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Overview

General

* A “tax” is defined by the Collins English Dictionary as a “compulsory financial contribution imposed by a government to raise revenue….”[1]

* In 2022, U.S. federal, state and local governments collected a combined total of $7.1 trillion in taxes, or more precisely, $7,146,628,750,000. This amounts to:

  • $21,423 for each person living in the U.S.
  • $54,470 for each household in the U.S.
  • 28.1% of the U.S. economy.[2]

* From 1929 to 2022, inflation-adjusted federal, state and local tax collections per person in the U.S. have ranged from $1,333 to $21,423 per year, with a median of $11,458 and an average of $10,697. In 2022, they were $21,423, or 100% above the average:

Inflation-Adjusted Federal, State & Local Taxes Per U.S. Resident

[3] [4]

* From 1929 to 2022, the portion of the U.S. economy collected in federal, state and local taxes has ranged from 10% to 28%, with a median of 25% and an average of 24%. In 2022, it was 28%, or 19% above the average:

Federal, State & Local Taxes as a Portion of the U.S. Economy

[5] [6]

* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resulting debt is “borne by tomorrow’s workers and taxpayers.” This burden can manifest in the form of higher taxes, lower wages, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[7] [8] [9] [10]

* In 2022, federal, state and local governments spent $8.7 trillion for current programs and received $7.6 trillion in revenues, leaving a gap of $1.1 trillion. This amounts to 4.1% of the U.S. economy and an average of $8,006 for every household in the U.S.:

Government Current Revenues and Spending

[11] [12] [13] [14]

* In addition to government debts, explicit and implicit government obligations such as public employee pensions and Social Security/Medicare benefits also constitute a burden on future taxpayers.[15]

* At the close of the federal government’s 2023 fiscal year, the federal government had $144.3 trillion in debts, liabilities, and unfunded obligations. This shortfall equates to $430,252 for every person living in the United States, or $1,098,087 per household.[16]

Federal

* In 2022, the U.S. federal government collected $4.8 trillion in taxes, or more precisely, $4,834,240,000,000. This amounts to:

  • $14,491 for each person living in the U.S.
  • $36,846 for each household in the U.S.
  • 19.0% of the U.S. economy.[17]

* From 1929 to 2022, inflation-adjusted federal tax collections per person in the U.S. have ranged from $275 to $14,491 per year, with a median of $7,604 and an average of $7,113. In 2022, they were $14,491, or 104% above the average:

Inflation-Adjusted Federal Taxes Per U.S. Resident

[18] [19]

* From 1929 to 2022, the portion of the U.S. economy collected in federal taxes has ranged from 3% to 20%, with a median of 17% and an average of 16%. In 2022, it was 19%, or 22% above the average:

Federal Taxes as a Portion of the U.S. Economy

[20] [21]

* In 2022, federal taxes came from following sources:

Type of Tax

Portion of Total

Personal Income Taxes

54%

Social Insurance Taxes

34%

Corporate Income Taxes

7%

Excise Taxes

2%

Custom Duties

2%

Estate and Gift Taxes

1%

[22]

* Since 1929, the components of federal tax collections have varied as follows:

Components of Federal Tax Collections

[23] [24] [25] [26]

State & Local

* In 2022, U.S. state and local governments collected a combined total of $2.3 trillion in taxes, or more precisely, $2,188,200,000,000. This amounts to:

  • $6,932 for each person living in the U.S.
  • $17,625 for each household in the U.S.
  • 9.1% of the U.S. economy.[27]

* From 1929 to 2022, inflation-adjusted state and local tax collections per person in the U.S. have ranged from $924 to $7,047 per year, with a median of $3,826 and an average of $3,584. In 2022, they were $6,932, or 93% above the average:

Inflation-Adjusted State & Local Taxes Per U.S. Resident

[28]

* From 1929 to 2022, the portion of the U.S. economy collected in state and local taxes has ranged from 4% to 11%, with a median of 9% and an average of 8%. In 2022, it was 9%, or 13% above the average:

State & Local Taxes as a Portion of the U.S. Economy

[29] [30]

* In 2022, state and local taxes came from following sources:

Type of Tax

Portion of Total

Sales & Excise Taxes

33%

Property Taxes

29%

Personal Income Taxes

24%

Corporate Income Taxes

5%

Social Insurance Taxes

1%

Other

8%

[31]

* Since 1929, the components of state and local tax collections have varied as follows:

Components of State and Local Taxes

[32]

Distribution of Tax Burdens

Overview

* Tax burdens are shaped by a combination of public laws and market forces. Lawmakers dictate who must remit taxes, but the final burden is determined by how people alter their actions in response to these taxes.[33] [34] [35] Per the textbook Public Finance:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. … Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on … the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.[36]

* Per the director of the Congressional Budget Office (CBO):

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[37]

* To calculate tax burdens, CBO uses the following assumptions/simplifications:

  • “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes.”[38] [39]
  • “[T]he economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol).”[40] [41] [42]
  • “In the judgment of CBO and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”[43] [44] [45] [46] [47] [48]
  • “Far less consensus exists about how to allocate corporate income taxes,” but CBO estimates that 75% is borne by owners/stockholders, and 25% falls on workers.[49] [50] [51]

* Per the latest pre-pandemic data from CBO,[52] the effective federal tax burdens for various income groups were as follows in 2019:

Average Effective Federal Tax Rates by Income of Household

[53] [54] [55]

Average Effective Federal Taxes by Income of Household

[56] [57] [58]

* Data from the charts above:

Average Effective Federal Tax Rates (2019)

Income Group

Household Income

Tax Rate

Taxes Paid

Lowest 20%

$39,100

0.3%

$100

Second 20%

$59,600

7.7%

$4,600

Middle 20%

$85,500

12.4%

$10,600

Fourth 20%

$124,900

16.5%

$20,600

Highest 20%

$333,100

24.3%

$81,100

Highest 1%

$1,998,700

30.0%

$600,300

* Per the latest available data from CBO, the effective federal tax burdens for various income groups were as follows in 2020 amid Covid-19 government lockdowns and intensified social spending:[59] [60] [61]

Average Effective Federal Tax Rates by Income of Household

[62] [63] [64]

Average Effective Federal Taxes by Income of Household

[65] [66] [67]

* Data from the charts above:

Average Effective Federal Tax Rates (2020)

Income Group

Household Income

Tax Rate

Taxes Paid

Lowest 20%

$42,200

–8.8%

–$3,700

Second 20%

$63,600

0.6%

$400

Middle 20%

$90,500

7.0%

$6,300

Fourth 20%

$131,800

12.7%

$16,800

Highest 20%

$360,900

23.6%

$85,200

Highest 1%

$2,291,800

29.9%

$686,300

* Per CBO, the effective federal tax rates for various income groups have varied over time as follows:

Average Effective Federal Tax Rates by Income of Household

[68] [69] [70]

* CBO does not include state and local taxes in its analysis of effective tax rates “because of the complexity” of estimating them for individual households.[71] Just Facts has not found a reliable analysis of the distribution of state and local taxes.[72]

* Using rough approximations and methods that vary from CBO’s,[73] the U.S. Treasury Department and the Tax Policy Center estimated the following effective federal tax burdens for various income groups in 2019, prior to the Covid-19 pandemic[74]:

Average Effective Federal Tax Rates by Income

[75] [76] [77]

* A scientific, nationally representative survey commissioned in 2019 by Just Facts found that 79% of voters believe that middle-income households pay a greater portion of their income in federal taxes than the top 1%.[78] [79]

* Using rough approximations and methods that vary from CBO’s,[80] the U.S. Treasury Department and the Tax Policy Center estimated the following effective federal tax burdens for various income groups in 2023:

Average Effective Federal Tax Rates by Income

[81]

Media

* The overall federal tax burden is progressive, which means that overall tax rates generally rise with income,[82] but this is not the case for all types of federal taxes. Excise taxes, for example, fall more heavily on lower-income households.[83] [84] In 2019, prior to the Covid-19 pandemic,[85] effective federal tax rates varied by income and tax type as follows:

Average Effective Federal Tax Rates (2019)

Type of Tax

Household Income Group

Lowest
20%

Second
20%

Middle
20%

Fourth
20%

Top
20%

Top
1%

Individual Income †

–6.6%

–1.5%

2.3%

5.9%

15.3%

23.3%

Social Insurance

5.6%

7.9%

8.7%

9.1%

6.5%

2.3%

Corporate Income

0.3%

0.5%

0.7%

0.8%

2.2%

4.2%

Excise

1.0%

0.8%

0.8%

0.6%

0.4%

0.2%

Overall

0.3%

7.7%

12.4%

16.5%

24.3%

30.0%

† Negative income tax burdens result from refundable tax credits, which often exceed the income tax liabilities of low-income households.[86] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[87]

[88] [89] [90]

* In a 2005 New York Times article, reporter David Cay Johnston claimed that “the 400 taxpayers with the highest incomes … now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.”[91] That statement fails to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[92]

* In a 2012 Fox News article entitled “Republicans Dispute Obama’s ‘Fair Share’ Claims, Say Top Earners Already Pay Enough,” reporter Jim Angle wrote that “the top 1 percent of earners take home 16.9 percent of the nation’s total income, but pay 36.7 percent of the nation’s income taxes.”[93] That statement fails to account for the burden of social insurance taxes, which fall more heavily on lower-income households.[94]

* In two columns published by the New York Times in 2012, James B. Stewart, a Pulitzer Prize-winning professor of journalism at Columbia University,[95] claimed:

What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system.[96]
[W]hat I’d already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn’t progressive. It’s not even flat. For people like me—and I assume there are millions of us—it’s regressive. For many people, the more you make, the lower the rate you pay.[97]

* Both of the claims above fail to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[98]

* Based upon Mitt Romney’s 2010 federal tax return, the following organizations published articles claiming that Romney pays a lower federal tax rate than most Americans: PolitiFact, FactCheck.org, CBS News, and Agence France-Presse.[99] [100] [101] [102] All of these articles fail to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[103] Both PolitiFact and FactCheck.org also:

  • used the same primary source (a single-page report published by the Tax Policy Center) to determine a middle-class tax burden while ignoring the following data in the report: the top-earning 0.1% of taxpayers paid 10.7% of their income in corporate income taxes versus 0.6% for the middle-class.[104] [105] [106]
  • included the burden of employer payroll taxes in their calculation of a middle-class tax burden, although these taxes (like corporate income taxes) are not remitted by employees but by employers.[107] [108] [109]
  • determined a middle-class tax burden by using adjusted gross income as the denominator for their calculation,[110] [111] [112] even though the source they cited (the Tax Policy Center) stated that adjusted gross income:
is a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. … Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their ETRs [effective tax rates].[113] [114]

* Just Facts and two Certified Public Accountants from Ceterus (a nationwide accounting firm) conducted a comprehensive analyses of Romney’s 2010 federal tax return that accounted for all measurable sources of income and federal taxes. It found:

  • “The complexities of the U.S. tax code make it practically impossible to determine Romney’s exact tax burden.”
  • Based upon simplifying estimates and the Congressional Budget Office’s methodology for allocating the burden of corporate income taxes, Romney’s federal tax burden was 23.3%, which is about twice the rate for middle-income Americans.
  • Based upon simplifying estimates and a wide range of academic opinions about the burden of corporate income taxes, Romney’s tax burden was 18.3% to 26.0%, which is 1.6 to 2.3 times higher than the rate for middle-income Americans.[115] [116]

* An Excel spreadsheet detailing the calculations of Romney’s tax burden is available here.

“Buffett Rule”

* In August 2011, the New York Times published an op-ed by billionaire investor Warren Buffett, who wrote:

Last year my federal tax bill—the income tax I paid, as well as payroll taxes paid by me and on my behalf—was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income—and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
 
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine—most likely by a lot.[117]

* Buffett’s tax rate comparison fails to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[118]

* Buffett’s tax rate comparison uses “taxable income” as the denominator for his tax burden calculations. Per the book Federal Taxation, using “taxable income” to calculate tax burdens is a “bit misleading” and says “little about the true impact of a tax on the taxpayer.”[119] Per a Congressional Research Service report on the Buffett Rule:

Taxable income is a fairly narrow measure of income and does not reflect all the resources available to the taxpayer or gauge the taxpayer’s ability to pay taxes. This is because personal exemptions and itemized deductions have been subtracted. This can artificially increase the effective average tax rate faced by a taxpayer.[120]

* In September 2011 (the month after the Times published Buffett’s op-ed), the Obama administration released a budget plan calling for tax reform that would:

Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.[121]

* In 2011, households in the middle 20% of the U.S. income distribution paid an average effective federal tax rate of 11.7%, as compared to 29.0% for the top 1% of income earners. In 2019, prior to the Covid-19 pandemic,[122] households in the middle 20% paid a tax rate of 12.4%, as compared to 30.0% for the top 1%.[123] [124] [125]

* CBO’s latest data shows that in 2020—amid Covid-19 government lockdowns and intensified social spending,[126] [127] [128] households in the middle 20% paid a tax rate of 7.0%, as compared to 29.9% for the top 1%.[129] [130] [131]

* In 2011, 15,000 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 58% of these cases, the primary reason was because they had earned interest from tax-exempt bonds issued by state and local governments.[132] These bonds are called “municipal bonds” or “munis,” and they are a principal means by which wealthy investors limit their federal income taxes.[133] [134]

* Per CBO:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.[135]

* Per the IRS:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”…. [136] [137]

General Revenues

* “General revenues” are taxes that are collected to fund the general operations of government. These taxes are not legally restricted to funding a specific program.[138] [139] [140]

* The national debt and interest on it are paid with general revenues.[141]

* Overall, general revenue taxes are progressive so that higher-income households pay higher effective tax rates. In 2019, prior to the Covid-19 pandemic,[142] the average federal general revenue taxes paid by various income groups varied as follows:

