July 10, 2012
Updated: On August 10, 2012, the supplemental data spreadsheet was reposted with a correction (in Table 5, to the 2009 value for market income, adjusted for household size), along with a few explanatory notes (to Tables 5, 9, and 13).
The recent recession has had a substantial impact on income, the amount of taxes owed, and average tax rates. Changes in households’ before-tax income and average tax rates in 2008 and 2009 were substantial and differed markedly across the income distribution. Average after-tax income fell notably, owing to a drop in market income caused by the recession that began in December 2007 that was only partially offset by increases in government transfers and decreases in federal taxes.
In this report CBO extends its estimates of the distribution of household income and federal taxes through 2008 and 2009, the latest year for which comprehensive data are available, and compares those estimates with estimates for 2007 and for the 1979–2009 period.
Average Before-Tax Income for All Households Fell 12 Percent from 2007 to 2009 in Real (Inflation-Adjusted) Terms
In 2009, the shares of total before-tax income (which includes government transfer payments, such as Social Security benefits) received by households in certain income quintiles were:
- Lowest quintile: 5.1 percent
- Middle quintile: 14.7 percent
- Highest quintile: 50.8 percent
(Each quintile contains one-fifth of the population, ranked by household income adjusted for household size as described in the report.)
Average before-tax income fell between 2007 and 2009 for households in all income quintiles, but the amount of that decline varied by quintile. The declines in before-tax income were 5 percent or less for households in each of the four lowest income quintiles and 18 percent for households in the top quintile. For households in the top one percent, income fell by 36 percent, reducing their share of before-tax income from 18.7 percent to 13.4 percent.
Average Federal Tax Rate for All Households Reached the Lowest Level Seen in the 1979–2009 Period
Average tax rates depend on tax laws and economic conditions. The average federal tax rate—that is, households’ federal tax liabilities divided by their income (including transfer payments) before taxes—was 17.4 percent in 2009 for all households and ranged from 1.0 percent for households in the lowest quintile to 23.2 percent for households in the highest quintile (and to 28.9 percent rate for households in the top percentile).
The overall average federal tax rates of 18.0 percent in 2008 and 17.4 percent in 2009 were the lowest in the 1979–2009 period and were well below the previous low of 19.4 percent in 2003 and the average of 21.0 percent over that period. For most income groups, the 2009 average federal tax rate also was the lowest observed in the 1979–2009 period. The pattern in the intervening years is more varied, reflecting the interaction of numerous changes to tax law and changes in the composition and distribution of income.
With the decline in before-tax income offset in part by the decrease in federal taxes, average after-tax income fell 10 percent in real terms. The decline in after-tax income for the highest-income households reversed a substantial portion of the sharp rise in their income between 1979 and 2007.
Although the detailed data that form the basis of CBO’s estimates in this report are available only through 2009, other data can provide some insight into more-recent changes in the distribution of income. Those data suggest that income for households toward the higher end of the distribution increased more rapidly than income for households elsewhere in the income distribution in 2010.
Share of Tax Liabilities Increases with Income
Because average federal tax rates rise with income, the share of federal taxes paid by higher-income households exceeded their share of before-tax income, and the opposite was true for lower-income households.
In 2009, the shares of federal taxes paid by households in certain income quintiles were:
- Lowest quintile: 0.3 percent
- Middle quintile: 9.4 percent
- Highest quintile: 67.9 percent
Declines in before-tax income among households in the top income percentile lowered their share of tax liabilities from 26.7 percent in 2007 to 22.3 percent in 2009.
The analysis reflects two significant changes CBO has made to the methodology it uses to derive estimates of before-tax income and federal tax liability. Specifically, the agency has revised its assumptions about the incidence of the corporate income tax and its method for valuing government-provided health insurance. CBO has also changed the index it uses to measure inflation; it now uses the personal consumption expenditures (PCE) price index, also referred to as the PCE deflator.
The attached tables supplement information provided in the full report.
- Average Federal Tax Rates for All Households, by Before-Tax Income Group, 1979 to 2009
- Shares of Federal Tax Liabilities for All Households, by Before-Tax Income Group, 1979 to 2009
- Number of Households, Average Income, and Shares of Income for All Households, by Before-Tax Income Group, 1979 to 2009
- Income Group Minimums for All Households, by Household Size and Before-Tax Income Group, 1979 to 2009
- Median Household Income, 1979 to 2009
- Sources of Income for All Households, by Before-Tax Income Group, 1979 to 2009
- Sources of Income for All Households, by Market Income Group, 1979 to 2009
- Percentage of Households Paying More in Payroll Taxes Than in Income Taxes, 2009
- Gini Indexes for Household Income and Progressivity Indexes for the Federal Tax System, 1979 to 2009
- Nonelderly Childless Households: Average Federal Tax Rates, Shares of Federal Tax Liabilities, Average Income, and Shares of Income, by Before-Tax Income Group, 1979 to 2009
- Elderly Childless Households: Average Federal Tax Rates, Shares of Federal Tax Liabilities, Average Income, and Shares of Income, by Before-Tax Income Group, 1979 to 2009
- Households with Children: Average Federal Tax Rates, Shares of Federal Tax Liabilities, Average Income, and Shares of Income, by Before-Tax Income Group, 1979 to 2009
- Average Federal Tax Rates, Shares of Federal Tax Liabilities, Average Income, and Shares of Income for All Households, by Before-Tax Income Group, Using an Alternative Value for Medicare and Medicaid, 1979 to 2009