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report
February 1, 2012
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Taxes
Over the past 40 years, federal revenues have ranged from nearly 21 percent of GDP, in fiscal year 2000, to less than 16 percent, in fiscal years 2009 through 2012; they have averaged about 18 percent of GDP over the four decades. In addition to projecting the future course of federal revenues, CBO analyzes the budgetary and economic effects of various features of the federal tax system and the effects of potential changes to current tax rules.
Highlights
This statement summarizes CBO's new economic forecast and baseline budget projections, which cover fiscal years 2012 to 2022. Those estimates were released yesterday in the report titled The Budget and Economic Outlook: Fiscal Years 2012 to 2022.
The federal budget deficit—although starting to shrink—remains very large by historical standards. How much and how quickly the deficit declines will depend in part on how well the economy does over the next few years. Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year under current law.
The pace of the economic recovery has been slow since the recession ended in June 2009, and CBO expects that, under current laws governing taxes and spending, the economy will continue to grow at a sluggish pace over the next two years. That pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and especially next. Although CBO projects that growth will pick up after 2013, the agency expects that the economy's output will remain below its potential until 2018 and that the unemployment rate will remain above 7 percent until 2015.
The Budget Outlook
As specified in law, and to provide a benchmark against which potential policy changes can be measured, CBO constructs its baseline estimates of federal revenues and spending under the assumption that current laws generally remain unchanged. On that basis, the federal budget will show a deficit of nearly $1.1 trillion in fiscal year 2012. Measured as a share of gross domestic product (GDP), that shortfall will be 7.0 percent, which is nearly 2 percentage points below the deficit recorded last year but still higher than any deficit between 1947 and 2008. Over the next few years, projected deficits in CBO's baseline drop markedly, averaging 1.5 percent of GDP over the 2013–2022 period. With deficits small relative to the size of the economy, debt held by the public drops—from about 75 percent of GDP in 2013 to 62 percent in 2022, which is still higher than in any year between 1952 and 2009.
Much of the projected decline in the deficit occurs because, under current law, revenues will rise considerably as a share of GDP—from 16.3 percent in 2012 to 20.0 percent in 2014 and 21.0 percent in 2022. In particular, between 2012 and 2014, revenues in CBO's baseline shoot up by more than 30 percent, mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect. Revenues continue to rise relative to GDP after 2014 largely because increases in taxpayers' real (inflation-adjusted) income are projected to push more of them into higher tax brackets and because more taxpayers become subject to the AMT.
As the economy expands in the next several years and as statutory caps constrain discretionary appropriations, federal spending in CBO's baseline projections declines modestly relative to GDP before turning up again because of increasing expenses generated by the aging of the population and rising costs for health care. Projected spending averages 21.9 percent of GDP over the 2013–2022 period, a percentage that is less than the 23.2 percent CBO estimates for 2012 but that is still elevated by historical standards. Spending resulting from the American Recovery and Reinvestment Act and outlays for unemployment compensation and other benefits that tend to increase during economic downturns will continue to ebb over the next few years. Caps on discretionary spending and other procedures established in the recently enacted Budget Control Act also will hold down growth in federal spending. In the baseline, discretionary spending is projected to decline to 5.6 percent of GDP in 2022—the lowest level in the past 50 years. Those constraining factors will be partially offset by increases in spending for mandatory programs, particularly Social Security, Medicare, Medicaid, and other federal health care programs: Mandatory spending is projected to climb from 13.3 percent of GDP in 2013 to 14.3 percent in 2022.
Although the projected deficits under current law are much smaller than those of the past few years, in CBO's baseline debt, along with rising interest rates, drives up the cost of financing that debt; in CBO's projections, net interest costs grow significantly from 1.4 percent of GDP this year to 2.5 percent in 2022.
CBO's baseline projections are heavily influenced by changes in tax and spending policies that are embodied in current law—changes that in some cases represent a significant departure from recent policies. As a result, those projections show much higher revenues and lower outlays than would occur if the lower tax rates now in effect were extended and if provisions constraining future spending were not implemented. To illustrate the budgetary consequences of maintaining some tax and spending policies that have recently been in effect, CBO developed projections under an "alternative fiscal scenario." That scenario incorporates the following assumptions:
- Expiring tax provisions (other than the payroll tax reduction) are extended;
- The AMT is indexed for inflation after 2011;
- Medicare's payment rates for physicians' services are held constant at their current level (rather than dropping by 27 percent in March 2012 and more thereafter, as scheduled under current law); and
- The automatic spending reductions required by the Budget Control Act in the absence of legislation reported by the Joint Select Committee on Deficit Reduction do not take effect (thereby leaving in place the discretionary caps established by the act, which would otherwise be subject to those reductions).
