from several sources.
 

HIGHLIGHTS OF THE ANALYSIS

Federal individual income taxes have risen as a share of income in recent years. Data tabulated from the SOI--a sample of individual income tax returns--show that individual income taxes net of refundable tax credits increased from 13 percent of adjusted gross income (AGI) in 1989 to 14 percent of AGI in 1996. Although more recent data from individual income tax returns are not available, aggregate data on federal income tax receipts suggest that the increase in income taxes as a percentage of AGI probably continued in 1997. In fiscal year 1997, federal individual income tax receipts were 9.3 percent of the country's gross domestic product, up from 8.7 percent in the previous fiscal year.

The small rise in aggregate income taxes as a percentage of AGI since 1989 reflects the restructuring of the tax system, which has become more progressive (see Figure 1). In 1989, income taxes were over 2 percent of AGI for tax filers with income below $20,000 (measured in 1996 dollars). By 1996, tax filers in that income group were eligible for refundable tax credits that, on average, exceeded positive tax liabilities; those filers therefore received net payments from the government of about 1 percent of AGI. The change from positive income tax liabilities to receipt of refundable credits for lower-income taxpayers came about because of increases in the earned income tax credit legislated in 1990 and 1993. Income taxes as a percentage of AGI changed little for tax units with income between $20,000 and $100,000. In contrast, income tax liabilities rose from 21 percent to 24 percent of AGI for tax filers with income above $100,000, in part because of tax increases enacted in 1990 and 1993. Within that group, the rise in tax liabilities relative to income was greater among filers at higher income levels.
 

FIGURE 1. INDIVIDUAL INCOME TAXES AS A PERCENTAGE OF ADJUSTED GROSS INCOME, FOR ALL TAX FILING UNITS, 1989-1996

SOURCE: Congressional Budget Office.

NOTE: Categories of adjusted gross income (AGI) are in 1996 dollars. Data for 1989 through 1995 are tabulated from the Internal Revenue Service, Statistics of Income, Individual Income Tax Returns files. Data for 1996 are from Internal Revenue Service tabulations using data in the Master File System.

Part of the increase in the aggregate ratio of income taxes to AGI between 1989 and 1996 reflects a rise in the share of adjusted gross income attributable to higher-income taxpayers. For example, taxpayers with income of $100,000 or more (in 1996 dollars) accounted for nearly 31 percent of total AGI in 1996, up from 27 percent in 1989. Commensurate with their higher share of income was an even higher share of income taxes. Taxpayers with income of $100,000 or more paid 53 percent of individual income taxes in 1996, up from 44 percent in 1989 (see Figure 2).
 

FIGURE 2. HIGH-INCOME TAXPAYERS' SHARE OF TOTAL INCOME AND INCOME TAX LIABILITIES, 1989-1996

SOURCE: Congressional Budget Office.

NOTE: High-income taxpayers are defined as those with adjusted gross income of $100,000 or more (in 1996 dollars). Data for 1989 through 1995 are tabulated from the Internal Revenue Service, Statistics of Income, Individual Income Tax Returns files. Data for 1996 are from Internal Revenue Service tabulations using data in the Master File System.

An analysis of the merged data using a more comprehensive measure of federal taxes paid by families and individuals reveals that combined federal individual and corporate income, social insurance payroll, and excise taxes averaged almost 25 percent of total family income in 1995 (see Figure 3). Individual income taxes alone were about 11 percent of income, and payroll taxes were about 9 percent.
 

FIGURE 3. EFFECTIVE FEDERAL TAX RATES BY TAX SOURCE, 1995 AND 1999

SOURCE: Congressional Budget Office.

NOTE: Based on data from the March 1996 Current Population Survey, adjusted to be consistent with Internal Revenue Service tax return data for 1995, with additional data from the 1994 and 1995 Consumer Expenditure Surveys. Data for 1999 reflect CBO's projected changes in aggregate income but assume that the distribution of income will not change.

Most families pay more in payroll taxes than in income taxes. In 1995, the employee portion of payroll taxes (including the Medicare portion of payroll taxes) exceeded income taxes for about 40 percent of families and individuals who had earnings. The combined employee and employer portion of payroll taxes exceeded income taxes for 80 percent of those families and individuals.

