[lit-ideas] Regarding the misleading impression about taxes and higher incomes
- From: Eternitytime1@xxxxxxx
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Wed, 25 May 2005 21:10:16 EDT
Hi,
This is from the Center for Budget and Policy Priorities. I am trying to
track
down some of the original sources that they used. The link will provide you
with the actual graphs, etc. if you are so interested ...
There does seem to be some confusion between the Treasury Dept and the
Congressional Budget Office as to whether or not the wealthy pay 33.9 % or
the 22.7 % ...
Hope it is of interest!
Best,
Marlena in Missouri
http://www.cbpp.org/4-15-04tax.htm#_ftn2
April 15, 2004
ARE TAXES EXCEPTIONALLY CONCENTRATED AT THE TOP?
Treasury Department Release Creates Misleading Impression
About Taxes That High-Income Taxpayers Pay
By Joel Friedman, Robert Greenstein, and Isaac Shapiro
PDF of report
View Related Analyses
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The Treasury Department recently released a fact sheet on who pays the
federal income tax. The fact sheet makes two main points: that â??the
individual income tax is highly progressive â?? a small group of higher income
taxpayers pay most of the individual income tax each year,â?? and that this
burden has increased as a result of the tax cuts enacted under the Bush
Administration.[1]
The Treasury release is designed to counter arguments that the recent tax
cuts are tilted to those at the top of the income scale and to portray the
tax
cuts enacted since 2001 in a positive light. The fact sheet, however, is
misleading. By focusing only on the federal income tax and leaving out all
other federal taxes, it creates misimpressions both about the degree to
which
the tax code is progressive and about who benefited the most from the recent
tax cuts. The fact sheet also ignores the degree to which income has
become more concentrated at the top of the income scale.
While the nationâ??s tax code is progressive, it is not nearly as progressive
as
the Treasury fact sheet would lead one to believe. The Treasury analysis
shows that the one percent of taxpayers with the highest incomes paid 33.9
percent of federal individual income taxes in 2001. However, a new analysis
by the Congressional Budget Office shows that this group pays a
substantially smaller proportion â?? 22.7 percent â?? of federal taxes overall,
including payroll, excise, and other taxes.[2] The progressivity of the tax
system is further muted if state and local taxes are taken into account;
most
state and local tax systems are regressive.
High-income households have clearly gained the most from recent tax cuts.
As a result of the three major tax cut bills enacted since 2001, the top one
percent of taxpayers will receive average tax cuts of nearly $35,000 in
2004,
according to new data from the Urban Institute-Brookings Institution Tax
Policy Center, or 54 times the average tax cut that the middle fifth of
taxpayers will receive. The highest-income taxpayers also will experience a
much greater percentage increase in after-tax income as a result of the tax
cuts than other taxpayers will. Finally, the Tax Policy Center data show
that
those at the top of the income scale will be paying a smaller share of all
federal taxes when the tax cuts are fully in effect.
High-income households paid a larger share of federal taxes in 2001 than in
the first half of the 1990s â?? the years that the Treasury fact sheet covers
â??
but this is due in significant part to high-income households receiving a
larger
share of before-tax income in the nation in 2001 than in the early 1990s.
In
addition, even after taxes are taken into account, after-tax income
increased
much faster for high-income households over the 1990-2001 period than for
any other income group. The CBO data show that from 1990 to 2001, the
average after-tax income of the top one percent of the population jumped 41
percent, while the average after-tax income of the middle fifth of the
population
rose 14 percent. When the 1980s are included, this differential is even
larger
(see box on page 6).
The tax burden on high-income households is not high in historical terms.
As
just noted, high-income taxpayers are paying a larger share of federal taxes
in
significant part because they are receiving a larger share of the national
income. But their actual tax burdens â?? the percentage of income they pay in
federal taxes â?? have declined. According to the CBO data, the top one
percent of households paid a slightly smaller share of their income in
federal
taxes in 2001 than they paid in any year since 1992. Further, since 2001,
the
percentage of income they pay in federal taxes has dropped significantly as
tax cuts targeted on them â?? such as the reduction in the top income tax
rates â?? have taken fuller effect.
How Progressive Is The Nationâ??s Tax Code?