Under that alternative fiscal scenario, deficits over the 2013–2022 period would be much higher, averaging 5.4 percent of GDP, rather than the 1.5 percent reflected in CBO's baseline projections. Debt held by the public would climb to 94 percent of GDP in 2022, the highest figure since just after World War II.
Even if the fiscal policies specified by current law come to pass, budgetary challenges over the longer term remain—and the challenges will be much more acute if those policies do not remain in place. Under both CBO's baseline and its alternative fiscal scenario, the aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid, and other federal health care programs considerably higher as a percentage of GDP. If that rising level of spending is coupled with revenues that are held close to the average share of GDP that they have represented for the past 40 years (rather than being allowed to increase, as under current law), the resulting deficits will increase federal debt to unsupportable levels. To prevent that outcome, policymakers will have to substantially restrain the growth of spending for those programs, raise revenues above their historical share of GDP, or pursue some combination of those two approaches.
The Economic Outlook
The continued slow recovery that CBO projects for the next two years reflects the lingering effects of the financial crisis and the recession, as well as the fiscal restraint that will arise under current law. According to CBO's projections, real GDP will grow by 2.0 percent this year (as measured by the change from the fourth quarter of the previous calendar year) and by 1.1 percent next year. CBO expects economic activity to quicken after 2013 but real GDP to remain below the economy's potential until 2018. As of late 2011, according to the agency's projections, the economy was only about halfway through the cumulative shortfall in total output that will result from the recession and its aftermath.
Considerable slack remains in the labor market, mainly as a consequence of continued weakness in demand for goods and services. In CBO's forecast, the unemployment rate remains above 8 percent both this year and next. As economic growth picks up after 2013, the unemployment rate will gradually decline, but it will still be around 7 percent at the end of calendar year 2015, before dropping to near 5½ percent by the end of 2017 and 5¼ percent by the end of 2022.
While the economy continues to recover during the next few years, inflation and interest rates will remain low. In CBO's forecast, the price index for personal consumption expenditures (PCE) increases by just 1.2 percent in 2012 and 1.3 percent in 2013, and rates on 10-year Treasury notes average 2.3 percent in 2012 and 2.5 percent in 2013. As the economy's output approaches its potential later in the decade, inflation and interest rates will rise to more normal levels. In CBO's projections for the 2018–2022 period, the annual change in the PCE price index averages 2.0 percent per year, and interest rates on 10-year Treasury notes average 5.0 percent.
Many developments could cause economic outcomes to differ substantially, in one direction or another, from those that CBO has projected. For example, the economy could grow considerably faster than the agency has forecast if the forces that have restrained the recovery fade more rapidly than anticipated. Alternatively, a significant worsening of the banking and fiscal problems in Europe could lead to further turmoil in international financial markets that could spill over to those in the United States and greatly weaken the economy here.
Furthermore, changes in fiscal policy that diverge from the path assumed in CBO's baseline also could have a significant impact on economic growth. Under CBO's alternative fiscal scenario, real GDP would be noticeably higher in the next few years than it is in CBO's baseline economic forecast. Over time, however, real GDP under that scenario would fall increasingly below the level in CBO's baseline projections because the larger budget deficits would reduce private investment in productive capital.
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Abstract
Updating the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) and presented in a recent paper, Effective Federal Tax Rates, 1997 to 2000, the following tables provide values for an additional year—2001.
The tables show effective tax rates for the four largest sources of federal revenues--individual income taxes, corporate income taxes, payroll taxes, and excise taxes--as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and the top percentiles of households.
Full Text
- document
Additional Data
- summary tables
- effective tax rates
- share of taxes paid
- average before-tax household income
- average after-tax household income
- shares of before tax income
- shares of after tax income
- income ranges for each income class
- all of the above information
Supplemental Material
- distribution of income, households with children
- distribution of income, elderly households
- distribution of income, nonelderly childless households
- households paying more in payroll taxes than income taxes
- median before-tax and after-tax income
- sources of income, by income category
- Historical Effective Tax Rates, 1979 to 2005: Supplement with Additional Data on Sources of Income and High-Income Households
Additional Analyses
- data sources and assumptions
- Effective Tax Rates: Comparing Annual and Multiyear Measures
- Effective tax rates
- blog post
Data on the Distribution of Federal Taxes and Household Income
Abstract
This page contains CBO's most recent estimates of federal effective tax rates (taxes as a percentage of income) across household income groups for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. The page also contains estimates of average before- and after-tax household income, counts of households, and shares of taxes, income, and households for each income group; information relating to the methodology used to construct the estimates; supplementary estimates for different household types; and a comparison of income and payroll taxes.