Average Federal General Revenue Taxes (2019)

Income Group

Household Income

Effective Tax Rate †

Taxes Per Household

Lowest 20%

$39,100

–6.0%

–$2,359

Second 20%

$59,600

–0.7%

–$424

Middle 20%

$85,500

3.9%

$3,300

Fourth 20%

$124,900

7.0%

$8,682

Highest 20%

$333,100

17.6%

$58,658

81st–90th%

$181,300

10.2%

$18,552

91st–95th%

$250,400

13.0%

$32,523

96th–99th%

$417,400

17.6%

$73,428

Top 1%

$1,998,700

27.6%

$551,879

† Negative tax burdens result from refundable tax credits, which often exceed the general revenue taxes of low-income households.[143] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[144]

[145] [146] [147]

* In 2020—amid Covid-19 government lockdowns and intensified social spending,[148] [149] [150] the average federal general revenue taxes paid by various income groups varied as follows:

Average Federal General Revenue Taxes (2020)

Income Group

Household Income

Effective Tax Rate †

Taxes Per Household

Lowest 20%

$42,200

–13.7%

–$5,798

Second 20%

$63,600

–6.7%

–$4,230

Middle 20%

$90,500

–1.4%

–$1,295

Fourth 20%

$131,800

3.6%

$4,739

Highest 20%

$360,900

17.1%

$61,609

81st–90th%

$191,500

8.2%

$15,707

91st–95th%

$265,100

12.0%

$31,775

96th–99th%

$440,000

17.3%

$76,077

Top 1%

$2,291,800

27.6%

$633,629

† Negative tax burdens result from refundable tax credits, which often exceed the general revenue taxes of low-income households.[151] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[152]

[153] [154] [155]

* The general revenues of the U.S. Treasury are comprised of:

  • individual income taxes (80%).
  • corporate income taxes (11%).
  • customs duties (3%).
  • excise taxes (2%).
  • estate and gift taxes (1%).
  • miscellaneous receipts (4%).[156] [157]

Individual Income Taxes

* In 2020, income taxes paid by individuals (as opposed to corporations) comprised 49% of the taxes collected by the federal government and 24% of the taxes collected by state and local governments:

Personal Income Taxes

[158]

* Federal individual income taxes are typically allocated to the general fund of the U.S. Treasury, which means that these taxes are not earmarked for specific programs and can be used for any legitimate purpose of government.[159] [160]

* Federal individual income tax liabilities are calculated in the following manner:

  1. Determine gross income Taxpayers tally their gross income, which by law, includes “income from whatever source derived” with several exceptions, such as interest from tax-free municipal bonds, life insurance death payments, and employer-provided benefits such as health insurance and pension contributions.[161] [162] [163] [164]
  1. Determine adjusted gross income Gross income is then reduced by certain deductions to arrive at an adjusted gross income (AGI). These deductions include items such as interest on student loans, business expenses, and alimony payments.[165] [166]
  1. Determine taxable income Adjusted gross income is then reduced by certain deductions to arrive at a taxable income. These deductions can be standard deductions based upon the number of family members that a taxpayer supports, or they can be itemized deductions such as state and local income taxes, home mortgage interest, and charitable contributions. Many of these deductions phase out for taxpayers with higher incomes and thus don’t benefit these individuals.[167] [168] [169]
  1. Determine preliminary tax liability Taxable income is then multiplied by graduated rates that rise with income to determine a preliminary tax liability. There are four different sets of rates that apply to the following categories of tax filers: single individuals, heads of household, married filing jointly, and married filing separately.[170] For example, in 2020, the tax rates for single individuals were:
  • 10% on their first $9,875 in taxable income
  • plus 12% on the next $30,250 in taxable income
  • plus 22% on the next $45,400
  • plus 24% on the next $77,775
  • plus 32% on the next $44,050
  • plus 35% on the next $311,050
  • plus 37% on all income thereafter[171]
  1. Determine regular tax liability Preliminary tax liability is then reduced by certain tax credits that decrease taxes on a dollar-for-dollar basis to determine a regular tax liability. Some of the most commonly used tax credits are the child tax credit, education tax credit, and earned-income tax credit. Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government. Many of these tax credits phase out for taxpayers with higher incomes and thus don’t benefit these individuals.[172] [173] [174] [175] [176]
  1. Determine alternative minimum tax liability After regular income tax liability is calculated, tax filers must determine if their alternative minimum tax liability exceeds their regular income tax liability, and if it does, pay the higher of the two liabilities (for more detail, see Alternative Minimum Tax).

* Federal individual income taxes also include taxes on capital gains and dividends,[177] which are addressed below.

* When the modern federal individual income tax was instituted in 1913,[178] the bottom tax rate was 1%, and the top rate was 7%. Since then, the bottom rate has been as high as 23% (in 1944–1945), and the top rate has been as high as 94% (in 1944–1945).[179] [180] In 2020, the bottom rate was 10%, and the top rate was 37%.[181]

Federal Income Tax Bottom and Top Rates

[182]

* From 1950 to 2019, the top federal individual income tax rate varied from 92% (in 1952–1953) to 28% (in 1988–1990), and income tax receipts (as a portion of gross domestic product) varied from 5.8% (in 1950) to 9.8% (in 2000). Over this period, these lower and higher income tax rates often do not correspond with lower and higher income tax collections:

Federal Income Tax Receipts and Top Rates

[183]

* As of January 1, 2021, the 50 U.S. states have individual income tax rates that vary from a top rate of 13.3% in California to 0% in seven states that don’t have such a tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).[184]

* In 2019, 4,964 counties, cities, townships, and school districts in 17 states levied individual income taxes.[185]

* In 2018, the portion of state and local tax collections that were comprised of individual income taxes varied from a high of 43% in Oregon, to a median of 24% in South Carolina to a low of 0% in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.[186]

Social Insurance Taxes

General

* Current government “social insurance” programs in the U.S. include Social Security, Medicare hospital insurance, unemployment insurance, and several smaller healthcare and income security programs. “Social insurance taxes,” which are also known as “payroll taxes” or “employment taxes,” are taxes that are levied specifically for these programs.[187] [188] [189] [190]

* In 2020, social insurance taxes comprised 41% of the taxes collected by the federal government and 1% of the taxes collected by state and local governments:

Social Insurance Taxes

[191]

* Employees and employers both pay social insurance taxes, but payroll taxes levied on employers are predominately borne by employees in the form of reduced wages.”[192] [193] [194] [195] [196] (For more detail, see Distribution of the Tax Burden).

* Federal taxpayers in all income groups except for the top 20% pay more in social insurance taxes than individual income taxes.[197]

* In 2020, 99% of federal social insurance taxes were levied for three programs: Social Security, Medicare hospital insurance, and unemployment insurance.[198] [199]

* Government began collecting social insurance taxes for unemployment insurance in 1936, Social Security in 1937, and Medicare hospital insurance in 1966. Combined payroll taxes for these programs have ranged from 0.2% of the nation’s gross domestic product (GDP) in 1936 to 6.5% in 1991 and 1998–2001:

Social Insurance Taxes for Social Security, Medicare, and Unemployment Insurance

[200]

Social Security

* In 2019, Social Security payroll taxes accounted for 74% of federal social insurance taxes.[201]

* For 2021, Social Security’s baseline payroll tax rate (employee and employer combined) is 12.4%.[202]

* Social Security payroll taxes are restricted to a “taxable maximum” or “wage threshold.” Earnings above the threshold are not subject to this tax. For 2021, the threshold is $142,800.[203] Since 1982, the taxable maximum has been annually indexed roughly based upon average worker compensation levels.[204] [205]

* At the outset of the Social Security program, the federal government published an informational pamphlet that stated the following about the program’s taxes:

And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.[206]

* Accounting for inflation, the figures above equate to a maximum tax collection of $1,935 per person in 2020 dollars.[207] In 2020, the maximum payroll tax collection per person was $17,075 or 8.8 times the promised maximum.[208] This figure does not include other taxes that are now levied to fund Social Security, such as the tax on Social Security benefits.

* For comprehensive facts about Social Security’s taxes, benefits, and financial status, visit Just Facts’ research on Social Security.

Medicare

* Medicare hospital insurance, which is also known as Medicare “Part A,” provides coverage for hospital inpatient services, skilled nursing facility care (not custodial care[209]), and hospice care.[210]

* In 2019, Medicare hospital insurance payroll taxes accounted for 22% of federal social insurance taxes.[211]

* Medicare’s baseline payroll tax rate is 2.9% of workers’ wages (employer and employee combined).[212] [213]

* Medicare’s payroll tax was previously limited by a wage threshold that generally increased as the national average wage increased. Earnings above this threshold were not subject to the tax. In 1993, this threshold was $135,000 per year.[214] That year, Congress and Democratic President Bill Clinton passed a law that removed the threshold, thus making all earnings subject to Medicare payroll taxes.[215] The bill passed with 85% of Democrats voting for it and 100% of Republicans voting against it.[216]

* The Affordable Care Act (a.k.a. Obamacare) levies an additional 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples.[217] [218]

* For comprehensive facts about Medicare’s taxes, benefits, and financial status, visit Just Facts’ research on Medicare.

Unemployment Insurance

* In 2019, unemployment insurance payroll taxes accounted for 3% of federal social insurance taxes.[219] [220]

Corporate Income Taxes

* Corporate income taxes are typically levied on “C corporations,” which are business entities that are fully separated by law from their owners’ personal finances. Most major and public corporations are structured in this manner.[221] [222]

* Per the IRS and the Congressional Research Service, U.S. tax law imposes a “double tax” on corporate profits. This is because the “profit of a corporation is taxed to the corporation when earned,” but shareholders cannot receive these profits without also paying dividend or capital gain taxes on them.[223] [224] [225] (For more detail, see Capital Gains, Dividends, and Interest).

* Business entities can be structured in other ways, such as “S corporations,” partnerships, and sole proprietorships. In these cases, tax law combines business incomes with owners’ personal incomes. These types of businesses are called “passthrough entities.” They are subject to personal income taxes instead of corporate income taxes and dividend taxes.[226] [227] [228]

* The combination of taxes on corporate income and dividends is typically higher than personal income taxes. Thus, people who have the option to structure business as pass-through entities often do so. The law does not allow businesses with more than 100 shareholders—like most major public corporations—to be structured as pass-through entities.[229] [230] [231] [232]

* In 2020, corporate income taxes comprised 6% of the taxes collected by the federal government and 4% of the taxes collected by state and local governments:

Corporate Income Taxes

[233]

* The burden of corporate income taxes falls on:

  • business owners in the form of decreased profits.
  • workers in the form of reduced wages.
  • possibly consumers in the form of higher prices.[234] [235]

* The Congressional Budget Office (CBO) estimates that 75% of corporate income taxes are borne by owners/stockholders and 25% are borne by workers.[236] [237] [238] Other creditable sources estimate that owners/stockholders bear anywhere from 33% to 100% of this tax burden.[239] (For more detail, see Distribution of Tax Burdens.)

* In basic terms, federal corporate income taxes are levied on profits, which are calculated by adding income from business operations and the sale of company stock minus:

  • employee wages and benefits
  • consumable resources used for producing products, delivering services, or marketing
  • interest paid on debts
  • contributions to charities
  • state and local taxes
  • depreciation, which is “an allowance for declines in the value of a firm’s tangible assets, such as machines, equipment, and structures.” Per the Congressional Research Service:
When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business is simply exchanging one asset—for example, cash—for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost. Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years.[240] [241] [242] [243]

* Higher marginal tax rates—which are the rates that taxpayers pay on the next dollar of income they earn—typically weaken incentives to save and invest.[244] [245] [246] [247] For more detail, see Economic Effects.)

* Starting in 2018, the Trump Tax Cuts reduced the top marginal federal corporate income tax to a flat rate of 21%.[248] [249] [250]

* In 2017 (latest IRS data), the marginal federal corporate income tax rate for active corporations averaged 36% before tax credits. After tax credits were applied, the average effective rate was 26%.[251] [252] (For more detail, see Tax Preferences).