The Treasury fact sheet focuses only on the individual income tax, one of
the
most progressive taxes. Not surprisingly, it shows that high-income
households pay a large share of this tax. But the degree to which high-
income households shoulder the tax burden is lessened once payroll taxes
are taken into account. Although the progressive individual income tax is
the
single largest source of federal revenue, the payroll tax â?? which is
regressive
â?? is a very close second, accounting for between 35 percent and 40 percent
of all federal taxes in recent years.[3] The payroll tax places a larger
burden
on low- and moderate-income families than the income tax because it is
levied on the first dollar of wages. According to CBO, more than three-
quarters of workers paid more in payroll than in income taxes in 2000, the
latest year for which these data are available.[4]
As a result, the CBO data show that the top one percent of households paid
22.7 percent of all federal taxes in 2001, significantly below the 34.4
percent
of individual income taxes that CBO estimates this group paid.[5]
The CBO data also indicate that in 2001, the top one percent of households
received 14.8 percent of the before-tax income in the nation, eight
percentage
points less than the share of total federal taxes they paid. This indicates
that
the federal tax system overall is progressive, but not to the steep degree
the
Treasury fact sheet implies.
Furthermore, taxes also are paid to state and local governments, which tend
to rely more heavily on regressive sales taxes and excise taxes. When state
and local taxes are included, the gap between the percentage of the national
income that high-income individuals receive and the percentage of the taxes
they pay narrows further, a point the noted tax expert Joseph Pechman
demonstrated nearly two decades ago.
New estimates by the Citizens for Tax Justice confirm this conclusion. They
show that in 2004, when more of the recently enacted tax cuts are in effect,
the overall share of federal, state, and local taxes that high-income
households will pay will be only a little bit larger â?? less than two
percentage
points larger â?? than their share of the national income. Similarly, the
share
of taxes that middle- and lower-income households pay will be just a little
more than one percentage point lower than their share of the national
income,
according to these CTJ estimates.[6] It is only because the progressive
federal tax system offsets the regressive effects of state and local taxes
that
the U.S. tax system as a whole is even mildly progressive.
Who Gains The Most From The Tax Cuts?
According to the Treasury Department fact sheet, â??The Presidentâ??s tax cuts
have shifted a larger share of the individual income taxes paid to higher
income taxpayers. In 2004, when most of the tax cut provisions are fully in
effect (e.g., lower tax rates, the $1,000 child credit, marriage penalty
relief),
the projected tax share for lower-income taxpayers will fall, while the tax
share for higher-income taxpayers will rise.â?? These statements appear
intended to create the impression that the tax cuts were distributed in a
highly
equitable manner, giving households that do not have high incomes more than
their fair share. This is not the case.
The tax cuts enacted since 2001 benefit high-income households the most,
by far, and are exacerbating the concentration of after-tax income at the
top of
the income scale, according to estimates prepared by the Urban Institute-
Brookings Institution Tax Policy Center. Economists generally believe
changes in after-tax income constitute the most appropriate measure of the
distributional impact of tax cuts, since after-tax income represents the
best
measure of the income that a household has available to spend or save. The
Tax Policy Center analysis shows that the tax cuts enacted since 2001 will
increase after-tax income in 2004 for households in the middle of the income
spectrum by an average of 2.3 percent, while increasing after-tax income for
those in the top one percent of the income scale by 5.3 percent â?? or twice
as
large as a percentage. For those with incomes over $1 million, the tax cuts
will increase after-tax income by 6.4 percent in 2004.
Table 1: Impact of Enacted Tax Cuts, 2004
Income Class
Average tax cut
Percentage growth in after-tax income
Middle 20 percent $647
2.3%
Top one percent $34,992
5.3%
Over $1 million $123,592
6.4%
Source: Urban-Brookings Tax Policy Center
The Treasury fact sheet tries to create the illusion that the tax cuts are
progressive by stating that the top one percent will pay a larger share of
the
individual income taxes after the tax cuts than before the tax cuts. By
itself,
this type of comparison is not especially meaningful for assessing the
progressivity of the tax cuts. Essentially, this statistic tells us that
the upper-
income group will be paying a slightly larger share of the much smaller
amount of federal income taxes that will be collected after the tax cuts.