Abstract
This Congressional Budget Office (CBO) study examines effective federal tax rates—tax liabilities measured as a percentage of income—over the 1979–1997 period for all households and for quintiles, or fifths, of the income distribution. The analysis uses a comprehensive measure of household income that encompasses not only cash income but also the value of benefits received in kind, such as health care and food stamps. The study provides information on the four major federal taxes: individual and corporate income taxes; social insurance, or payroll, taxes; and excise taxes. It also considers the combination of the four.
Effective Federal Tax Rates, 1997 to 2000
Abstract
This Congressional Budget Office (CBO) paper presents estimates of effective federal tax rates—tax burdens measured as a percentage of income—from 1979 through 2000, updating CBO’s October 2001 report Effective Federal Tax Rates, 1979-1997. In addition to providing information for three more years, this analysis employs a revised methodology for combining data from the Bureau of the Census and the Internal Revenue Service that underlie the calculations and consequently revises some of CBO’s previously published estimates. The analysis includes information on the four major federal taxes—individual income taxes; corporate income taxes; social insurance, or payroll, taxes; and excise taxes—separately and in combination. Along with providing the effective tax rate measures, the paper presents estimates of the number of households that pay more income taxes than payroll taxes.
Historical Effective Federal Tax Rates: 1979 to 2002
Abstract
The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional year—2002. The tables show effective tax rates for the four largest sources of federal revenue—individual income taxes, corporate income taxes, payroll taxes, and excise taxes—as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.
Historical Effective Federal Tax Rates: 1979 to 2003
Abstract
The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional calendar year: 2003. The tables show effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.
Historical Effective Federal Tax Rates: 1979 to 2004
Abstract
The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional calendar year—2004. The tables show effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.
Additional Data
- document
- summary tables
- average tax rates
- average tax rates
- share of taxes paid
- share of taxes paid
- average before-tax household income
- average before-tax household income
- average after-tax household income
- average after-tax household income
- shares of before-tax income
- shares of before-tax income
- shares of after-tax income
- shares of after-tax income
- income ranges for each income class
- income ranges for each income class
- all of the above information
- all of the above information
Supplemental Material
- median before-tax and after-tax household income
- median before-tax and after-tax household income
- distribution of income and taxes, households with children
- distribution of income, households with children
- distribution of income, elderly households
- distribution of income, elderly households
- distribution of income, nonelderly childless households
- distribution of income, nonelderly childless households
- households paying more in payroll taxes than in income taxes
- households paying more in payroll taxes than in income taxes
- sources of income by income category
- sources of income by income category
Additional Analyses
- Historical Effective Tax Rates, 1979 to 2005: Supplement with Additional Data on Sources of Income and High-Income Households
- Effective Tax Rates: Comparing Annual and Multiyear Measures
- Effective tax rates
Abstract
This page contains CBO's estimates of average federal tax rates (tax rates as a percentage of income) paid by households in various income categories for the four largest sources of federal revenues--individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes--as well as the average rate for the four taxes combined. The page also contains estimates of average before- and after-tax household income; the number of households in each income category; shares of taxes, income, and households for each income group; information relating to the methodology used to construct the estimates; supplementary estimates for different types of households; and estimates of the number of households that pay more in payroll taxes than they do in income taxes.
Highlights
The accompanying tables update annual estimates by the Congressional Budget Office (CBO) of average tax rates—that is, households’ tax liability divided by their income—and compare those estimates for 2007 with estimates from 2006. This report’s tables show average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—and for the four taxes combined. The tables also present average before-tax and after-tax household income; the number of households in each income category; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top 10 percent, 5 percent, and 1 percent of households. A page on CBO’s Web site, “Federal Taxes by Income Group,” includes publications on this topic, CBO’s estimates of average federal tax rates for the years 1979 to 2007, and other information on household income and taxes.
View more presentations from Congressional Budget Office
Estimates for 2007
In 2007, the overall average federal tax rate was 20.4 percent (see Table 1). Individual income taxes, the largest component, were 9.3 percent of household income. Social insurance taxes (also called payroll taxes) were the next-largest source, with an average rate of 7.4 percent. Corporate income taxes and excise taxes were smaller, with average tax rates of 3.0 percent and 0.6 percent, respectively.