* Out of 20 major business sectors, the effective federal corporate income tax rates in 2017 averaged as low as 15% for mining and 19% for utilities to as high as 32% for educational services and retail trade and 33% for healthcare and social assistance.[253] [254]

* In 2018, the portion of state and local tax collections that were comprised of corporate income taxes varied from a high of 11% in New Hampshire to a median of 3% in Iowa to a low of 0% in Nevada, Texas, Washington and Wyoming.[255]

Capital Gains, Dividends, and Interest

* A “capital gain” is an increase in the price of a financial asset between when it is purchased and when it is sold.[256] [257] Financial assets that are subject to capital gain taxes include items such as company stocks, real estate, collectibles, and precious metals.[258]

* A “dividend” is a company profit that is distributed to shareholders.[259] [260]

* “Interest income” is money earned from “certain bank accounts or from lending money to someone else.”[261]

* Per the Encyclopedia of Taxation and Tax Policy (as confirmed by the IRS, Congressional Research Service, and U.S. Joint Committee on Taxation):

Income that is earned by corporations in the United States is currently subject to two levels of tax. Corporate profits are subject to the corporate income tax. When these profits are distributed to the shareholders who own the corporations, these distributions are also included in the shareholders’ taxable income.[262] [263] [264]
[T]he capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income….[265] [266] [267]

* Taxes on dividends and capital gains are classified by the federal government as individual income taxes, but the tax rates are generally lower, which mitigates some of the double taxation. The lower tax rates on capital gains only apply to assets that are owned for a year or longer. Assets that are owned for less than a year are considered “short-term capital gains” and are taxed at ordinary income tax rates.[268] [269] [270] [271]

* In 2020, the tax rates on most dividends and capital gains ranged from 0% to 20%. For couples filing jointly, the typical rates are:

  • 0% for taxable income below $80,000.
  • 15% for taxable income from $80,000 to $496,600.
  • 20% for taxable income above $496,600.[272] [273]

* Interest income, such as that from bank accounts and personal loans, is not considered a capital gain or a dividend, and it is generally subject to regular income tax rates.[274] [275]

* Starting in 2013, the Affordable Care Act (a.k.a. Obamacare) began subjecting income earned from interest, dividends, and capital gains to an additional 3.8% tax for singles with incomes above $200,000 and couples with incomes above $250,000. This tax is called the “net investment income tax.”[276] [277] [278]

* Taxes on interest income, dividends, and capital gains are not offset for inflation, and investors must pay taxes on gains that are due to inflation (a.k.a. “phantom gains”).[279] [280] For example, if a $1,000 investment yields a 4% return over the course of a year while inflation is at 3% and the tax rate is at 25%, the effective tax rate is 100%:

  • $1,000 investment × .04 return = $40 nominal profit (i.e., not adjusted for inflation[281])
  • $40 nominal profit × .25 tax rate = $10 tax bill
  • $1,000 investment × .03 inflation = $30 lost to inflation
  • $40 nominal profit – $10 tax bill – $30 loss due to inflation = $0 real profit[282]

* With capital gains (but not dividends or interest income), some effects of inflation are alleviated because taxes on capital gains don’t need to be paid until an asset is sold. This allows an asset to grow in value without losing some gains to taxes each year.[283] [284] [285]

* In 2019, 11.2% of federal individual income tax receipts came from capital gain taxes.[286]

* For 2020, the Congressional Budget Office estimated that 6.5% of gross income earned by individuals will come from capital gains, and 3.5% from dividends or interest income.[287]

* In 2020, state taxes on capital gains ranged from as low as 0%—in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—to as high as 13% in California and 11% in Hawaii and New Jersey.[288] [289]

Preferences

Definition

* “Tax preferences,” which are also called “tax expenditures,” are defined by federal law as “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”[290] [291]

* Tax preferences fall into five broad categories:

  1. Credits “reduce a taxpayer’s liability dollar for dollar.”
  2. Deductions “reduce the amount of income subject to tax.”
  3. Deferrals “allow taxpayers to postpone the date at which income gets taxed.”
  4. Exclusions and exemptions “allow certain types of income to avoid taxation entirely.”
  5. Preferential rates “tax certain types of income at lower levels.”[292]

* Per Donald B. Marron, director of the Tax Policy Center and former acting director of the Congressional Budget Office:

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark.[293] [294] [295]

* Examples of unambiguous tax preferences/expenditures include:

  • the deduction for home mortgage interest.[296] [297]
  • business credits for renewable energy.[298]
  • credits for paid child care.[299]
  • the exemption for interest earned on state and local government bonds.[300] [301]
  • the deduction for charitable contributions.[302]
  • credits for education expenses.[303]
  • exclusions for employer-provided benefits such as pensions and health insurance.[304] [305]

Purpose & Effects

* Per the U.S. Joint Committee on Taxation, tax preferences/expenditures are commonly:

designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives.”[306] [307]

* Many tax preferences have the same purpose and effects as government spending. For example, if the government were to repeal the child tax credit and instead send checks to certain households with children, the result would be the same.[308] [309] [310] [311] [312]

* With regard to tax preferences:

  • the IRS’ Taxpayer Advocate Service states that the “IRS no longer is just a revenue collection agency but is also a benefits administrator.”[313]
  • the Organization for Economic Cooperation and Development states that governments “make use of the tax system to directly pursue social policy goals.”[314]
  • Donald B. Marron, director of the Tax Policy Center and former acting director of the Congressional Budget Office, states:
A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences—preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.[315] [316]

* Per the federal government’s Energy Information Administration:

  • “Many tax expenditure programs are functionally equivalent to direct expenditure programs.”
  • Tax expenditures “are less visible than direct expenditure programs in the budget process.”
  • Tax expenditures “may be less subject to annual review in the normal budget cycle.”[317]

* The primary beneficiaries of tax preferences are sometimes not the individuals who claim them. For example, the exemption for interest earned on state and local government bonds mainly benefits the governments that issue the bonds instead of the investors who buy them. This is because governments can sell tax-exempt bonds with lower interest rates than comparable taxable bonds, and investors will still buy these bonds as long as their after-tax profits are equivalent or greater. Hence, the tax exemption allows governments to issue bonds at lower interest rates, which lowers their costs of financing.[318] [319] Per the Internal Revenue Service:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”….[320]

* During the U.S. Constitutional Convention, James Madison, who would later become known as the Father of the Constitution for his central role in its formation, stated that all civilized societies are “divided into different sects, factions, and interests,” and “where a majority are united by a common interest or passion, the rights of the minority are in danger.” He then listed some “unjust laws” that were due to majorities taking advantage of minorities, such as those that sanctioned slavery and those that imposed “a disproportion of taxes” on certain types of properties.[321] [322] [323]

* Out of 20 major business sectors, the effective federal corporate income tax rates in 2017 averaged as low as 15% for mining and 19% for utilities to as high as 32% for educational services and retail trade and 33% for healthcare and social assistance.[324]

Refundable

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[325] [326] [327] [328]

* The first major refundable tax credit was implemented by the federal government in 1976. Since then, six others have been enacted, and a total of five such programs are still in effect.[329] [330]

* In 2014, the Affordable Care Act (a.k.a. Obamacare) began providing refundable tax credits for people who purchase health insurance through the program. Under this law:

  • Households with incomes up to 400% of federal poverty guidelines are eligible for these tax credits. This includes households with incomes up to $87,840 for a family of three, $106,000 for a family of four, or $124,160 for a family of five.[331] [332]
  • In 2020, roughly 9.2 million people qualified for an average tax credit of $5,898 per year.[333]

* Due to refundable tax credits, the lowest-income 20% of U.S. households paid an average effective federal income tax rate of –6.6% in 2019 prior to the Covid-19 pandemic.[334] This amounted to an average payment from the federal government of $2,600 per household.[335] [336] [337] [338]

* Due to refundable tax credits, the lowest-income 20% of U.S. households paid an average effective federal income tax rate of –14.2% in 2020—amid Covid-19 government lockdowns and intensified social spending.[339] [340] [341] This amounted to an average payment from the federal government of $6,000 per household.[342] [343] [344] [345]

1986 Reform

* In 1986, the 99th Congress passed and Republican President Ronald Reagan signed a tax reform law that eliminated many tax preferences while reducing the top personal income tax bracket from 50% to 28% and reducing the top corporate income tax bracket from 46% to 34%.[346]

* In the year after the 1986 reform, the average effective federal tax rate for the top 20% of income earners increased by 2.1 percentage points, while the rates for all other income groups dropped by less than one percentage point. In the next five years, the tax rate for the top 20% stayed higher than before the law was enacted, while the rates for all other income groups stayed about the same or lower:

Effective Federal Tax Rates by Income of Household

[347] [348] [349]

* The 1986 reform kept in place some of the more widely used tax preferences, such as the deduction for home-mortgage interest.[350]

* In the 25 years after the 1986 reform was passed, various congresses and presidents enacted at least 150 provisions into law that the Joint Committee on Taxation classifies as tax preferences. Examples of such include:

  • the enhanced oil recovery tax credit,
  • a credit for the cost of providing access for disabled individuals,
  • tax incentives for businesses in empowerment zones, enterprise communities, and rural development investment areas,
  • accelerated depreciation for property on Indian reservations,
  • HOPE and Lifetime Learning credits for tuition for post-secondary education,
  • the welfare-to-work tax credit,
  • a deduction for film and television production costs,
  • a tax credit for expenditures for maintaining railroad tracks,
  • a tax credit for biodiesel blenders, and
  • a charitable deduction for certain expenses incurred in carrying out sanctioned whaling activities.[351]

Alternative Minimum Tax

* The alternative minimum tax (AMT) is a form of federal income tax that is imposed on top of the standard income tax. The AMT disallows certain tax preferences and thereby increases the income taxes that some individuals must pay.[352] [353] [354] [355]

* Per the Congressional Budget Office (CBO):

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts.[356]
Inflation is the most important driver of the long-term growth in receipts from the AMT. Under the regular individual income tax, the tax rate brackets, exemptions, and certain deductions and credits are adjusted automatically to keep pace with inflation. By contrast, the exemption amounts and rate brackets used to calculate the AMT are not indexed.
Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers…. In the years to come, however, many taxpayers with lower income will move onto the AMT because it disallows some widely used features of the regular tax, such as the personal exemption (which all taxpayers use) and the standard deduction (which roughly two-thirds of filers use).[357]

* The AMT has a greater impact on taxpayers with large families, high medical bills, and high state and local taxes.[358]

* Between 2001 and 2011, various Congresses and presidents partially alleviated the inflationary impact of the AMT by enacting temporary changes in the law.[359] [360]

* In 2012, President Obama and Congress passed permanent legislation to adjust the AMT for inflation on an annual basis. This reduced but did not eliminate the impact of bracket creep.[361] [362]

* In 2017, President Trump and Congress passed legislation that temporarily decreases the portion of taxpayers subject to the AMT until 2025. This law:

  • expands the amount of income that is exempt from the AMT.
  • limits certain tax preferences, such as the write-off for state and local taxes.
  • eliminates certain tax preferences, such as write-offs based on the size of a person’s family.[363] [364] [365]

* From 1983 to 1998, the portion of taxpayers liable for the AMT stayed below 1%. By 2017, 4.9% of taxpayers were required to pay the AMT. In 2018 the portion dropped to 0.2%:

Impact of AMT

[366]

* The origins of the AMT can be traced to a January 1969 speech given by Treasury Secretary Joseph Barr, in which he stated that “there is going to be a taxpayer revolt over the income taxes in this country unless we move in this area.” Barr criticized the use of “loopholes and gimmicks” by the wealthy and pointed out that “in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the ‘taxpayers’ paid the U.S. Government not 1 cent of income taxes….”[367] [368]

* Barr’s speech spurred a public uproar, and in August of 1969, Life magazine published a house editorial noting that Congress was considering a “minimum tax” to address “the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all.”[369] [370]

* In December of 1969, Congress passed and the president signed the first minimum tax law. The legislative report echoed Barr’s speech and stated, “It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income.”[371] [372]

* Over the ensuing three decades, various U.S. Congresses and presidents made at least 18 changes to this tax.[373] The legislative report for the changes passed in 1982 echoed Barr’s speech again, stating that the changes have “one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits.”[374]

* The 155 tax returns cited by Barr amounted to 0.0002% of taxable returns in 1967.[375] Adjusted for inflation, $200,000 in 1967 is equivalent to $1.5 million in 2018.[376] In 2018, the AMT levied additional taxes on 0.2% of taxable returns,[377] including:

  • 18,753 returns with adjusted gross incomes below $100,000.
  • 31,382 returns with adjusted gross incomes from $100,000 to $200,000.
  • 91,442 returns with adjusted gross incomes from $200,000 to $500,000.
  • 30,022 returns with adjusted gross incomes from $500,000 to $1 million.
  • 72,409 returns with adjusted gross incomes above $1 million.[378]

* In 2017, 10,988 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 42% of these cases, their primary tax preference was interest earned from tax-exempt bonds issued by state and local governments.[379] These bonds are called “municipal bonds” or “munis,” and they are a principal means by which wealthy individuals limit their federal income taxes.[380] [381]

* When Congress was considering the first minimum tax in 1969, the editors of Life wrote that the proposed law has “some dubious side effects” because “among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works.”[382]

* Currently, under federal tax law, the definition of “gross income” excludes interest from tax-exempt munis, and hence, income from these bonds is not subject to the alternative minimum tax.[383] [384] [385]

* Per the CBO:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.[386]

* Per the IRS:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”….[387] [388]

Bracket Creep

Overview

* Per the Congressional Budget Office (CBO), “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” Thus, if tax laws remain unchanged, “average federal tax rates would increase in the long run.” This is referred to as “bracket creep.”[389]

* In 2012, before Congress and President Obama passed a law to index the alternative minimum tax for inflation and make most of the Bush tax cuts permanent for everyone but high-income earners,[390] [391] CBO projected that if tax laws remained unchanged, federal revenues would grow to 46% above the average of the previous 40 years by 2051:

Federal Revenues, Actual and Projected Under 2012 Laws

[392] [393]

* From 1962 to 2020, federal revenues averaged 17.3% of the nation’s gross domestic product (GDP). In 2021, CBO projected that if current tax laws remain unchanged, federal revenues will grow to 7% above this long-term average by 2051, mainly due to bracket creep:

Federal Revenues, Actual and Projected Under Current Law

[394] [395]

* With regard to middle-income families, CBO projected:

  • in 2016 that if current laws remained unchanged, “a married couple with two children earning the median total income” will see their income and payroll taxes rise from 17% of their income in 2016 to 19% over the next 30 years. This amounts to a 12% increase.[396]
  • in 2019 that after most of the Trump tax cuts expire, “a married couple (including one worker with average earnings) with two children” will see their federal income taxes rise from 3.3% of their income in 2026 to 8.2% in 2049. This amounts to a 148% increase.[397]

* Examples of tax laws that are not indexed for inflation or wage growth include:

  • the taxes on Social Security benefits, which apply to single beneficiaries with incomes of more than $25,000 per year and couples with incomes of more than $32,000 per year. These taxes currently affect 40% of all Social Security beneficiaries and are projected to affect more than 56% of these beneficiaries by 2050.[398] [399]
  • the deduction for home mortgage interest.[400] [401] [402]
  • some excise taxes. In this case, the lack of indexing generally decreases the burden of these taxes over time.[403] [404]
  • the following provisions of the 2010 Affordable Care Act (a.k.a. Obamacare):
    • a 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples.[405] [406]
    • a 3.8% tax on income from investments imposed on singles with income above $200,000 and couples with income above $250,000.[407] [408] [409]

