December 4, 2013
The increase in the nation’s economic activity in 2010 affected households’ income, federal tax liabilities, and federal tax rates. In this report, CBO presents its estimates of the distribution of household income and federal taxes in 2010, and it compares those estimates with estimates for the preceding three decades. The report also discusses the effects of changes in tax rules on the distribution of federal taxes in 2013.
How Were Federal Taxes Distributed in 2010?
The average federal tax rate for all households in 2010—that is, tax liabilities divided by income (including government transfer payments) before taxes—was 18.1 percent. To examine the effect of taxes on households with different amounts of income, CBO divided the nation’s households into five groups of equal size, arrayed by before-tax income. In 2010, the federal tax rate for the bottom quintile of the income distribution was 1.5 percent and that for the top quintile was 24.0 percent (see the figure below). The top 1 percent of all households in the United States had an average federal tax rate of 29.4 percent in 2010.
Higher-income households pay much more in federal taxes than do their lower-income counterparts: They have a much greater share of the nation’s before-tax income, and they pay a much larger proportion of that income in taxes. Households in the top quintile (including the top percentile) paid 68.8 percent of all federal taxes, households in the middle quintile paid 9.1 percent, and those in the bottom quintile paid 0.4 percent of federal taxes.
How Did Federal Taxes Affect the Distribution of Income in 2010?
Federal taxes caused the distribution of after-tax income in 2010 to be slightly more even among quintiles than was the distribution of before-tax income. Households in the bottom four quintiles received shares of after-tax income that were about 1 percentage point greater than their shares of before-tax income. For example, households in the bottom quintile received 5.1 percent of before-tax income and 6.2 percent of after-tax income, and those in the middle quintile received 14.2 percent of before-tax income and 15.4 percent of after-tax income. In contrast, households in the highest quintile received 51.9 percent of before-tax income and 48.1 percent of after-tax income.
How Did the Distribution of Income and Federal Taxes Change From 2009 to 2010?
Average before-tax income rose by 2.7 percent from 2009 to 2010 in real (inflation-adjusted) terms, but the increase was uneven. Income rose by about 1 percent for households in the lowest quintile and by less than 1 percent for households in each of the three middle quintiles (see the figure below). In contrast, income grew by about 5 percent for households in the top quintile and by about 16 percent for households in the top percentile. Those increases recouped some of the steep declines that occurred from 2007 to 2009 for the highest-income taxpayers, although it left their incomes well below the prerecession peaks. As a result of the uneven growth from 2009 to 2010, the share of income for the top 1 percent increased by 1.6 percentage points, and the share for the middle three quintiles taken together fell by 1.3 percentage points.
The average federal tax rate for all households rose by 0.8 percentage points from 2009 to 2010. The increases were fairly even across income groups, with each quintile seeing an increase of between 0.4 and 0.8 percentage points. Average individual and corporate income tax rates rose and the average payroll tax rate fell, driven largely by changes in the composition of the tax base rather than by changes in tax provisions.
What Are the Longer-Term Trends in the Distribution of Federal Taxes?
Even with the increases in average federal tax rates in 2010, the average rate for each income group was below the rate that prevailed for that group in the 1990s and most of the 2000s (see the figure below). For most income groups, average federal tax rates in 2010 were near the lowest rates for the 1979–2010 period. The exception was households in the top 1 percent, whose average federal tax rate in 2010 was significantly above its low in the mid-1980s.
How Will Changes in Tax Rules Between 2010 and 2013 Affect Average Federal Tax Rates?
Current federal tax rules differ from those of 2010 in important ways:
- Several provisions affecting high-income taxpayers, originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), were allowed to expire in 2013.
- The Making Work Pay tax credit expired at the end of 2010, and payroll tax rates that had been reduced in 2011 and 2012 were reset in 2013 to their earlier amounts.
- New taxes for high-income taxpayers, enacted with the Affordable Care Act, took effect in 2013.
For this report, CBO estimated average federal tax rates for 2013 by simulating tax liabilities under 2013 tax rules using reported 2010 incomes and making an adjustment for estimated aggregate income growth between 2010 and 2013. That analytical approach was taken to isolate the effects of changes in tax rules and does not account for shifts in the distribution of income that might have occurred between 2010 and 2013. Tax rates will increase overall as a result of the changes in tax rules, with the largest increases at either end of the income distribution: Average rates are projected to rise by 1.6 percentage points for households in the lowest quintile, by 1.0 percentage point for those in the middle quintile, and by 4.2 percentage points for the top percentile. For most income groups, average tax rates under 2013 law are projected to remain below those in 2007, the year before the recession began, and well below those for most of the past three decades. For the top 1 percent of households, however, average rates under 2013 law will be higher than in any year since 1997.