The latest year for which SOI data exist to construct the broader measure of family income used in this analysis is 1995. CBO's projection of that measure through 1999 shows a decline of about 0.5 percentage points in the average tax rate. However, the projection necessarily relies on extrapolating 1995 data to 1999 based on forecasts for overall income growth and thus does not capture any changes in the distribution of income that have occurred or might occur between 1995 and 1999. Such changes could affect the average tax rate. In fact, recent information from tax collections suggests that the rate may be higher than projected in 1999. The projection includes the effects of tax legislation enacted in 1997, as well as some provisions enacted in 1993 that were not completely phased in by 1995.

Combined taxes as a percentage of income--the total effective tax rate--varied for different types of families (see Figure 4). For example, the effective tax rate for single-parent families with children under age 18 was about 17 percent in 1995, well below the overall average. The rate for those families was low because many of them received earned income tax credits. The effective tax rate for older families and individuals was also lower than average--about 20 percent. Most of those families and individuals were retired and, having little or no earnings, paid little in social insurance payroll taxes. Although the average effective tax rate for all types of families and individuals is projected to decline between 1995 and 1999, the largest decline is expected for families with children under age 18, primarily as a result of the child credit enacted in the Taxpayer Relief Act of 1997.
 

FIGURE 4. EFFECTIVE TOTAL FEDERAL TAX RATES BY FAMILY TYPE, 1995 AND 1999

SOURCE: Congressional Budget Office.

NOTE: Based on data from the March 1996 Current Population Survey, adjusted to be consistent with Internal Revenue Service tax return data for 1995, with additional data from the 1994 and 1995 Consumer Expenditure Surveys. Data for 1999 reflect CBO's projected changes in aggregate income but assume that the distribution of income will not change.

In 1995, the total effective tax rate ranged from under 10 percent for all families and individuals combined in the lowest income group to 35 percent for those in the highest group. The effective individual income tax rate ranged from negative amounts for the lowest income group to over 20 percent for the highest income group. The negative rate for families and individuals in the lowest income group occurs because they, on average, receive payments in the form of refundable tax credits rather than pay any income tax. Projected effective tax rates for 1999 are lower for all income groups as a result of the tax cuts enacted in the Taxpayer Relief Act.
 

DETAILED TAX TABLES

Tables 1 through 3 present data from the Internal Revenue Service's (IRS's) individual tax return files for 1989 through 1996. Because those data are based on actual returns, they give an accurate picture of the relationship between taxes and income. There are some limitations, however: only individual income taxes are included; the measure of income is that reported on tax forms, which has varied somewhat over this period; and the data include only units that file tax returns.

To expand the scope of the analysis, Tables 4 though 14 present data from CBO's merged data set, including projections to 1999. Those data represent the whole population, have a broader definition of income, and include most federal taxes. Because constructing that data set requires merging data from several sources and imputing certain tax and income components, the results reflect more analytic judgments than do the data from tax returns.

Income Tax Return Data for 1989 Through 1996

Tables 1 through 3 describe individual income taxes paid by tax-filing units. They compare the number of tax returns, adjusted gross income, and individual income tax liabilities in each year from 1989 through 1996. The data, which are displayed in the tables by AGI category and family type, come from the Internal Revenue Service, Statistics of Income, Individual Income Tax Returns files for 1989 through 1995, and from IRS tabulations of the Master File System for 1996.⁽²⁾ The data include a relatively large sample of tax returns with oversampling of high-income returns, which makes it possible to show highly detailed information about taxpayers with very high income. The unit of analysis is all tax returns filed in that year, ranked by the reported dollar amount of their adjusted gross income, measured in constant 1996 dollars (adjusted using the consumer price index for all urban consumers).

Income in these tables is adjusted gross income as reported on tax returns. AGI includes wages and salaries, self-employment and partnership income, taxable interest, dividends, rental income, pensions, some Social Security benefits, and realized capital gains. AGI is reduced for deductible contributions to individual retirement accounts and Keoghs. Taxes are federal individual income taxes net of refundable tax credits.

Table 1 shows the number of returns and aggregate AGI and income taxes by income category. Table 2 shows the share of returns, income, and taxes in each category. Table 3 shows individual income taxes as a percentage of AGI, by income category.
 

Comprehensive Family Income and Tax Data for 1995 and 1999

Tables 4 through 14 present estimates of effective tax rates for total federal taxes and the percentage of those taxes paid by individuals and families, grouped by cash income and family type for 1995 and projections for 1999. In Tables 4 through 8, individuals and families are grouped into ranges of cash income. In Tables 9 through 14, they are grouped into quintiles--equal fifths of the population based on cash income.⁽³⁾ The estimates for 1995 are constructed by merging data from the March 1996 Current Population Survey with additional information imputed from the 1995 Statistics of Income, Individual Income Tax Returns file, and the 1994 and 1995 Consumer Expenditure Surveys.