Taken to its logical extreme, if all income taxes were eliminated except for
a
tax of $1 a year on the top one percent of households, these high-income
households would be paying 100 percent of all income taxes. Yet such an
outcome would represent a regressive change, because the progressive
income tax code would have essentially been eliminated, which would
presumably lead to increases in other, less progressive taxes or to
reductions
in programs that primarily benefit middle- and low-income households, as
most major federal programs do.[7]
In addition, the Treasury produces its â??findingâ?? that high-income
households
are paying a modestly larger share of federal income taxes by ignoring all
taxes other than the income tax and also ignoring years after 2004. The
fact
sheet leaves out tax cuts enacted in 2001 that are scheduled to be phased in
after 2004, including income-tax cuts benefiting only higher-income
households that have not yet taken effect as well as the repeal of the e
state
tax. A more complete analysis by the Tax Policy Center shows that when all
of the tax cuts are fully in effect, the top one percent will pay a slightly
smaller
share of federal taxes as a result of the tax cuts, not a larger share.[8]
Large Share Of Taxes Paid By Top One Percent Reflects The Increased
Concentration Of Income
New CBO data show that the before-tax income of the top one percent of the
population grew by 125 percent between 1979 and 2001, the years the CBO
analysis covers. (All of these figures are adjusted to remove the effects
of
inflation.) In contrast, the incomes of those in the middle of the income
scale
grew by 12 percent over this period, or at one-tenth the pace of the top one
percent. In dollar terms, the top one percent experienced a $583,300
average
increase in income over this period, while those in the middle saw their
incomes grow by an average of $5,500.
Table 2: Growth in Before-Tax Income* 1979-2001
Income Class
Percentage
Increase
Increase in Dollars
Middle 20 percent 12.0%
$5,500
Top one percent 125.0%
$583,300
*Adjusted for inflation
Source: CBO
As a result of the rapid income growth at the top of the income scale, the
share of the nationâ??s income that flows to those with high incomes grew
substantially over this period. According to CBO, the top one percent
received 14.8 percent of the nationâ??s before-tax income in 2001, up sharply
from this groupâ??s 9.3 percent share in 1979.[9] Since 1996, the households
that make up the top one percent of the population have received a larger
share of the national income than the entire 20 percent of the population in
the
middle of the income spectrum.
Similarly, the top five percent received about as much income in 2001 as the
bottom 60 percent of the population. That is, the 5.7 million households
with
the highest incomes (the top five percent) received as much income as the
bottom 64.9 million households combined.
Table 3: Shares of Before-Tax Income
Income Class
1979
2001
Middle 20 percent 15.8%
14.2%
Top one percent 9.3%
14.8%
Source: CBO
Given that those at the top of the income spectrum are receiving a larger
share of the national income than in the past, it is not surprising that
they are
paying a larger share of federal taxes.
After-Tax Income Gains Also Have Been Concentrated at the Top
Although households with high incomes pay a larger share of their income in
federal taxes than other income groups do, their income after-taxes has
grown
much more rapidly over the past two decades than the after-tax income of
other households. After-tax income is the best indicator of a householdâ??s
well-being, because it shows the level of income that a household has to
spend, save, or invest.
CBO estimates that the average after-tax income of the top one percent of
households grew by a stunning 139 percent between 1979 and 2001. In
contrast, the incomes of those in the middle of the income spectrum grew by
an average of 17 percent over this period. In dollar terms, the top one
percent
experienced a $408,800 average increase in after-tax income over this
period,
while those in the middle saw their incomes grow by an average of $6,300.
(These figures are adjusted to remove the effects of inflation.)
The CBO data also show marked disparities in after-tax income growth since
1990, the first year the Treasury fact sheet covers. After-tax income grew
much faster among high-income households between 1990 and 2001 than
among ordinary households, despite the fact that the overall tax rates that
the
top one percent of households faced were higher in 2001 than in 1990, as a
result of deficit-reduction measures enacted in 1990 and 1993. According to
the CBO data:
Between 1990 and 2001, the average after-tax income of the top one percent
of households rose from $500,400 to $703,100. This represents a robust
average gain of more than $200,000 per household, or 41 percent.
Middle-income households gained much more modestly over this period. The
average after-tax income of the middle fifth of households rose by $5,300,
or
14 percent.
Growth in After-Tax Income*
1990-2001
1979-2001
Income Class
Percentage Increase
Increase in Dollars
Percentage Increase
Increase in Dollars
Middle 20 percent 13.8%
$5,300
16.8%
$6,300
Top one percent 40.5%
$202,700
138.9%
$404,800
*Adjusted for inflation
Source: CBO
Tax Burden For Upper-Income Households Has Declined
Finally, the CBO data show that the percentage of income that higher-income
households pay in federal taxes was lower in 2001 than in a number of the
previous years covered by the CBO study.
CBO estimates that in 2001, the top one percent of households paid an
average of 33 percent of their income in federal taxes, including income,
payroll, and other taxes.
This percentage is lower than in any year since 1992. It also is lower than
the
average for the 1990s.