The federal tax system is progressive—that is, average tax rates generally rise with income. Households in the bottom fifth of the income distribution paid 4.0 percent of their income in federal taxes, the middle quintile paid 14.3 percent, and the highest quintile paid 25.1 percent. Average rates continued to rise within the top quintile: The top 1 percent faced an average rate of 29.5 percent.
Higher-income groups earn a disproportionate share of pretax income and pay a disproportionate share of federal taxes. In 2007, the highest quintile earned 55.9 percent of pretax income and paid 68.9 percent of federal taxes; the top 1 percent of households earned 19.4 percent of income and paid 28.1 percent of taxes. The share of taxes paid by high-income groups exceeded their share of income because average tax rates rise with income. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 4.0 percent of income and paid 0.8 percent of taxes, and the middle quintile earned 13.1 percent of income and paid 9.2 percent of taxes.
Much of the progressivity of the federal tax system derives from the individual income tax. In 2007, the bottom quintile’s average rate for the individual income tax was -6.8 percent, which means that refundable earned income and child tax credits exceeded the income tax owed by that group. On average, households in the second quintile also received more in credits than they paid in individual income taxes. The average income tax rate was 3.3 percent for the middle quintile and 6.2 percent for the fourth quintile. For the highest quintile, the rate was 14.4 percent. The top 1 percent, on average, paid 19.0 percent of their income in individual income taxes. Average rates for payroll taxes rise gradually across most of the income distribution, then fall at the top. The average payroll tax rate for the lowest quintile was 8.8 percent. That rate was 9.5 percent for the second quintile, 9.4 percent for the middle quintile, and 9.5 percent for the fourth quintile. The increase occurs because nontaxable transfer payments (for example, spending for Medicare, Medicaid, and most Social Security benefits) make up a larger share of income at the bottom of the distribution. The payroll tax rate was 5.7 percent for the highest quintile. That rate is lower than others in part because much of the wages in that quintile are above the maximum income subject to Social Security taxes ($97,500 in 2007) and in part because capital income, such as interest, dividends, and capital gains, is a larger share of income at the top. Social insurance taxes account for the largest share of taxes paid by households in all but the top quintile. The impact of the corporate income tax also rises with income, because CBO assumes in this analysis that the tax is borne by those who receive capital income, and capital income is a larger share of income at the top of the distribution. The incidence of the corporate income tax is uncertain, and various models suggest that at least some of the tax is borne by workers in the form of reduced earnings, in which case the tax would not be as progressive as shown in CBO’s analysis. The effect of excise taxes, relative to income, is greatest for lower-income households, which tend to spend a greater proportion of their income on such goods as gasoline, alcohol, and tobacco, which are subject to excise taxes.
Average tax rates in 2007 changed only slightly from those in 2006 (see Table 2). There were no significant changes in the income tax law between those years, and differences in the income distribution were not enough to cause large changes in average rates. The overall average rate fell by 0.3 percentage points from 2006 to 2007. The largest contributor was a decline of 0.5 percentage points in the average corporate tax rate, which was caused by falling corporate profits and associated reductions in taxes. Payroll taxes also fell by 0.1 percentage point, mainly because of rapid growth in wages above the Social Security taxable maximum. Excise taxes fell by 0.1 percentage point, largely because of changes in the telephone excise tax. Those declines were partially offset by an increase of 0.2 percentage points in the average individual income tax rate, which occurred in part because real income growth pushed more and more income into higher tax brackets.
The changes in average tax rates from 2006 to 2007 were uneven across income quintiles. The rate for the lowest quintile declined by 0.5 percentage points, largely because of declining excise taxes. The second quintile’s average tax rate increased by 0.4 percentage points, as rates for both the individual income tax and the payroll tax crept up. The average rate for the middle and fourth quintiles changed only slightly, reflecting an increase in the average rate for individual income taxes and small decreases in the average rate paid for other taxes. The largest decline in average tax rates—0.7 percentage points—applied to taxpayers in the highest quintile. That change was attributable mostly to the reduction in payments of corporate income taxes. The pattern continued up the income scale; the average rate for the top 1 percent declined by 1.8 percentage points, mostly because of lower corporate income taxes.