* Examples of tax laws that are indexed for inflation (but not for wage growth) include:

  • income tax brackets, exemptions, and deductions. In this case, the lack of wage indexing has a greater impact on lower-income taxpayers.[410] [411]
  • the alternative minimum tax. This tax will apply to more taxpayers as inflation-adjusted income rises.[412] [413] [414]
  • the earned-income tax credit eligibility thresholds. As these lose value relative to income over time, the portion of taxpayers who receive the credit is projected to fall from 16% in 2016 to 12% in 2046.[415] [416] [417]
  • the annual gift tax exemption. This is the annual amount that can be given away without potentially incurring taxes.[418] [419] [420]

Politics/Media

* In a 2011 budget analysis published by the Washington Post, Ezra Klein posted a chart of federal spending and revenue projections based on the Congressional Budget Office’s “current law” scenario and wrote that it:

  • shows what happens if we do … nothing. The answer, as you can see, is that the budget comes roughly into balance.
  • contains “a balanced mix of revenues” and “program cuts.”[421] [422]

* Klein called this is a “pretty good plan” without revealing that under it:

  • elements of the tax code that were not indexed for inflation or wage growth would shift taxpayers into progressively higher tax brackets over time.
  • by 2020, federal revenues would “reach higher levels relative to the size of the economy than ever recorded in the nation’s history.”
  • the portion of the U.S. economy consumed by federal revenues would continue climbing through 2084, rising to:
    • 69% higher than the average of the previous 40 years.
    • 47% higher than ever recorded in the history of the United States.[423] [424]
  • the publicly held national debt would increase from 62% of the U.S. economy in 2010 to 113% in 2084 due to interest on the national debt, which his analysis did not account for.[425] [426]

* In a 2012 commentary published by Rolling Stone, Jared Bernstein—a former economic advisor to President Obama and a senior fellow with the Center on Budget and Policy Priorities—wrote that “it is well within our means” to reduce the national debt by following the “broad outlines” of “current law.” He then pushed for this without revealing that under the law at that time, federal taxes would progressively consume a greater share of the U.S. economy, rising to:

  • 21% higher than the average of the previous 40 years by 2025.
  • 40% higher by 2045.
  • 56% higher by 2065.[427] [428] [429]

Compliance

Complexity

* Per the Congressional Budget Office:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. … Complexity also arises from efforts to achieve certain equity goals. Provisions that phase out various tax credits and deductions at higher income levels are designed to target benefits toward people with the greatest need, but they make taxes more difficult to calculate.[430] [431]

* The federal tax code is about 6,000 pages when printed on 8.5×11 inch paper in size 11 font. This includes supplementary materials that do not have the force of law (such as indexes and records of some repealed provisions), but these materials are often needed to understand the law.[432] [433] [434]

* Per the IRS, “Federal tax regulations … pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.”[435] When printed on 8.5×11 inch paper in size 8 font, current federal tax regulations are about 15,000 pages. This does not include obsolete provisions or indexes.[436] [437]

* U.S. taxpayers (including businesses) spend roughly six billion hours per year complying with the requirements of federal tax law. This amounts to 48 hours per household, or the labor equivalent of more than three million full-time workers. Per the IRS’s Taxpayer Advocate, these figures do not include “millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits.”[438] [439]

* The IRS’s Taxpayer Advocate estimates that the cost of complying with federal income tax laws was $195 billion in 2015, or 10% of income tax receipts.[440]

* In 2006, General Electric filed the nation’s longest federal tax return, which was about 24,000 pages long.[441] In 2011, its federal tax return was about 57,000 pages long.[442]

* In 2019, the IRS spent $11.8 billion and employed 78,004 people, including seasonal and part-time workers.[443]

* Per the IRS’s Taxpayer Advocate:

[T]ax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.[444]

Noncompliance

* A 2019 IRS study found that from 2011 to 2013, the difference between what was legally due in federal taxes and what was actually paid amounted to an average annual “tax gap” of $381 billion. This equates to a noncompliance rate of 14.2%.[445] [446]

* Per the IRS’s Taxpayer Advocate, the tax gap represents an effective tax on most taxpayers “to subsidize noncompliance by others.”[447] Adjusted for inflation into 2020 dollars, the 2013 tax gap was an average of $3,519 for every household in the U.S.[448]

* Per the IRS’s Taxpayer Advocate:

IRS data show that when taxpayers have a choice about reporting their income, voluntary tax compliance rates are disturbingly low. Among self-employed workers whose income is not subject to tax withholding, reporting compliance rates are 43 percent for the business income of non-farm sole proprietors and 28 percent for unincorporated farming businesses.[449]

* In instances where income was reported to the IRS and withheld by third parties (such as employers), the noncompliance rate was about 1% from 2011 to 2013. In instances where income was not subject to reporting or withholding, the noncompliance rate was 55%.[450] [451]

* Willfully evading federal taxes is a felony crime punishable by up to five years in prison and fines of up to $250,000 for individuals and $500,000 for corporations.[452] [453] [454]

Refundable Tax Credits

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[455] [456] [457] Per the Treasury Department’s Inspector General for Tax Administration, “the risk of fraud for these types of claims is significant.”[458] [459]

* Two of the costliest and most frequently claimed refundable tax credits are the earned income tax credit and the child tax credit.[460] [461] [462]

* In 2019, the IRS improperly paid $17.4 billion in earned income tax credits, amounting to an improper payment rate of 25%.[463] [464] These improper payments were greater than the budget of the IRS.[465]

* In 2019, the IRS improperly paid about $7.2 billion in refundable child tax credits, amounting to an improper payment rate of 15%.[466]

* In 2020, the maximum refundable child tax credit is $1,400 per child.[467]

* Federal law generally prohibits illegal immigrants from earning income in the U.S., but the law also requires them to file tax returns if they do earn income. Federal law also prohibits illegal immigrants from receiving most federal benefits, but the IRS has concluded that this restriction does not apply to refundable child tax credits. In 2010, the IRS paid out $4.2 billion in refundable child tax credits to 2.3 million tax filers who were not legally authorized to work in the United States.[468] [469]

* In 2010, 72% of the tax returns filed by illegal immigrants and foreign investors received cash payments from the IRS for child tax credits. Among the U.S. citizens and foreigners legally working the U.S., 14% of tax filers received cash payments from the IRS for child tax credits.[470]

* In April 2012, WTHR, an NBC News affiliate in Indiana, aired a report by investigative journalist Bob Segall about illegal immigrants who were fraudulently obtaining child tax credits by claiming credit for children who live in Mexico. The IRS responded to the report by stating that the agency “has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund.”[471]

* In the wake of the WTHR news report, 11 current and former IRS employees contacted WHTR and made statements such as the following:

  • “I just saw your report and there’s something I need to tell you. I see this stuff every day and there isn’t anything I can do about it.”
  • “Most of these documents are fraudulent and there’s absolutely no system here to catch it.”
  • “We don’t have the resources to follow up on much and we’re not allowed to flag problems.”
  • “We get applications from Mexico, Honduras, China, Japan, Bulgaria, all over the world. … I guarantee 90% of them are phony. We see the same signatures hundreds of times. We see the same docs photocopied and attached to different applications. It’s the same person, same photo, same address. I’ve seen the same birth certificate twelve times now in the past day.”[472]

* Two months later, the Treasury Department’s Inspector General for Tax Administration published an audit of the IRS department that handles tax returns for illegal immigrants and foreign investors. Since these individuals are ineligible to receive Social Security Numbers, the IRS issues them ITINs (Individual Taxpayer Identification Numbers).[473] The audit found that the:

  • IRS had issued 9,909 ITINS to 9,522 people allegedly living at a single address in Tulsa, Oklahoma (more examples in footnote).[474]
  • IRS had mailed 23,994 ITIN refunds totaling $46,378,040 to a single address in Atlanta, Georgia (more examples in footnote).[475]
  • IRS had deposited 2,706 ITIN refunds totaling $7,319,518 into a single bank account (more examples in footnote).[476]
  • IRS had eliminated a process used to detect fraud in ITIN applications in 2010.[477]
  • “environment created by [IRS] management discourages tax examiners from identifying questionable ITIN applications.”[478]
  • “payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts federal law and policy to remove such incentives.”[479]

* With regard to fraudulent tax refunds obtained through identity theft, IRS Inspector General J. Russell George stated: “Once the money is out the door, it is almost impossible to get it back.”[480]

* Various members of Congress have sponsored bills to prevent the IRS from awarding refundable child tax credits to illegal immigrants, none of which have become law. For example:

  • In 2012, Republican Congressman Paul Ryan sponsored a wide-ranging bill with a provision that would restrict illegal immigrants from obtaining refundable child tax credits.[481] [482] The bill passed the House of Representatives with 90% of Republicans voting for it and 96% of Democrats voting against it.[483] The Senate never voted on it.[484]
  • In 2013, Republican Congressman Sam Johnson sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[485] [486] The bill was cosponsored by 67 Republicans and no Democrats. It was never voted upon.[487] [488]
  • In 2015, Republican Congressman Larry Bucshon sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[489] [490] The bill was cosponsored by four Republicans and no Democrats.[491] The House never voted on it.[492]
  • In 2017, Republican Congressman Gus Bilirakis sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[493] [494] The bill was cosponsored by two Republicans and no Democrats.[495] The House never voted on it.[496]

* In 2017, Congress passed and Republican President Donald Trump signed a law that:

  • forbids parents from receiving refundable child tax credits unless their children are U.S. citizens and have a Social Security number.[497] (Due to birthright citizenship, about 88% of the children of illegal immigrants are U.S. citizens.[498])
  • adds a separate nonrefundable $500 child tax credit for illegal immigrants whose children do not have a Social Security number.[499] [500] [501]
  • continues to allow an education tax credit of up to $2,500 per student for illegal immigrants who do not have a Social Security number.[502]

* President Trump’s 2018, 2019, 2020 and 2021 budget proposals called for restricting illegal immigrants from obtaining refundable child tax credits.[503] [504] [505] [506]

Economic Effects

* Examples of the types of decisions that are affected by taxes include:

  • whether or not to work.[507]
  • how long to hold investments.[508]
  • whether or not to get married.[509]
  • how much to save.[510]
  • whether or not to buy a house.[511]
  • whether to be self-employed or work for somebody else.[512]
  • how to finance a business.[513]

* Among different measures of taxes, marginal tax rates—which are the rates that taxpayers pay on the next dollar of income they earn—typically have the greatest impact on people’s financial decisions. This is because when people are deciding whether or not to take effort or risk to earn more income, they typically consider how much money they will take home after taxes. The marginal tax rate informs such decisions because it determines how much of this added income will be taken in taxes.[514] [515]

* Per the U.S. Joint Committee on Taxation, the negative economic effects of taxes can be minimized while collecting the same amount of tax revenue when there is “a broad base of taxation in order to keep marginal tax rates as low as possible….”[516]

* Marginal tax rates are generally higher than average tax rates because much income is not subject to taxation (due to tax preferences) and because income tax brackets rise with income.[517] [518] For example, households with $85,500 in income during 2019 paid an average of $10,600 in federal taxes, which amounts to an effective tax rate of 12%.[519] [520] [521] However, if the household earned another $10,000, they would have paid a marginal tax rate of about 39% on this added income.[522]

* Marginal tax rates can have differing effects on people depending upon their circumstances and mindsets.[523] Per the Congressional Budget Office (CBO):

Changes in marginal tax rates have two different types of effects on people. On the one hand, the lower those tax rates are, the greater the share of the returns from additional work or saving that people can keep, thus encouraging them to work and save more. On the other hand, because lower marginal tax rates increase after-tax income, they make it easier for people to attain their consumption goals with a given amount of work or saving, thus possibly causing people to work and save less.[524]

* There is disagreement among economists about the quantitative effects of marginal tax rates, but there is broad agreement that:

  • higher marginal tax rates on workers mostly reduce their “incentive to work,” and this effect is stronger on those who are not already working than those who are working but considering working more.[525] [526]
  • the “efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.”[527]
  • higher “marginal tax rates may encourage taxpayers to seek compensation in the form of tax free fringe benefits rather than taxable compensation and to engage in other tax avoidance activities, including deductible expenses or deductible consumption, or even illegal tax evasion. Such distortions in consumption represent an efficiency loss to the economy.”[528]
  • higher marginal tax rates on investors and savers mostly reduce their incentive to invest and save, but there is much dispute over the strength of this effect, and a few studies have concluded that higher marginal tax rates encourage investing and saving.[529] [530]

* With regard to the effects of marginal tax rate on investments and savings, the Congressional Budget Office and Joint Committee on Taxation have stated:

  • “[M]ore saving implies more investment, a larger capital stock, and greater output and income.”[531]
  • “If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.”[532]
  • “A small change in the growth of productivity can, over a long period, have a larger effect on GDP [gross domestic product] than most recessions do” because “the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount.”[533]

* In addition to marginal tax rates, other aspects of tax laws with economic effects include provisions such as the following:

  • Corporate income taxes that are sometimes higher in the U.S. than in other countries can incentivize corporations to relocate overseas.[534]
  • The combination of the following two provisions of U.S. tax law incentivizes corporations to raise money by going into debt: (1) the corporate income tax deduction for interest on debt, and (2) the taxation of money raised through selling corporate shares.[535] [536] [537]

Excise and Sales Taxes

* Excise taxes are imposed on specific goods and services, whereas sales taxes are imposed on wide arrays of goods and services.[538] [539]

* In addition to raising revenue, excise taxes are sometimes imposed to discourage or penalize certain activities.[540] [541] Per the U.S. Joint Committee on Taxation:

Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.[542]

* In 2020, excise taxes comprised 2% of the taxes collected by the federal government and 11% of the taxes collected by state and local governments:

Excise Taxes

[543]

* In 2018, state and local excise taxes ranged from a low of $328 per person in Arizona to a high of $1,134 per person in Vermont. The nationwide average was $613 per person.[544]

* Excise taxes are remitted by businesses that manufacture, import, or sell the goods and services that are taxed.[545] [546]

* The economic burden of excise taxes primarily falls on retail customers in the form of higher prices. Per the Congressional Budget Office:

The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.[547] [548] [549] [550]

* In 2010, the 111th Congress and President Obama passed the Affordable Care Act (a.k.a. Obamacare), which enacted several new types of excise taxes on items such as medical devices, indoor tanning services, and high-cost health plans. Some of these taxes took effect during 2010–2014, and others were delayed by Congress.[551] [552] [553] In 2019, the 116th Congress and President Trump repealed the taxes on medical devices and high-cost health plans.[554]

* Sales taxes are typically remitted by retailers and shown on purchase receipts, but the burden of these taxes falls on both consumers and retailers to varying degrees, depending upon the product or service.[555] [556] [557]

* Most states don’t impose a sales tax on prescription drugs or food.[558]

* In 2020, sales taxes comprised 22% of the taxes collected by state and local governments:

Sales Taxes

[559]

* In 2018, the portion of state and local tax collections that were comprised of sales taxes varied from a high of 42% in Louisiana, to a median of 22% in Michigan, to a low of 0% in Delaware, Montana, New Hampshire and Oregon.[560]

Property Taxes

* Property taxes are annual levies on properties based upon their appraised value. Per The Oxford Companion to American Law, property taxes were levied:

in ancient times but the modern tax has roots in the feudal obligations owed to British and European kings or landlords. In the fourteenth and fifteenth centuries, British tax assessors used ownership of property to estimate ability to pay. In time the tax came to be regarded as a levy on the property … itself. In the United Kingdom the tax developed into a system of “rates” based upon the annual (rental) value of the property.[561]

* Local governments generally do not levy property taxes on colleges, hospitals, and other nonprofit organizations, but these organizations sometimes make “payments in lieu of taxes” or “PILOTs” to local governments. Such payments are generally lower than property taxes.[562]

* In addition to property taxes on real estate, some states levy taxes on personal property such as automobiles, boats, and aircraft.[563]

* In 2020, property taxes comprised 30% of the taxes collected by state and local governments:

Property Taxes

[564]

* In 2018, the portion of state and local tax collections that were comprised of property taxes varied from a high of 64% in New Hampshire, to a median of 30% in Arizona, to a low of 17% in Delaware.[565]

* In 2018, state and local property taxes ranged from a low of $598 per person (not per household) in Alabama to a high of $3,378 per person in New Jersey. The nationwide average was $1,675 per person.[566]

* Economists generally fall into three different camps regarding who bears the burden of property taxes. All three groups agree that property taxes on owner-occupied housing are mostly borne by homeowners, and property taxes on land (but not necessarily housing located on the land) are mostly borne by landowners. There is much disagreement over commercial and industrial properties.[567]

Estate and Gift Taxes

* Per the Congressional Research Service, the federal:

  • estate tax is “imposed when property is transferred at death.”
  • gift tax “operates alongside the estate tax to prevent individuals from avoiding the estate tax by transferring property to heirs before dying.”[568]

* The modern federal estate tax was first enacted in 1916, and per the IRS, it “was to serve the dual purposes of producing revenue and redistributing wealth.”[569]

* In 2020, estate and gift taxes comprised 0.5% of total federal taxes and 0.3% of total state and local taxes:

Estate and Gift Taxes

[570]

Hidden Taxes

* Hidden taxes are those that are not apparent to the individuals who ultimately pay them. Per the director of the Congressional Budget Office (CBO):

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[571]

* Examples of hidden taxes include:

  • excise taxes on items such as gasoline and wine, which are remitted by businesses but are primarily borne by retail customers in the form of higher prices.[572] [573] [574] For example, retail consumers pay an average of 45 cents in federal and state excise taxes per gallon of gasoline, but these taxes do not appear on their purchase receipts.[575]
  • employer payroll taxes, which are remitted by employers but are primarily borne by employees in the form of lower wages.[576] [577] [578] For example, middle-income households lose about 4.0% of their income to federal payroll taxes remitted by employers, but these taxes did not appear on employees’ paychecks or tax returns.[579] [580] [581]
  • corporate income taxes, which are remitted by corporations but are primarily borne by stockholders and employees in the form of lower profits and wages.[582] [583] [584] For example, the top 1% of income earners lose about 3.6% of their income to federal corporate income taxes, but these taxes did not appear on their paychecks or tax returns.[585] [586] [587]

* In 2020, U.S. households paid an average of $7,000 in hidden federal taxes. For different income groups, the amounts and rates varied as follows:

2020 Average Hidden Federal Taxes Per Household

Income Group

Full Income

Hidden Taxes

Hidden Tax Rate

Lowest 20%

$42,200

$1,400

3.3%

Second 20%

$63,600

$3,000

4.7%

Middle 20%

$90,500

$4,700

5.2%

Fourth 20%

$131,800

$7,350

5.6%

Highest 20%

$360,900

$19,500

5.4%

81–90%

$191,500

$11,300

5.9%

91–95%

$265,100

$15,700

5.9%

96–99%

$440,000

$22,900

5.2%

Highest 1%

$2,291,800

$111,300

4.9%

[588] [589] [590]

* Governments also enact laws and regulations that do not collect tax revenue but impose the costs of government policies on the private sector. These are functional hidden taxes, and examples of such include:

  • a federal law that requires most hospitals with emergency departments to provide an “examination” and “stabilizing treatment” for anyone who comes to such a facility and requests care for an emergency medical condition or childbirth, regardless of their ability to pay and immigration status.[591]
  • state and federal mandates that require health insurers to enroll all applicants regardless of preexisting conditions, thus increasing the cost of health insurance and forcing existing health insurance customers to subsidize the healthcare of those who do not purchase insurance until after contracting serious illnesses.[592]
  • state mandates that require electric utility companies to obtain certain amounts of their electricity from alternative energy sources that are more expensive than traditional sources, thus increasing the cost of electricity.[593]

Politics

Overview

* The U.S. Constitution vests Congress with the powers to tax, spend, and pay the debts of the federal government. Legislation to carry out these functions must be enacted in one of the following ways:

  • passed by majorities in both houses of Congress and approved by the President.
  • passed by majorities in both houses of Congress, vetoed by the President, and then passed by two-thirds of both houses of Congress.
  • passed by majorities in both houses of Congress and left unaddressed by the President for ten days.[594]

Bush Tax Cuts

* Per the Congressional Budget Office (CBO), “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” Thus, if tax laws remain unchanged, “average federal tax rates would increase in the long run” (for more detail, see Bracket Creep).[595]

* In 2000, the federal government collected revenues equal to 20.4% of the nation’s gross domestic product (GDP). This was the highest level in the history of the United States.[596]

* In 2000, the stock market “dotcom” bubble burst,[597] [598] [599] the NASDAQ lost 39% of its value,[600] and profits for nonfinancial corporations fell by 18%.[601] In the first quarter of 2001, the nation’s GDP contracted and a recession began.[602] [603]

* Republican President George W. Bush entered office in January of 2001 and signed his first major economic bill in June of that year.[604] [605] Among other provisions, this law enacted various tax reforms that Congress and Bush accelerated and expanded upon in 2002 and 2003. Collectively, these statues:

  • decreased tax rates on incomes, estates, capital gains and dividends.
  • increased the child tax credit (which is also a form of spending).
  • raised the exemption amount for the alternative minimum tax.
  • increased certain corporate income tax deductions.[606] [607]

* Collectively, the tax provisions in these laws are known as the “Bush tax cuts.” Congress passed these bills with Democratic and Republican support varying as follows:

Congressional Bush Tax Cut Votes

Bill Year

Democrats

Republicans

For

Against

For

Against

2001

15%

71%

95%

1%

2002

90%

4%

98%

0%

2003

4%

96%

97%

1%

[608] [609] [610]

* In order to avert Democratic filibusters in the Senate, Republicans used a procedural rule that required them to sunset many of the tax cuts at the end of 2010.[611] [612] [613] [614] [615]

* In addition to the Bush tax cuts, federal revenues during 2000–2010 were impacted by factors such as:

  • the burst of the dotcom bubble in 2000 and ensuing recession.[616] [617]
  • average economic growth of 3.4% above the rate of inflation during 2003–2006.[618] [619]
  • the burst of the housing bubble in 2007 and ensuing Great Recession.[620] [621]
  • the rise of unemployment from 5.0% in January 2008 to 9.9% in December 2009.[622]
  • the economic “stimulus” bill of February 2008.[623]

* From 2000 to 2010, federal revenues (as a portion of GDP) varied as follows:

Federal Receipts as a Portion of Gross Domestic Product Bush

[624] [625] [626] [627] [628]

* For facts related to the economic implications of the Bush tax cuts, see the sections of this research on economic effects and government debt.

Obama Tax Cuts

* In 2007, the housing bubble burst, and “banks began reporting large losses resulting from declines in the market value of mortgages and other assets.”[629] The nation entered a recession in the last quarter of 2007,[630] and unemployment increased from 5.0% at the outset of 2008 to 9.9% at the end of 2009.[631]

* Democratic President Barack Obama entered office in January of 2009 and signed his first major economic bill one month later in February.[632] [633] Among other provisions, this law:

  • created or expanded four temporary tax credits.
  • created a temporary tax exclusion for unemployment benefits.
  • created a temporary sales tax deduction for new car purchases.
  • instituted four business tax benefits and a business tax increase.[634]

* Congress passed this bill with 97% of Democrats voting for it and 98% of Republicans voting against it.[635]

* In December of 2010, Congress passed and Obama signed a bill that extended most of the Bush tax cuts and some of the tax cuts from Obama’s 2009 law through 2012. This law also decreased the Social Security payroll tax by two percentage points until the end of 2011.[636] [637] In 2011 and 2012, Congress and Obama extended the Social Security tax cut through the end of 2012.[638] [639]

* In January of 2013, Congress passed and Obama signed a bill to make the most of the previous tax cuts permanent for everyone but high-income earners (except for adjustments to the estate, gift, and alternative minimum taxes). Also, the law did not renew the Social Security payroll tax cut.[640] [641]

* In addition to the Obama tax cuts, federal revenues during 2007–2017 were impacted by factors such as:

  • the Great Recession.[642] [643]
  • an unconventional Federal Reserve policy called “quantitative easing,” which involved creating trillions of dollars of new money to purchase government debt and private financial assets that had become bad investments.[644] [645] [646] [647] [648]
  • average inflation-adjusted economic growth of 2.3% during 2010–2017.[649]

* From 2007 to 2017, federal revenues (as a portion of GDP) varied as follows:

Federal Receipts as a Portion of Gross Domestic Product Obama

[650] [651] [652] [653] [654] [655]

* For facts related to the economic implications of the Obama tax cuts, see the sections of this research on economic effects and government debt.

Obama Tax Increases

* In a campaign speech during September of 2008, Barack Obama stated:

I can make a firm pledge: under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.[656]

* About two weeks after taking office, Obama signed a law that more than doubled federal excise taxes on cigarettes, cigars, and other tobacco products.[657] [658] [659] The bill passed with 98% of Democrats voting for it and 75% of Republicans voting against it.[660] Per the Congressional Budget Office, “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.”[661]

* In 2010, the 111th Congress and President Obama passed two laws that are collectively known as the Affordable Care Act or “Obamacare.” These bills passed with 88% to 89% of Democrats voting for them and 99% of Republicans voting against them.[662] [663] These laws impose or increase 10 types of taxes, fees, and penalties (in addition to fines for not having health insurance).[664] The largest of these are:

  • a 3.8% tax on income from investments (such as interest, dividends, and rent) imposed on singles with income above $200,000 and couples with income above $250,000. This began in 2013.[665] [666]
  • an added 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples. This began in 2013.[667] [668]
  • a 40% excise tax imposed on high-cost health insurance plans. This was initially due to begin in 2018, but a 2016 law delayed it to 2020,[669] and a 2019 law repealed it.[670]
  • an annual fee imposed on health insurance providers. This began in 2014,[671] and a 2019 law repealed it.[672]
  • an annual fee imposed on manufacturers and importers of pharmaceuticals. This began in 2011.[673]
  • a 2.3% excise tax imposed on manufacturers and importers of certain medical devices. This began in 2013,[674] and a 2019 law repealed it.[675]

* Regarding tax preferences (which are also a form of spending), the Affordable Care Act provided refundable tax credits for individuals who purchase health insurance with incomes up to 400% of federal poverty guidelines (for example, $106,000 for a family of four).[676] [677] [678] The law also eliminated or reduced six other preferences while adding three others.[679] [680]

* The Affordable Care Act also imposed fines on large employers that don’t provide full time-employees with health insurance that meets certain requirements,[681] and the law requires most Americans to carry some form of health insurance starting in 2014 or pay a fine.[682] [683] [684] [685] (In 2017, Congress passed and President Trump signed a law that repealed this fine starting in 2019.[686] [687] [688])

* During a September 2009 interview on ABC News, Obama was asked if such a fine constitutes a tax increase, and he replied, “I absolutely reject that notion.”[689] In March of 2012, an Obama administration lawyer argued before the Supreme Court that the Affordable Care Act’s fine for not buying health insurance is constitutional because:

  • it is “justifiable under [Congress’s] tax power.”
  • it is “fair to read this as an exercise of the tax power.”
  • the “Court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis.”[690]

* The Supreme Court ruled (5 to 4) that Obamacare’s fine is constitutional on the grounds that it is a tax.[691]

* Obama’s budget proposal for 2017 contained 45 pages of tax-related provisions.[692] Some of his proposals were to:

  • impose a one-time 14% tax on the untaxed foreign earnings that U.S. corporations hold overseas.[693]
  • increase the tax rate on capital gains and dividends from 20% to 24.2% for upper income individuals (for a total tax rate of 28% when combined with the 3.8% net investment tax).[694]
  • enact the “Buffett rule.”[695]
  • enact, expand, or extend at least 22 different tax credits.[696]

* Per the Joint Committee on Taxation and Congressional Budget Office:

  • “The complexity of the tax system partly results from tax expenditures [a.k.a. preferences] that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions.”[697]
  • “Complexity also arises from efforts to achieve certain equity goals.”[698] [699]
  • “Policymakers are not concerned only with efficiency issues in designing a tax system, but are also concerned with establishing an ‘equitable’ tax code with respect to the distribution of the tax burden. Whether a tax system is viewed as equitable is in the eye of the beholder, and economic analysis cannot define an equitable tax.”[700]
  • “Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases.”[701]
  • “A less efficient allocation of labor and capital resources leaves society with a lower level of output of goods and services than it would otherwise enjoy in the absence of tax-system induced economic distortions.”[702]
  • “[M]any of the same aspects of the tax system that reduce economic efficiency also increase complexity.”[703]
  • “In general, the goals of equity and efficiency are in conflict. In order to keep rates low for efficiency reasons, the progressivity of the rate schedule should be minimized, but this conflicts with the desire to have more progressive rates for equity reasons.”[704]

* For more facts related to the economic implications of the Obama tax increases, see the sections of this research on economic effects and government debt.