The 1999 projections extrapolate each component of income (for example, wages and salaries) from the 1995 data using the Congressional Budget Office's January 1998 economic forecast. Those projections do not adjust for changes in the distribution of different components of income that have occurred or may occur between 1995 and 1999. The tax calculations for 1999 include changes made by the Taxpayer Relief Act of 1997. The estimates assume that deductions and adjustments to income will bear the same relationship to income as they did in 1995. That may not be true over a period in which incomes of higher-income taxpayers are rising rapidly.

In contrast to the SOI data for 1989 to 1996, the unit of analysis for the merged data is related individuals living in the same household. Individuals living apart from relatives form a one-person unit, even though they may share a residence with others. Yet units at the same income level may not be in equivalent economic circumstances because of differences in the number of children, in the number of working adults, or in age of the individual(s)--they may even face different tax schedules. Tables 4 through 8 also show estimates for five subgroups, defined by the number of adults, the presence of children under age 18, and whether the self-reported head of a unit is age 65 or older.

Tables 4 through 14 rank families and individuals by the dollar amount of the unit's income. Income is defined on a cash receipts basis and includes wages and salaries, net income from a business or farm, taxable and nontaxable interest, dividends, rental income, realized capital gains, cash transfers from the government, and retirement benefits. That definition excludes government transfer payments in kind, such as food stamps, rent subsidies, and government-sponsored Medicare or Medicaid health insurance, as well as nonmonetary payments by employers, such as health and life insurance premiums and other fringe benefits. CBO is currently working on a broader measure of income that would include those benefits using values developed by the Census Bureau.

The major differences between family income and AGI are that family income includes all cash transfer payments and is measured before any federal taxes are imposed. In order to implement the concept of income before federal taxes, estimates of the employer contribution to payroll taxes for Social Security, Medicare, and federal unemployment insurance as well as federal corporate income taxes were included in family income.

Family income is measured over a single year. Income may vary from year to year. For example, income may be lower than normal because of a period of unemployment, or higher than normal because of bonuses paid by employers. Capital gains realizations are another significant source of volatility. Gains will be unusually high if an individual sells an asset that has grown for a long time or changed dramatically in value. If income was averaged over a number of years, there would be less dispersion in the distribution of both income and effective tax rates. CBO is currently developing alternative measures of annual income that would attempt to adjust for unusually high or low incomes in a single year.

Tables 4 through 14 estimate taxes as total federal liabilities for 1995 or 1999 for most revenue sources. Total federal taxes include individual and corporate income taxes; payroll taxes for Social Security, Medicare, and federal unemployment insurance; and federal excise taxes. They do not include customs duties, estate and gift taxes, and other miscellaneous receipts. The total effective tax rate is the total tax divided by total before-tax income. The effective tax rate for each separate tax is that tax divided by total before-tax income.

In this analysis, individual income taxes have been calculated for each observation in the March 1996 CPS file and allocated directly to families and individuals. The refundable portion of the earned income and the child credits are included, so income taxes may be negative. Payroll taxes are estimated for each observation and distributed to families paying those taxes directly, or indirectly through their employers. Most economists agree that the burden of payroll taxes is borne by wage earners in the form of lower wages than would otherwise be the case, and CBO uses that assumption.

Federal excise taxes are imputed, or assigned, to families according to their consumption of taxed goods and services, as reported in the Consumer Expenditure Survey. Some portion of excise taxes is assumed to fall on intermediate products and pass through to families based on their total consumption.

The corporate income tax is collected from corporations, but families and individuals ultimately bear the economic burden of it. Economists disagree, however, on whether people bear the tax as shareholders in corporations, owners of all capital assets, employees, or consumers. Based on a survey of the economic literature on that point, this analysis assumes that the burden of corporate income taxes falls on families and individuals in proportion to their realized income from capital. The analysis therefore imputes corporate taxes on that basis.

Table 4 shows average 1995 pretax income and effective tax rates for families and individuals by level of income and type of family. Table 5 shows the percentage of families and individuals in each income group and their share of income and of taxes. Tables 6 and 7 present the same information using income projected to 1999.

Table 8 shows the fraction of families and individuals, by income level, who pay more in Social Security and Medicare taxes than in individual income taxes. The comparison was done both for units that have some tax liability and for the subset of those units that have earnings. Within those groups, the income taxes are compared both with the employee share alone and the employee and employer shares combined.