1 PART X.-THE DISTRIBUTION OF INCOME HYPOTHETICAL TAX CALCULATIONS FOR SELECTED FAMILIES The following table presents taxable income levels, values of the personal exemptions, standard deductions, and additional standard deductions for the elderly and the blind for tax years 1989 to 1998. The figures for 1994-98 are based on Congressional Budget Office projections. TABLE 1. PERSONAL EXEMPTIONS, STANDARD DEDUCTIONS, AND TAXABLE INCOME LEVELS $2,000 $2,050 $2,150 $2,300 $2,350 $2,450 $2,500 $2,550 $2,650 $2,700 Head of household 18,550 19,450 20,350 21,450 30,950 32,450 34,000 35,800 36,950 38,000 39,050 40,100 29,650 30,500 31,350 32,200 33,050 33,950 Table 2 presents examples of tax liabilities for hypothetical taxpayers. The table presents 1993 Federal income and payroll tax burdens. The worker is assumed to bear both the employer and employee shares of FICA tax (7.65 percent for each). Taxpayers claim the earned income tax credit, if eligible, and they claim the standard deduction. They do not itemize. Income sources are listed for each example. TABLE 2.-EXAMPLES OF FEDERAL INCOME AND PAYROLL TAX LIABILITIES 1The average tax rate is total tax liability divided by income plus the employer share of FICA. The marginal rate computations also count the employer share of FICA tax as income to the employee (for both payroll and income tax purposes). All calculations assume the taxpayer takes the standard deduction rather than itemized deductions. 2 Assumes one child, one earner and all income is wage income. 3 All income is Social Security. 4$12,000 is Social Security, $12,000 is a taxable pension and $6,000 is taxable interest. 5 Same as above plus additional $10,000 of taxable interest and $10,000 of wages. 6 If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 14.2 percent. This represents the FICA tax liability on this income. "If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 28.1 percent, representing both the income tax liability and the FICA tax liability on this income. 8 $7,500 is Social Security, $2,500 is taxable pension. 9$7,500 is Social Security, $7,500 is taxable pension, $15,000 is taxable interest. 10 Same as above plus $20,000 of wages. 11 If the marginal dollar of income is assumed to consist of wage income, the marginal tax rate would be 35.1 percent, representing both the income tax liability (22.5 percent marginal rate reflects the inclusion of 50 cents of Social Security benefits as taxable for each additional dollar of AGI) and the FICA tax liability on this income. Summary THE DISTRIBUTION OF FEDERAL TAXES: 1977-1994 The one-fifth of the population with the highest incomes paid a smaller percent of their income in taxes in 1990 than in 1977 while the bottom 80 percent paid about the same percentage of their income in taxes in 1990 as in 1977. Taxpayers in the very highest income categories (top 1 and top 5 percent) show the largest reduction in taxes as a percent of income. Over the same period, the incomes of the top 20 percent of families rose faster than average family income. The income of the bottom 40 percent of families fell in constant dollar (adjusted for changes in the price level) terms, and relative to everyone else. Because the incomes of the top 20 percent of families rose faster than average, they earned a higher share of overall family income in 1990 than in 1977. As a result, they paid a higher share of total Federal taxes. But they paid less of their income in taxes in 1990 than in 1977; therefore, their share of total family income grew faster than their share of total Federal taxes paid. Two principal trends have caused this shift in Federal taxes. First, while income taxes have fallen as a percent of income for all income groups, payroll taxes have increased as a percent of income for all income groups. Payroll taxes represent a higher share of income for low- to middle-income households than for high-income households. This is because payroll taxes are levied only on earned income up to a dollar cap. In fact, it is only for the top 20 percent of households that income taxes exceed payroll taxes. For the top 20 percent of households, income tax reductions have more than offset payroll tax increases. Conversely, for low- and moderate-income households, significant payroll tax increases have more than offset modest income tax reductions. Second, while the overall progressivity of the Federal individual income tax has stayed roughly constant since 1977, this is not true for very high income families (the top 1 percent). For these households, income taxes have fallen as a percent of income more than for other households. The net result is that for households at the very top of the income scale, total taxes have fallen as a percent of income more than for other households-and even more than for other households in the top 20 percent. Overview of tables The percent of income paid in Federal taxes-or "effective tax rate"-for the highest income one-fifth of American families is projected to be just under 1 percentage point less in 1994 than it was in 1977 (see table 3). Because of changes in the Budget Enforcement Act of 1990, families in the highest quintile will face Federal effective tax rates of 26.5 percent in 1994, less than the 27.2 effective rate in 1977, but 1 percentage point higher than the rate in 1990. The rate decreases slightly to 26.3 with the expiration of the limitation of itemized deductions and the phaseout of personal exemptions in 1996 and 1997. For the highest income 1 percent of the population, the effective Federal tax rate declined from 35.4 percent in 1977 to 26.3 percent in 1990. The tax is projected to in |