Trump Tax Cuts

* Republican President Donald Trump entered office in January of 2017 and signed his first major economic bill in December of that year.[705] [706] Among other provisions, this law permanently lowered the corporate tax rate beginning in 2018 and temporarily (during 2018–2025):

  • lowered the income tax rates in five of the seven income brackets.
  • increased the basic standard tax deduction for people who do not itemize their deductions.
  • increased the child tax credit (which is a form of spending).
  • increased the amount of charitable contributions that people can deduct from their federal income taxes.
  • limited the maximum amount of state and local taxes that people can deduct from their federal income taxes.
  • reduced the maximum amount of mortgage interest that people can deduct from their federal income taxes.[707]

* The bill passed Congress with 95% of Republicans voting for it and 98% of Democrats voting against it.[708]

* In order to avert a Democratic filibuster in the Senate, Republicans used a procedural rule that required them to sunset many of the tax reforms at the end of 2025.[709] [710] [711]

* In April of 2018, the Congressional Budget Office (CBO) projected that federal revenues will vary as follows under current law:

Federal Revenues After Trump Tax Cuts as Projected by CBO Under Current Law

[712] [713]

* Per the Congressional Budget Office, the corporate income tax “reduces capital investment in the United States,” and hence:

it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. … That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.[714]

* By August 2020, businesses had enacted at least 1,200 general pay raises, bonuses, benefit increases, consumer price reductions, charitable donations, and business expansions that they credited to the Trump tax cuts.[715]

* For more facts related to the economic implications of the Trump tax cuts, see the sections of this research on economic effects and government debt.

Media

* When President Bush proposed tax cuts at the outset of his presidency, Newsweek published a cover story that showed pictures of objects that people with various incomes could buy with money from the tax cuts. On the low end, Newsweek showed a bowl of pasta to signify “three weeks’ worth of groceries” or $168 that a family of four with a gross income of $20,000 would save on an annual basis. On the high end, Newsweek showed a Lexus GS 430 to signify $47,114 that a married couple with an income of $1,000,000 would save on an annual basis.[716]

* Newsweek did not reveal what these families were currently paying in federal taxes or what they were receiving in cash and other benefits from the federal government. The family with a gross income of $20,000 was paying about $1,600 per year in taxes while receiving $16,000 from the government. In comparison, the family with an income of $1,000,000 was paying $325,000 in taxes and receiving $7,000 from the government.[717] [718]

Debt

* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resultant debt is “borne by tomorrow’s workers and taxpayers.” This burden can manifest in the form of higher taxes, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[719] [720] [721] [722]

* Other factors impacting the debt/GDP ratio include but aren’t limited to high inflation (which lowers the ratio in the short term and raises it in the long term),[723] [724] [725] legislation passed by previous Congresses and presidents,[726] economic cycles, terrorist attacks, pandemics, government-mandated lockdowns, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[727] [728] [729]

Congress

* During the first session of the 113th Congress (January–December 2013), U.S. Representatives and Senators introduced 168 bills that would have reduced spending and 828 bills that would have raised spending.[730]

* The table below quantifies the costs and savings of these bills by political party. This data is provided by the National Taxpayers Union Foundation:

Costs/Savings of Bills Sponsored or Cosponsored in 2013 by Typical Congressman (in Billions)

Legislative Body & Party

Proposed Increases

Proposed Decreases

Net Agendas

Change in 2013 Budget Outlays (%)

House Democrats

$407

$10

$397

11.5

Senate Democrats

$22

$3

$18

0.5

House Republicans

$9

$91

–$83

–2.4

Senate Republicans

$6

$165

–$159

–4.6

[731] [732]

* The table below quantifies the net agendas of the political parties in previous Congresses:

Costs/Savings of Bills Sponsored or Cosponsored in the First Sessions of Congress by Typical Congressman (in Billions)

2011

2009

2007

2005

2003

2001

1999

House Democrats

$497

$500

$547

$547

$402

$262

$34

Senate Democrats

$24

$134

$59

$52

$174

$88

$15

House Republicans

–130

–$45

$7

$12

$31

$20

–$5

Senate Republicans

–$239

$51

$7

$11

$26

$19

–$324

NOTE: Data not adjusted for inflation.

[733]

George W. Bush

* In February 2001, Republican President George W. Bush stated:

Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt, repaid more quickly than has ever been repaid by any nation at any time in history.[734]

* From the time that Congress enacted Bush’s first major economic proposal (June 7, 2001[735]) until the time that he left office (January 20, 2009), the national debt rose from 54% of GDP to 74%, or an average of 2.7 percentage points per year.[736]

* During eight years in office, President Bush vetoed 12 bills, four of which were overridden by Congress and thus enacted without his approval.[737] These bills were projected by the Congressional Budget Office to increase the deficit by $26 billion during 2008–2022.[738]

Barack Obama

* In February 2009, Democratic President Barack Obama stated:

I refuse to leave our children with a debt that they cannot repay—and that means taking responsibility right now, in this administration, for getting our spending under control.[739]

* From the time that Congress enacted Obama’s first major economic proposal (February 17, 2009[740]) until the time that he left office (January 20, 2017), the national debt rose from 75% of GDP to 104%, or an average of 3.6 percentage points per year.[741]

* During eight years in office, President Obama vetoed twelve bills, one of which was overridden by Congress and thus enacted without his approval.[742] The Congressional Budget Office estimated that this bill “would have no significant effect on the federal budget.”[743]

Donald Trump

* In March 2016, Republican presidential candidate Donald Trump had the following exchange in an interview with Bob Woodward of the Washington Post:

Trump: “We’ve got to get rid of the $19 trillion in debt.”
 
Woodward: “How long would that take?”
 
Trump: “I think I could do it fairly quickly, because of the fact the numbers…”
 
Woodward: “What’s fairly quickly?”
 
Trump: “Well, I would say over a period of eight years.”[744]

* From the time that Congress enacted Trump’s first major economic proposal (December 20, 2017[745]) until the outset of the Covid-19 pandemic (March 11, 2020[746]), the national debt rose from 102.9% of GDP to 108.9%, or an average of 2.7 percentage points per year.[747]

* Before the Covid-19 pandemic, President Trump vetoed six bills, none of which were overridden by Congress.[748]

* From the outset of the Covid-19 pandemic (March 11, 2020[749]) until the end of 2020, the national debt rose from 108.9% of GDP to 129.1%, or at a rate of 24.9 percentage points per year.[750]

* During the Covid-19 pandemic, President Trump vetoed four bills, one of which was overridden by Congress and thus enacted without his approval.[751] The Congressional Budget Office estimated that this bill would increase the deficit by $21 million during 2021–2030.[752]

Joseph Biden

* In May 2022, President Biden claimed:

My Treasury Department is planning to pay down the national debt this quarter, which never happened under my predecessor. Not once. Not once.[753]

* From the time that Congress enacted Biden’s first major economic proposal (March 10, 2021[754]) until June 28, 2024, the national debt:

  • rose from $27.93 trillion to $34.83 trillion, or by $6.91 trillion.[755]
  • rose by 24.7%,[756] while inflation rose by 18.6%.[757]
  • fell from 124% of GDP to 122%, or an average of –0.6 percentage points per year.[758]

* From the beginning of his presidency until December 31, 2022, Biden vetoed one bill, and it was not overridden by Congress.[759]

* The lifting of Covid-19 lockdowns allowed GDP to recover in the first year of Biden’s term, thereby decreasing the debt/GDP ratio.[760] [761] [762] [763]

* As documented in an article published by the Federal Reserve Bank of St. Louis, inflation:

directly reduces the real value of government debt, as well as the ratio of debt to GDP, because—holding other things constant—higher prices increase nominal GDP. Thus, surprise inflation transfers wealth from holders of U.S. government debt—who include both Americans and non-Americans—to U.S. taxpayers.3
 
This transfer is not an unalloyed good even for U.S. taxpayers, however, because unexpected inflation will tend to raise the cost of servicing future U.S. debt … by increasing the expected rate of inflation and the risk premium associated with inflation.[764] [765] [766]

Context

* Without mentioning the role of Congress in taxes, spending, or the national debt,[767] [768] PolitiFact reported in 2009 that the national debt increased by $5 trillion “under” George W. Bush, while “there were several years of budget surpluses” at “the end of the Clinton administration.”[769]

* Measured in consistent terms, the average annual changes in national debt varied as follows during the tenures of recent presidents and congressional majorities:

Political Power

Dates

Annual Change in National Debt

Raw Debt (Trillions)

Percentage Points of GDP

Bill Clinton with Democratic House and Senate

1/20/93 –  1/4/95

$0.3

0.8

Bill Clinton with Republican House and Senate

1/4/95 –  1/19/01

$0.2

-1.5

George W. Bush with Republican House and Senate

1/20/01 –  6/6/01, 11/12/02 –  1/4/07

$0.5

0.7

George W. Bush with Republican House and Democratic Senate

6/6/01 –  11/12/02

$0.4

2.2

George W. Bush with Democratic House and Senate

1/4/07 –  1/20/09

$1.0

6.2

Barack Obama with Democratic House and Senate

1/20/09 –  1/5/11

$1.7

9.0

Barack Obama with Republican House and Democratic Senate

1/5/11 –  1/6/15

$1.0

2.2

Barack Obama with Republican House and Senate

1/6/15 –  1/20/17

$0.9

1.6

Donald Trump with Republican House and Senate

1/20/17 – 1/3/19

$1.0

0.2

Donald Trump with Democratic House and Republican Senate

1/3/19 – 1/20/21

$2.8

9.2

Joseph Biden with Democratic House and Democratic Senate

1/20/21 – 1/3/23

$1.8

-3.0

[770]

* Other factors impacting the debt/GDP ratio include but aren’t limited to high inflation (which lowers the ratio in the short term and raises it in the long term),[771] [772] [773] legislation passed by previous Congresses and presidents,[774] economic cycles, terrorist attacks, pandemics, government-mandated lockdowns, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[775] [776] [777]

Footnotes

[1] Entry: “tax.” Collins English Dictionary—Complete & Unabridged. HarperCollins, 1991, 1994, 1998, 2000, 2003. <www.thefreedictionary.com>

“1. (Government, Politics & Diplomacy) a compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organizations, on the production costs or sales prices of goods and services, etc.”

[2] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

e) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

f) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

h) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[3] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

d) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

e) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

f) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

g) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[4] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[5] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

e) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

f) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[6] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[7] Report: “United States Federal Debt: Answers To Frequently Asked Questions, An Update.” U.S. Government Accountability Office, August 12, 2004. <www.gao.gov>

Page 39:

Over the long term, the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers. Higher saving and investment in the nation’s capital stock—factories, equipment, and technology—increase the nation’s capacity to produce goods and services and generate higher income in the future. Increased economic capacity and rising incomes would allow future generations to more easily bear the burden of the federal government’s debt. Persistent deficits and rising levels of debt, however, reduce funds available for private investment in the United States and abroad. Over time, lower productivity and GDP [gross domestic product] growth ultimately may reduce or slow the growth of the living standards of future generations.

Page 41:

GAO’s [Government Accountability Office’s] long-term simulations show that absent policy actions aimed at deficit reduction, debt burdens of such magnitudes imply a substantial decline in national saving available to finance private investment in the nation’s capital stock. The fiscal paths simulated are ultimately unsustainable and would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result in rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.

[8] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “[I]f the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output.”

[9] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 175: “[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt.”

[10] The consequences of unchecked government debt are addressed in greater detail in Just Facts’ research on the national debt.

[11] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

c) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

NOTES:

  • This data shows government “current” revenues and spending. To measure all government revenues and spending, “total” instead of “current” figures are preferable, but such data only extends back to 1960.
  • For an explanation of the differences between “total” and “current” expenditures, see <www.bea.gov>
  • An Excel file containing the data and calculations is available upon request.

[12] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[13] “WHO Director-General’s Opening Remarks at the Media Briefing on Covid-19.” World Health Organization, March 11, 2020. <www.who.int>

[Dr. Tedros Adhanom Ghebreyesus:] …

WHO [World Health Organization] has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction.

We have therefore made the assessment that COVID-19 can be characterized as a pandemic.

