South-Western College Publishing - Economics  
Taking Taxes Personally
Subject Taxes, Income distribution
Topic Fiscal Policy
Key Words Capital Gains, Tax Policy, Investment, Economic Growth
News Story

At a time when most Americans are busily preparing their annual income tax returns, some new studies show that the federal tax burden for all but the richest Americans has fallen. The tax bill for most Americans has declined to less than 10 percent of their income. Perhaps these findings explain why voters place tax cut proposals near the bottom of their list of priorities.

A study by the Congressional Budget Office estimates that the middle fifth of American families paid only 5.4 percent of its income in income tax in 1999 compared with 8.3 percent in 1981. The middle fifth of the distribution of American families has an average income of $39,100. The Treasury Department estimates that a four-person family with the median income of $54,900 paid 7.46 percent of that income in federal income taxes - the lowest level since 1965. Yet another study, this by the conservative Tax Foundation, estimates that the median two-wage earner family with an income of $68,605, paid approximately 8.8 percent in taxes in 1998. This is about the same level of taxes as in 1955.

Personal income tax rates are at the lowest levels in four decades. This decline is the result of tax cuts initiated in the Reagan Administration, an expansion of the tax credit for the working poor in the 1990s and the addition of tax credits for education and children in 1997. According to the congressional Joint Committee on Taxation, more than one third of potential taxpayers pay no taxes. These personal income tax rates do not include Social Security or Medicare taxes, which have increased since the 1970s and now average about 9 percent of income.

In spite of this data, both presidential candidates have proposed large tax cuts. George W. Bush has proposed a tax cut of over $1 trillion over 10 years as the centerpiece of his economic plan. Bush argues that tax revenues now represent over 20 percent of Gross Domestic Product, the highest level since 1945. The decline in personal income tax rates at the same time that the overall share of taxes is increasing can be explained by the booming economy, which has added millions of new taxpayers to the IRS rolls. The increase in stock prices and realized capital gains is another important factor. Vice-President Gore has a more modest decrease of $350 billion targeted at middle-income Americans.

(Updated May 1, 2000)

1. What are the three largest sources of revenue for the Federal Government?
2. What is the difference between the marginal tax rate that an individual faces and the average tax rate?
3. How can average personal income tax rates decline at the same time that tax revenues as a percent of GDP increase?
4. What is a tax on capital gains?
Source Glenn Kessler, "Federal Tax Levels Fall For Most," The Washington Post, March 26, 2000.

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