The percentage is lower than in 1979 and 1980 as well, the first years that
the
CBO study covers. The percentage is higher than in most years of the 1980s
and early 1990s, which should not be surprising given the very large tax
cuts
for high-income households that were enacted in 1981. It also should be
noted that the 1980s and early 1990s were marked by large federal deficits
and substantial increases in the national debt.
One key point is that these CBO estimates for 2001 reflect the effects of
only
a small fraction of the recent tax cuts that have benefited high-income
households handsomely. The top income tax rate stood at 39.1 percent in
2001, down only slightly from the 39.6 percent rate before the tax cuts.
Today, the top tax rate is significantly lower at 35 percent. In addition,
the
recent tax cuts on dividend and capital gains income were not enacted until
2003. When all of the recent tax cuts are in full effect, the share of
income
that high-income households pay in federal taxes will be significantly lower
than it was in 2001. As just noted, the 2001 level itself was below the
level for
all years since 1992, as well as for 1979 and 1980.
Conclusion
The Treasury Department fact sheet continues a trend by the Administration
and the Treasury Departmentâ??s public affairs office of using statistics
selectively to create questionable impressions about the nature of the nation
â??s
tax burden and the impact of the tax cuts enacted since 2001. In general,
the
overall tax system is only modestly progressive. The share of federal taxes
that high-income households pay has risen in recent decades, but this is in
significant part because these householdsâ?? incomes have risen more rapidly
than everyone elseâ??s and they now receive a substantially larger share of
the
national income.
Moreover, the percentage of income that high-income households pay in
federal taxes has been declining since 1996, was already lower in 2001 than
in any year since 1992, and has fallen significantly further since 2001 as
more
tax cuts have taken effect.
------------------------------------------------------------------------------
--
End Notes:
[1] Treasury Department, â??Fact Sheet: Who Pays The Most Individual Income
Taxes?â?? April 1, 2004.
[2] Congressional Budget Office, â??Effective Federal Tax Rates, 1979-2001,â??
April 2004.
[3] CBO estimates that in 2004, individual income taxes and payroll taxes
will
represent nearly equal shares of total federal taxes, with individual income
taxes representing 42 percent of the total and payroll taxes representing 41
percent. After 2004, assuming extension of the tax cuts, the share
attributable to individual income taxes is projected to rise somewhat and
the
share attributable to payroll taxes to fall modestly.
[4] Congressional Budget Office, â??Effective Federal Tax Rates, 1979-2000,â??
August 2003. This calculation follows the standard practice of attributing
to
workers the burden of both the employee and employer payroll taxes, with the
employer portion being passed on to workers in the form of lower wages.
[5] The CBO estimate (34.4 percent) is slightly higher than the Treasury
estimate (33.9 percent). This small discrepancy exists largely because the
two institutions employ somewhat different concepts of income and of the
populations their analyses cover.
[6] Citizens for Tax Justice, â??Overall Tax Rates Have Flattened Sharply
Under
Bush,â?? April 13, 2004. CTJ estimates that in 2004, the top one percent of
households will receive 19.1 percent of the nationâ??s income and pay 20.8
percent of federal, state, and local taxes. The CTJ figures reflect
concepts of
income and of the population covered in its analysis that are slightly
different
than those used by CBO and Treasury.
[7] How tax cuts are paid for is particularly relevant in the current
context,
where deficits that have been generated in significant part by the tax cuts
are
spurring calls for deficit reduction. Because the tax cuts are tilted
toward the
highest-income households, the burden of financing these tax cuts ultimately
is likely to be borne primarily by households that gain much more modestly
from the tax cuts. This will be the case unless the spending cuts or tax
increases used to shrink the deficit reduce benefits or raise taxes
primarily on
high-income households. Over the long term, most Americans thus may end
up as net losers from the tax cuts.
[8] Other Tax Policy Center data also show that households with very high
incomes will receive outsized benefits from the tax cuts. For instance, TPC
data indicate that in 2004, households with incomes of more than $1 million
will receive 9.1 percent of the before-tax income in the nation and would
pay
13.6 percent of all federal taxes in the absence of the tax cuts. But they
will
receive 15.3 percent of the tax-cut benefits in 2004, which is larger than
both
the share of federal taxes they pay and the share of the national income
they
receive.
[9] The share of income going to the top one percent was lower in 2001 than
in 1998 through 2000, reflecting in large part the drop in the stock market.
There are no official data available on income shares after
2001._____________________________________________________
Marlena Boggs mboggs@xxxxxxxxxxxxxx
Adults Services Specialist 816-836-5200
Mid-Continent Public Library http://www.mcpl.lib.mo.us
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