[14] Press release: “COVID-19 and Other Global Health Issues.” World Health Organization, May 5, 2023. <www.justfacts.com>

[Dr. Tedros Adhanom Ghebreyesus:] …

Yesterday, the Emergency Committee met for the 15th time and recommended to me that I declare an end to the public health emergency of international concern. I have accepted that advice. It’s therefore with great hope that I declare COVID-19 over as a global health emergency.

[15] Report: “United States Federal Debt: Answers to Frequently Asked Questions, An Update.” U.S. Government Accountability Office, August 12, 2004. <www.gao.gov>

Pages 35–36: “Assuming no changes to currently projected benefits and revenues, Social Security and Medicare ultimately will pose an unsustainable burden on future taxpayers and would significantly reduce the nation’s economic growth.”

Page 65:

Debt held by the public is the largest explicit liability of the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending. These “fiscal exposures”2 vary widely as to source, extent of the government’s legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrum extending from explicit liabilities to the implicit promises embedded in current policy or public expectations. (See table 2.) For example, the current liability figures for the U.S. government do not include the difference between scheduled and funded benefits in connection with the Social Security and Medicare programs.

Pages 66–67:

Fiscal exposures represent significant commitments that ultimately have to be addressed. The burden of paying for these exposures may encumber future budgets and constrain fiscal flexibility. Not capturing the long-term costs of current decisions limits policymakers’ ability to control the government’s fiscal exposures at the time decisions are made. In addition, the lack of recognition of long-term fiscal exposures may make it difficult for policymakers and the public to adequately understand the government’s overall performance and true financial condition.

[16] A detailed accounting of these debts, liabilities, and obligations is published in Just Facts’ research on the national debt.

[17] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

d) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

e) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[18] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

e) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[19] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[20] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[21] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[22] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[23] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[24] Article: “Great Depression.” By Richard H. Pells and Christina D. Romer. Encyclopedia Britannica, 1998. <www.britannica.com>

“Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.”

[25] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[26] Webpage: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research. Last updated March 14, 2023. <www.nber.org>

“Contractions (recessions) start at the peak of a business cycle and end at the trough. … Peak Month (Peak Quarter) [=] December 2007 (2007Q4) … Trough Month (Trough Quarter) [=] June 2009 (2009Q2)”

[27] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

d) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

e) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[28] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

e) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]

[29] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]

[30] Article: “Great Depression.” By Richard H. Pells and Christina D. Romer. Encyclopedia Britannica, 1998. <www.britannica.com>

“Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.”

[31] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[32] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[33] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 398:

Economic incidence is concerned with how the burden of the tax is distributed among economic agents (producers, consumers, employees, and shareholders) as determined by market forces, not by the law. It is one thing to specify in law that the sales tax be collected and paid by Wal-Mart, for example, but it is quite another to determine how Wal-Mart then passes some portion of the tax burden along to its customers, workers, and owner-shareholders, depending on the economic forces at work in each of these market contexts. Economic incidence is the pattern of tax burden as it is distributed by supply and demand forces in each of these markets.

[34] Textbook: Macroeconomics: Private and Public Choice. By James D. Gwartney and others. South-Western Cengage Learning, 2005.

Pages 95–98:

Economic analysis indicates that the actual burden of a tax—or more precisely, the split of the burden between buyers and sellers—does not depend on whether the tax is statutorily placed on the buyer or the seller. …

If the actual incidence of a tax is independent of its statutory assignment, what does determine the incidence? The answer: The incidence of a tax depends on the responsiveness of buyers and of sellers to a change in price. When buyers respond to even a small increase in price by leaving the market and buying other things, they will not be willing to accept a price that is much higher than it was prior to the tax. Similarly, if sellers respond to a small reduction in what they receive by shifting their goods and resources to other markets, or by going out of business, they will not be willing to accept a much smaller payment, net of tax. The burden of a tax—its incidence—tends to fall more heavily on whichever side of the market has the least attractive options elsewhere—the side of the market that is less sensitive to price changes, in other words.

[35] Textbook: Microeconomics. By N. Gregory Mankiw and Mark P. Taylor. Thompson Learning, 2006.

Page 122: “Politicians can decide whether a tax comes from a buyer’s pocket or from the seller’s, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand.”

[36] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. Statutory incidence refers to tax incidence required by legal statutes. Of course, it is not possible to specify true economic incidence in law, but that does not stop lawmakers from trying. Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.

NOTE: See also the next three footnotes.

[37] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. <www.cbo.gov>

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.

[38] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes. But households also bear the burden of the taxes paid by businesses.”

[39] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 31:

CBO [Congressional Budget Office] allocated individual income taxes and the employee’s share of payroll taxes to the households paying those taxes directly.2 The agency also allocated the employer’s share of payroll taxes to employees because employers appear to pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay.3 Therefore, CBO also added the employer’s share of payroll taxes to households’ earnings in calculating before-tax income.

[40] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 23–24:

CBO [Congressional Budget Office] also assumed that the economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the Bureau of Labor Statistics’ Consumer Expenditure Survey.

Page 9: “The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes.”

[41] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 43–44:

Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service. Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.

[42] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. Because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity.

[43] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In the judgment of CBO [Congressional Budget Office] and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”

[44] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 48:

Transparent tax systems include the following elements: …

• Taxpayers know their own tax burden and the tax burden of others: Irrespective of who actually writes a check to the government, taxpayers can identify who actually bears the burden of a tax. For example, the payroll tax is not transparent to the extent that taxpayers in general are unaware of the incidence of the tax. Even though payroll taxes are divided equally between employees and employers, economists generally agree that employees bear the entire burden of payroll taxes in the form of reduced wages.

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

Page 69: “Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.”

[45] Book: The Economics of Tax Policy. Edited by Alan J. Auerbach and Kent Smetters. Oxford University Press, 2017.

Chapter 5: “Economic and Distributional Effects of Tax Expenditure Limits.” By Len Burman and others. Pages 109–144.

Page 143: “In our distribution tables, we assume that the worker bears the burden of both the employer and employee portions of payroll taxes. This premise is widely accepted among economists. CBO [Congressional Budget Office], JCT [Congress’ Joint Committee on Taxation], and Treasury all make the same assumption for their distributional analyses.”

[46] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 23: “CBO [Congressional Budget Office] further assumed—as do most economists—that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share of payroll taxes in households’ before-tax income and in households’ taxes.”

[47] “2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply and demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[48] Webpage: “Current Law Distribution of Taxes.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). October 26, 2013. <www.taxpolicycenter.org>

“A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers.”

[49] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[50] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear.”

[51] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, March 28, 2012. <www.fas.org>

Page 4: “The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital.”

b) Working paper: “International Burdens of the Corporate Income Tax.” By William C. Randolph. Congressional Budget Office, August, 2006. <www.cbo.gov>

Pages 51–52: “In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears –71 percent, and the excess burden equals about 4 percent of the revenue.”

[52] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[53] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[54] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[55] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[56] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[57] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[58] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[59] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[60] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[61] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[62] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[63] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[64] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[65] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[66] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[67] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[68] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[69] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[70] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[71] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 17:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020.

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines. Because of the complexity of estimating state and local taxes for individual households, this report considers federal taxes only.

[72] Just Facts has found very few quantitative analyses of the distribution of state and local taxes, and all of them suffer from one or more major inadequacies. For example, the Institute on Taxation and Economic Policy (ITEP) conducted such an analysis for 2007 that excludes large portions of income for lower- and middle-class families, thus artificially inflating their tax burdens.

The report in question, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” does not define “income” and refers readers to the organization’s website for more details about methodology.† This methodology document also does not define “income.”‡ However, the report cites figures for family incomes in the lowest quintile of income distribution that are far below the figures provided by CBO [Congressional Budget Office]. For example, the report states that the lowest quintile of families in California had an average income of $13,200 in 2007, whereas CBO states that the lowest quintile of households nationwide had an average income of $23,900 that year.§ (Note that ITEP’s income figures for the lowest quintiles in most of the other states are significantly lower than in California). The CBO report adjusts for inflation and was published in 2012, while the ITEP report does not state it adjusts for inflation. Hence, in the most extreme scenario, this effectively lowers the CBO’s figure for the income of the lowest quintile from $23,900 to $21,630, which is still 64% higher than ITEP’s figure.#

Just Facts contacted ITEP via email on 8/27/2012 and asked what measure of income was used in its analysis. Just Facts then followed up with a phone call later that day. ITEP failed to respond to both inquiries. Just Facts’ research on tax distribution for the “Media” and “Buffett Rule” reveals how various organizations and individuals use narrow measures of income as the denominator to calculate effective tax burdens, which has the effect of artificially increasing tax rates, especially for lower- and middle-income households. For an article from Just Facts about the media’s uncritical use of ITEP’s defective tax analysis, click here.

NOTES:

  • † Report: “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 3rd edition.” By Carl Davis and others. Institute on Taxation & Economic Policy, November 2009. <itep.org>
  • ‡ Webpage: “ITEP Tax Model Methodology.” Institute on Taxation & Economic Policy. Accessed August 26, 2012 at <itep.org>
  • § Dataset: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>. Tab 3: “Household Income”
  • # “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed August 26, 2012 at <www.bls.gov>. “$23,900 in 2012 has the same buying power as $21,629.80 in 2007”

[73] The differing methodologies of Congressional Budget Office, the U.S. Treasury, and the Tax Policy Center are detailed in these documents:

  • Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>
  • Report: “Treasury’s Distribution Methodology and Results.” U.S. Department of the Treasury, Office of Tax Analysis, July 14, 2021. <home.treasury.gov>
  • Webpage: “Brief Description of the Tax Model.” Tax Policy Center. Updated March 9, 2022. <www.taxpolicycenter.org>

[74] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[75] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

b) Dataset: “Distribution of Tax Burden, Current Law.” U.S. Department of the Treasury, Office of Tax Analysis, April 18, 2018. <home.treasury.gov>

“Distribution Table: 2019 001”

c) Dataset: “Table T22-0068, Average Effective Federal Tax Rates, All Tax Units, By Expanded Cash Income Percentile, 2019.” Tax Policy Center, October 14, 2022. <www.taxpolicycenter.org>

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Negative tax burdens result from refundable tax credits, which sometimes exceed the taxes paid by low-income households. For more detail, see tax preferences.
  • The next two footnotes contain important context for these calculations.

[76] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[77] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[78] Article: “Scientific Survey Shows Voters Widely Accept Misinformation Spread by the Media.” By James D. Agresti. Just Facts, January 2, 2020. <www.justfacts.com>

The survey was conducted by Triton Polling & Research, an academic research firm used by scholars, corporations, and political campaigns. The responses were obtained through live telephone surveys of 700 likely voters across the U.S. during December 2–11, 2019. This sample size is large enough to accurately represent the U.S. population. Likely voters are people who say they vote “every time there is an opportunity” or in “most” elections.

The margin of sampling error for the total pool of respondents is ±4% with at least 95% confidence. The margins of error for the subsets are 6% for Democrat voters, 6% for Trump voters, 5% for males, 5% for females, 12% for 18 to 34 year olds, 5% for 35 to 64 year olds, and 6% for 65+ year olds. The survey results presented in this article are slightly weighted to match the ages and genders of likely voters. The political parties and geographic locations of the survey respondents almost precisely match the population of likely voters. Thus, there is no need for weighting based upon these variables.

NOTE: For facts about what constitutes a scientific survey and the factors that impact their accuracy, visit Just Facts’ research on Deconstructing Polls & Surveys.

[79] Dataset: “Just Facts’ 2019 Survey of Voter Knowledge on Public Policy Issues.” Just Facts, December 2019. <www.justfacts.com>9_voter_knowledge_weighted_crosstabs.pdf

Page 2:

Q7. On average, who would you say pays a greater portion of their income in federal taxes: The middle class or the upper 1% of income earners?

Middle class [=] 78.9%

Upper 1% [=] 18.3%

Unsure [=] 2.8%

[80] The differing methodologies of Congressional Budget Office, the U.S. Treasury, and the Tax Policy Center are detailed in these documents:

  • Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>
  • Report: “Treasury’s Distribution Methodology and Results.” U.S. Department of the Treasury, Office of Tax Analysis, July 14, 2021. <home.treasury.gov>
  • Webpage: “Brief Description of the Tax Model.” Tax Policy Center. Updated March 9, 2022. <www.taxpolicycenter.org>

[81] Calculated with data from:

a) Dataset: “Distribution of Tax Burden, Current Law.” U.S. Department of the Treasury, Office of Tax Analysis, March 14, 2019. <home.treasury.gov>

“Distribution Table: 2020 001”

b) Dataset: “Table T21-0132, Average Effective Federal Tax Rates, All Tax Units, By Expanded Cash Income Percentile, 2020, Baseline: Current Law.” Tax Policy Center, August 5, 2021. <www.taxpolicycenter.org>

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Negative tax burdens result from refundable tax credits, which sometimes exceed the taxes paid by low-income households. For more detail, see tax preferences.

[82] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2 (of PDF): “Income tax rates in the United States are generally progressive, such that higher levels of income are typically taxed at higher rates.”

[83] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 12: “The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.”

[84] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. And because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity.

[85] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[86] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[87] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[88] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[89] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[90] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[91] Article: “Class Matters: Richest Are Leaving Even the Rich Far Behind.” By David Cay Johnston. New York Times, June 5, 2005. <www.nytimes.com>

“Under the Bush tax cuts, the 400 taxpayers with the highest incomes—a minimum of $87 million in 2000, the last year for which the government will release such data—now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.”

NOTE: The author fails to account for corporate income taxes throughout the article.

[92] See the table “Effective Federal Tax Burdens.”

[93] Article: “Republicans Dispute Obama’s ‘Fair Share’ Claims, Say Top Earners Already Pay Enough.” By Jim Angle. Fox News, July 12, 2012. <www.foxnews.com>

NOTE: The author fails to account for any federal taxes beyond income taxes throughout the article.

