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Revised April 2, 2012

FEDERAL INCOME TAXES ON MIDDLE-INCOME FAMILIES REMAIN NEAR HISTORIC LOWS
By Chuck Marr Federal taxes on middle-income Americans are near historic lows,1 according to the latest available data. That’s true both for federal income taxes and total federal taxes.2

FIGURE 1:

Federal Income Tax Burden at Historic Low

Income taxes: A family of four in the exact middle of the income spectrum will pay only 5.6 percent of its 2011 income in federal income taxes, according to a new analysis by the Urban InstituteBrookings Institution Tax Policy Center. 3 Average income tax rates for these typical families have been lower during the Bush and Obama Administrations than at any time since the 1950s, as Figure 1 shows. (As discussed below, 2009 and 2010 were particularly low because of the temporary Making Work Pay Tax Credit.)

Source: Treasury Department, 1955-1996; Tax Policy Center update, 1997-2011.

This paper focuses on the taxes of middle-income households. The average tax rates for high-income households have fallen sharply in recent decades. See, for example, “Yes, There’s Real Money at the Top”, Off the Charts, August 18, 2011, http://www.offthechartsblog.org/yes-there%E2%80%99s-real-money-at-the-top/. Congressional Budget Office, “Average Federal Tax Rates for All Households, by Comprehensive Income Quintile, 1979-2007.” Tax Policy Center, “Historical Federal Income Tax Rates for a Family of Four,” March 29, 2012. The Tax Policy Center’s estimates were derived by updating (using Treasury’s methodology) a 1998 Treasury Department analysis that examined changes since 1955 in the percentage of income that the median-income family of four pays in federal income taxes.
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Overall federal taxes: Overall federal taxes — which include income as well as payroll and excise taxes — on middle-income households are near their lowest levels in decades, according to the latest data from the Congressional Budget Office (CBO).

Federal Income Taxes Have Declined Significantly in Recent Decades Federal income taxes on middle-income families have declined significantly in recent decades. In 2000, the year before the 2001 tax cut enacted by President Bush and Congress, the median-income family of four paid 8.0 percent of its income in individual income taxes, according to Tax Policy Center estimates — a smaller share than in any year since 1967 (except for 1998 and 1999).4 The Bush tax cuts further reduced middle-income tax obligations. This year (i.e., when people pay income tax on 2011 income) the Tax Policy Center estimates that the median-income family of four will pay 5.6 percent of its income in federal income taxes. The 5.6 percent rate (as well as the other rates discussed here for both 2011 and other years) is the effective tax rate, or the percentage of its income that a family pays in taxes. It is well below the 15 percent marginal tax rate — the rate paid on a filer’s next dollar of income — that a family of four in the exact middle of the income spectrum faces. A family’s effective tax rate typically is significantly lower than its marginal tax rate, because the family takes the standard deduction (or, in some cases, itemized deductions), personal exemptions, and tax credits such as the child tax credit, and because a portion of the family’s taxable income is taxed at lower rates. (For the median-income family, some of its income is not taxed, some is taxed at a 10 percent rate, and some is taxed at a 15 percent rate.) Expiration of Making Work Pay Credit Raised Effective Income Tax Rate Figure 1 shows that while the overall trend in a typical family’s effective tax rate has been downward, the 2011 rate is above the rates for 2009 and 2010. This is because of the expiration of the Making Work Pay Tax Credit. Created by the 2009 Recovery Act, Making Work Pay provided an income tax credit of $800 to married couples ($400 to single filers) in 2009 and 2010. In 2011, this tax credit expired and policymakers replaced it with a cut in the employee portion of the Social Security payroll tax, from 6.2 percent to 4.2 percent of workers’ Social Security taxable earnings (which were capped at $106,800 in 2011). Therefore, while middle-income taxpayers will pay slightly higher federal income taxes on their 2011 income than on their 2009 and 2010 income, they will pay lower payroll taxes.5 As the table below shows, the payroll tax cut benefits workers in a wide range of income groups.

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Tax Policy Center, “Historical Federal Income Tax Rates for a Family of Four,” March 29, 2012.

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On net, most middle-income people will pay lower overall federal taxes following the replacement of Making Work Pay with the payroll tax cut; for example, the typical family of four in the TPC table with a median income of $75,648 (assuming all from wages) would receive a payroll tax cut of over $1,500 instead of an $800 Making Work Pay credit. Lower-income people, in contrast, will pay higher overall federal taxes following this change; for example, a full-time, minimum wage worker will receive a $300 payroll tax cut instead of a $400 Making Work Pay credit.

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Table 1

Effect of Temporary Payroll Tax Deduction
Occupation Cashier Home health aide Hairdresser Truck Driver Machinist Plumber Electrician Nurse Computer Programmer Real Estate Broker Marketing Manager
Source: Bureau of Labor Statistics, CBPP analysis.

Average Salary6 $19,810 $21,760 $26,510 $39,450 $39,780 $50,360 $51,810 $67,720 $74,900 $76,060 $122,720

Amount of Payroll Tax Cut $396 $435 $530 $789 $796 $1,007 $1,036 $1,354 $1,498 $1,521 $2,2027

Overall Federal Taxes Also at Low Levels While income taxes on middle-class households have declined in recent years, so, too, have overall federal taxes. Households in the middle fifth of the income spectrum paid an average of 14.3 percent of their income in overall federal taxes in 2007, the latest year for which data are available, according to CBO.8 This is just slightly above this group’s effective tax rate of 13.8 percent in 2003, which was the lowest on record in data that go back to 1979. Most Americans pay more in payroll taxes, which support Social Security and Medicare, than they do in income taxes. Thus, the 14.3 percent figure reflects the impact of payroll taxes far more than income taxes. When CBO releases data for more recent years, the overall effective federal tax rates on middleincome families (and other taxpayers) are likely to be lower because of the effect of the Making Work Pay tax credit in 2009 and 2010 and the payroll tax cut in 2011 and 2012, as well as the weaker economy (since the large rise in unemployment reduced many families’ incomes).

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Bureau of Labor Statistics 2010 National Occupational Employment and Wage Estimates, http://www.bls.gov/oes/current/oes_nat.htm#45-0000. Figures are mean average annual wages in 2010. These figures are used as a proxy for 2012 income to estimate the payroll tax effect. The amount of wages subject to the payroll tax is currently capped at $106,800. According to the Social Security Administration, that cap will rise to $110,100 in 2012, which implies a maximum tax cut under the payroll tax provision of $2,202. See http://www.ssa.gov/OACT/COLA/autoAdj.html for more information. The CBO study covers the 1979-2007 period and includes federal income, payroll, and excise taxes. Congressional Budget Office, “Average Federal Tax Rates for All Households, by Comprehensive Household Income Quintile, 19792007,” June 2010, http://www.cbo.gov/publications/collections/tax/2010/average_rates.pdf.
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Figure 2

United States Is a Low-Tax Country Tax Revenue as a Percent of GDP in 2007

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owThe United States Is a LowTax Country

Note: OECD total is an un-weighted average. Source: OECD

The downward trend in effective tax rates for middle-income families, the steep drop in federal taxes at the top of the income scale in recent decades, and the decline in corporate income tax revenue as a share of GDP have all contributed to keeping the United States a low-tax country, by international standards. The United States (including both the federal government and the states) collects less in taxes as a share of the economy than nearly any other developed country, as Figure 2 shows.

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