Methodology
CBO uses a multistep methodology to estimate the distribution of income and taxes on the basis of data contained in the Census Bureau’s Current Population Survey (CPS) and in the Statistics of Income (SOI) recorded by the Internal Revenue Service. CBO estimates federal taxes for each household in the sample on the basis of income, demographic characteristics, and existing laws in the relevant year. Households are then grouped into quintiles on the basis of income, and then income, taxes, and average tax rates (the amount of tax liability divided by income) are tabulated for each quintile.
Sources of Data
CBO’s analysis of average tax rates draws information on income from two primary sources. The SOI samples more than 300,000 individual income tax returns and reports much of the information that taxpayers provide on those returns. The March supplement to the CPS contains data on demographic characteristics and income for almost 100,000 households.
CBO statistically matches each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. The matching process begins by dividing all records in the CPS and the SOI into demographic subgroups by household composition, considering the marital status of the head of the household, the number of children, and the number of elderly members. Because income measures in the SOI and CPS are not directly comparable, CBO uses a regression equation for each demographic subgroup (estimated using data from the SOI) to calculate a predicted income for each record for each source of data. All CPS and SOI records are ranked by predicted income within demographic subgroups, and the two files are then matched, starting at the top of the income distribution: The SOI record with the highest predicted income is matched with the CPS record with the highest predicted income—after their sample weights are taken into account. The SOI record with the next highest predicted income is then matched with the corresponding CPS record, and the process is repeated until all SOI records in the demographic subgroup have been paired with CPS records.
Each pairing results in a new record that takes on the demographic characteristics of the CPS record and the income reported in the SOI. Some types of income, such as most transfer payments and in-kind benefits (such as employer-provided health insurance, Medicare and Medicaid benefits, and food stamps), appear only in the CPS; values for those items are drawn directly from that survey. Because not all households must file tax returns, some do not appear in the SOI; thus, the CPS reflects more households. After all SOI records have been matched to CPS records, the remaining survey records are recorded as nonfilers, and the income values are taken directly from the CPS. CBO then estimates the tax liability for each matched record. The SOI record with the next highest predicted income is then matched with the corresponding CPS record, and the process is repeated until all SOI records in the demographic subgroup have been paired with CPS records.
Who Pays Taxes?
CBO’s analysis of average tax rates assumes that households bear the burden of the taxes that they pay directly, such as individual income taxes (including taxes on interest, dividends, and capital gains) and the employee’s share of payroll taxes. The analysis assumes—as do the analyses of most economists—that the employer’s share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid. Therefore, the amount of those taxes is included in employees’ income, and the taxes are counted as part of employees’ tax burden. CBO estimates payroll taxes and individual income taxes, including refundable tax credits, by applying the tax law for the relevant year to each of the sample tax returns from the SOI.
Excise taxes are assumed to fall on households according to their consumption of taxed goods (such as gasoline, tobacco, and alcohol). Excise taxes that affect intermediate goods, which are paid by businesses, are attributed to households in proportion to their overall consumption. CBO assumes that each household spends the same on taxed goods as is spent by similar households that are shown in the Consumer Expenditure Survey to have comparable income.
Far less consensus exists about how to attribute corporate income taxes (and taxes on capital income generally). In this analysis, CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends, capital gains, and rents. Over the long term, however, some models suggest that at least part of the burden falls on labor income.
Measuring Income
This analysis focuses on households’ adjusted pretax comprehensive income, which includes all cash income (taxable and tax-exempt), taxes paid by businesses (which are imputed to individuals, as noted above), employees’ contributions to 401(k) retirement plans, and the value of in-kind income received from various sources (such as employer-paid health insurance premiums, Medicare and Medicaid benefits, and food stamps). The calculations use the Census Bureau’s fungible value measure to determine the cash equivalent of Medicare and Medicaid benefits.
Income Quintiles
In a series of steps, CBO combines the income and taxes of households to create tables showing distributions of income and taxes among income groups and types of households. The first calculation adjusts for household size by dividing household income by the square root of household size to take account of the differing needs of larger and smaller households. Then, households are ranked by their (adjusted) income and grouped into quintiles that contain equal numbers of people (because household sizes vary, however, separate quintiles generally contain different numbers of households). Overall income and taxes are tabulated for each quintile and for smaller groupings at the top of the distribution.
Types of Households
Separate tables, available on CBO’s Web site, show average tax rates and income for three types of households: those with members under age 18 (households with children), those headed by a person age 65 or older and with no member under age 18 (elderly childless households), and all others (nonelderly childless households). The tables group households into quintiles by position in the income distribution within the entire population, not within each of the three types of households, so each type of household need not be evenly spread across the income quintiles.