[94] See the table “Effective Federal Tax Burdens.”

[95] Webpage: “James B. Stewart.” New York Times. Accessed August 30, 2018 at <www.nytimes.com>

James B. Stewart is a columnist at The New York Times, a staff writer at The New Yorker and the author of nine books.

He won a Pulitzer Prize for explanatory journalism in 1988 for his coverage of the stock market crash of 1987 and the Ivan Boesky insider trading scandal. …

Stewart is also the Bloomberg professor of business journalism at Columbia University. …

Before becoming a journalist, Stewart practiced law at the firm of Cravath, Swaine & Moore, in New York.

Stewart is a graduate of DePauw University and Harvard Law School.

[96] Commentary: “In Superrich, Clues to What Might Be in Romney’s Returns.” By James B. Stewart. New York Times, August 10, 2012. <www.nytimes.com>

“What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1 percent of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009—but paid an average tax rate of just 19.9 percent.”

NOTE: The author fails to account for corporate income taxes throughout the piece.

[97] Commentary: “In One Man’s Return, the Tax Code’s Unfairness.” By James B. Stewart. New York Times, April 20, 2012. <www.nytimes.com>

“This perverse outcome proves that what I’d already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn’t progressive. It’s not even flat. For people like me—and I assume there are millions of us—it’s regressive. For many people, the more you make, the lower the rate you pay.”

NOTE: The author fails to account for corporate income taxes throughout the piece.

[98] See the table “Effective Federal Tax Burdens.”

[99] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

A new ad from President Barack Obama’s campaign continues the drumbeat that Mitt Romney is a privileged rich guy who isn’t paying his fair share of taxes.

“You work hard, stretch every penny,” a narrator says. “But chances are, you pay a higher tax rate than him: Mitt Romney made $20 million in 2010, but paid only 14 percent in taxes—probably less than you.”

We wondered whether it’s accurate to say that Romney “paid only 14 percent in taxes—probably less than you.” …

So what happens when you add payroll taxes to income taxes? Obama’s ad is accurate.

NOTE: PolitiFact fails to account for corporate income taxes throughout the article.

[100] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“A new ad from the Obama campaign claims that Mitt Romney ‘paid only 14 percent in taxes—probably less than you.’ That depends. Romney paid a federal income tax rate that is higher than the income tax rate paid by 97 percent of tax filers. But if you include a combination of income taxes and payroll taxes—which make up the bulk of federal taxes for most taxpayers—the ad is accurate.”

NOTE: The author fails to account for corporate income taxes throughout the article.

[101] Article: “Romney Admits He Pays Lower Tax Rate Than Most Americans.” By Sarah B. Boxer. CBS News, January 17, 2012. <www.cbsnews.com>

“Republican presidential front-runner Mitt Romney acknowledged Tuesday that he pays an income tax rate close to 15 percent, the same rate that billionaire investor Warren Buffett has decried as lower than that paid by most middle-class Americans.”

NOTE: The author fails to account for corporate income taxes throughout the article. Also, Romney did not say he paid a lower tax rate than most Americans.

[102] Article: “Obama Team Signals Nasty White House Race.” By Stephen Collinson. Agence France-Presse, April 10, 2012. <news.yahoo.com>

“Romney, a former venture capitalist, paid a tax rate of just 13.9 percent in 2010, a far lower rate than the average American paid, as his fortune is mainly based on investment and not salaried income.”

NOTE: The author fails to account for corporate income taxes throughout the article. Also, the article does not cite the tax rate paid by average Americans.

[103] See the table “Effective Federal Tax Burdens.”

[104] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“Here are the average effective tax rates for Americans in different slices of the income spectrum, according to a study by the Urban Institute-Brookings Institution Tax Policy Center.”

NOTE: In the sentence above, the word “study” is linked to the following URL: <www.taxpolicycenter.org>

[105] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

NOTE: In the sentence above, the phrase “an analysis” is linked to the following URL: <www.taxpolicycenter.org>

[106] Report: “T12-0018: Average Effective Federal Tax Rates by Cash Income Percentiles, 2011; Baseline: Current Law.” Tax Policy Center, February 08, 2012. <www.taxpolicycenter.org>

“As a Percentage of Cash Income … Corporate Income Tax … Middle Quintile [=] 0.6 … Top 0.1 Percent [=] 10.7”

[107] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“Here’s the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer)”

[108] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

[109] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397: “The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee.”

[110] Report: “T12-0018: Average Effective Federal Tax Rates by Cash Income Percentiles, 2011; Baseline: Current Law.” Tax Policy Center, February 08, 2012. <www.taxpolicycenter.org>

“As a Percentage of Adjusted Gross Income … Middle Quintile … Individual Income Tax [=] 4.1 … Payroll Tax … Employee [=] 5.1 … Employer [=] 6.3”

NOTE: These figures add up to 15.5%. The next two footnotes show that this is the figure used by PolitiFact and FactCheck.

[111] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“So what happens when you add payroll taxes to income taxes? Obama’s ad is accurate. Here’s the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer): … Middle fifth: 15.5 percent”

[112] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

[113] Article: “Income Measure Used for Distributional Analysis by the Tax Policy Center.” Tax Policy Center, July 12, 2012. <www.taxpolicycenter.org>

The purpose of an income qualifier is to reflect taxpayers’ ability to pay tax. In the initial versions of the tax model, the Tax Policy Center (TPC) used adjusted gross income (AGI) as the income qualifier because resource limitations prevented us from developing a more comprehensive measure of income. AGI, however, is a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest.

The measurement of income also matters importantly for the calculation and interpretation of effective tax rates (ETRs), the amount of taxes paid measured as a percentage of income. Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their ETRs. If omitted sources of income vary across households, ETRs do not accurately measure the distribution of tax burdens as a share of income, either within or across income groups.

[114] Paper: “Integration of Micro and Macro Data on Consumer Income and Expenditures.” By Clinton P. McCully. U.S. Bureau of Economic Analysis, October 23, 2012. <www.justfacts.com>

Page 27: “The NIPA [Bureau of Economic Analysis’ National Income and Product Accounts] estimates include both cash and in-kind social benefits, while [Census Bureau] money income only includes cash benefits, and AGI [adjusted gross income] excludes the great majority of social benefits.”

[115] Article: “FactCheck Abets False Obama Claim About Romney’s Taxes.” By James D. Agresti and Anna Harrington. Just Facts Daily, August 7, 2012. <www.justfactsdaily.com>

As detailed in the earlier analysis by Just Facts and Ceterus, corporate income tax burdens depend upon several variables that are subject to uncertainty, and the key one is how much of this tax falls upon stockholders. Up until this latest report, CBO [Congressional Budget Office] assumed that stockholders bore 100% of this burden. However, “CBO has reevaluated the research on that topic” and now “allocates 75 percent of the federal corporate income tax to” stockholders.

Just Facts and Ceterus accounted for the uncertainty of this key variable by using values ranging from 33% to 100%, which were determined by researching a wide array of academic literature. CBO’s new figure of 75% falls roughly in the middle of this range.

Again, using CBO’s 75% figure to calculate Romney’s 2010 tax burden yields a rate of 23.3%, which is about twice CBO’s 2009 tax rate for middle-income households. Using the full range of values determined by Just Facts yields tax rates for Romney that extend from 18.3% to 26.0%, which are 1.6 to 2.3 times higher than the 2009 middle-income tax rate. Hence, regardless of what the exact figure may be, Romney pays a much higher tax rate than most Americans.

[116] Article: “Reporters Wrong: Romney Pays a Far Higher Federal Tax Rate Than Most Americans.” By James D. Agresti, Levi Morehouse, and Anna Harrington. Just Facts Daily, May 24, 2012. https://<www.justfactsdaily.com>

The complexities of the U.S. tax code make it practically impossible to determine Romney’s exact tax burden. Even CBO’s [Congressional Budget Office’s] estimates are based on suppositions that leave room for uncertainty. Nonetheless, a comprehensive estimate based upon known facts is presented below.

First, Romney’s excise tax rate is probably close to zero. Per the CBO, “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.” Given that the upper 1% of income earners made an average of $1.9 million in 2007 while paying a 0.1% excise tax rate, the rate on Romney’s earnings of $21.6 million should be vanishingly small.

Calculating Romney’s corporate income tax burden is more complicated because:

• certain capital gains and dividends (such as those from municipal bonds) are not subject to corporate income taxes.

• although the basic corporate income tax rate is 35%, tax preferences (such as those for manufacturers and those for green energy companies) make the effective rate 27% while spreading this tax burden unevenly.

• uncertainty exists about how the burden of corporate income taxes is distributed among stockholders, employees, and customers. As the CBO has explained, “households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital [stockholders], as workers, or as consumers is not clear.”

Thus, each investor’s corporate income tax burden is dependent upon the nature of his or her portfolio and the portion of corporate income tax borne by stockholders. Estimates for this last variable range from nearly 100% down to 33%. For a 1998 survey published in the Journal of Economic Literature, researchers asked economists at leading U.S. universities to estimate the “percentage of the current corporate income tax in the United States that is ultimately borne by capital.” The median response was 40%.

Based upon the facts above and the details of Romney’s personal tax return, Just Facts and Ceterus calculate that Romney paid somewhere between 18.4% and 26.0% of his 2010 income in federal taxes (Excel file). This amounts to a 29% to 83% higher rate than CBO’s equivalent figure for middle-class Americans.

[117] Commentary: “Stop Coddling the Super-Rich.” By Warren E. Buffett. New York Times, August 14, 2011. <www.nytimes.com>

Last year my federal tax bill—the income tax I paid, as well as payroll taxes paid by me and on my behalf—was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income—and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine—most likely by a lot.

[118] See the table “Effective Federal Tax Burdens.”

[119] Book: Federal Taxation (2012 edition). By James W. Pratt and William N. Kulsrud. Cengage Learning, 2012.

Pages 1–8:

Average Tax Rates The average rate is computed by dividing the taxpayer’s tax liability by the tax base. For the income tax, the average tax rate is simply the tax divided by the taxable income (tax / taxable income). …

Average tax rates are a bit misleading in that they seem to suggest that all units of the tax base (e.g., all dollars of income) are treated equally. … While providing some insight about the overall rate structure, average rates say little about the true impact of a tax on the taxpayer. For this information, effective tax rates are the preferred statistic.

Effective Tax Rates The effective tax rate is computed by dividing the tax by some broader measure other than the tax base, often some quantity reflecting taxpayer’s ability to pay. For example, for the income tax, the effective rate tax rate is normally determined by dividing the tax by total economic income (tax / total economic income).

[120] Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. <www.fas.org>

Page 3: “Taxable income is a fairly narrow measure of income and does not reflect all the resources available to the taxpayer or gage [sic] the taxpayer’s ability to pay taxes. This is because personal exemptions and itemized deductions have been subtracted. This can artificially increase the effective average tax rate faced by a taxpayer.”

NOTE: Instead of using taxable income for the denominator in its calculation of tax rates, this report uses adjusted gross income,† which still undercounts income, though not as egregiously as taxable income. Per the Tax Policy Center, adjusted gross income is “a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. … Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their” effective tax rates. In 2012, the Tax Policy Center began using a “broadened measure of income” that “is similar to the measures currently employed by Treasury, the Joint Committee of Taxation, and the Congressional Budget Office….”‡

† Page 3: “Adjusted gross income (AGI) is a broader income measure that does not exclude personal exemptions and itemized deductions for charitable contributions, state taxes, and mortgage interest.11 AGI is used for the analysis in calculating tax rates and determining income categories.”

‡ Article: “Income Measure Used for Distributional Analysis by the Tax Policy Center.” Tax Policy Center, July 12, 2012. <www.taxpolicycenter.org>

[121] Report: “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.” White House Office of Management and Budget, September 2011. <obamawhitehouse.archives.gov>

Page 46:

Principles for Tax Reform …

5. Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.

[122] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[123] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[124] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[125] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[126] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[127] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[128] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[129] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[130] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[131] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[132] Report: “High-Income Tax Returns for 2011.” By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. <www.irs.gov>

Page 51:

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI), and the “expanded income” concept.2 The expanded income concept uses items reported on tax returns to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax (AMT) purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.3, 4, 5

There are also two tax concepts in this article used to classify returns as taxable or nontaxable: “U.S. income tax” and “worldwide income tax.” The first concept, U.S. income tax, is total Federal income tax liability, which includes the AMT, less all credits against income tax and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits (including refundable credits). A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits). Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. income tax concept even though income taxes had been paid to a foreign government. The second tax concept, worldwide income tax, addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S. income tax.6, 7 The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

For 2011, the number of expanded-income returns over $200,000 increased 9.4 percent to almost 4.8 million returns. Of these, 15,000 returns had no worldwide income tax liability. … Tax-exempt interest was the primary reason for nontaxability on more than half (58.2 percent) of these returns.

Page 59: “On returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 58.2 percent of returns, was the exclusion for State and local Government interest (‘tax-exempt interest’) (Table 8).”

Pages 63–64:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[133] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 15, 2012. <www.sec.gov>

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[134] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Pages 3–4: “Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is ownership of dividend paying stocks.5”

[135] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[136] Report: “High-Income Tax Returns for 2012.” By Justin Bryan. IRS, Statistics of Income Bulletin, Summer 2015. <www.irs.gov>

Pages 13–14:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[137] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Page 4:

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[138] “Internal Revenue Manual.” Internal Revenue Service. Accessed February 1, 2018 at <www.irs.gov>

Part 1, Chapter 34, Section 1.2, Definition 57a (<www.irs.gov>):“The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[139] Report: “Analytical Perspectives: Budget of the United States Government, Fiscal Year 2005.” White House Office of Management and Budget, February 2004. <fraser.stlouisfed.org>

Page 339: “The main financing component of the Federal funds group is the general fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program. It consists of all collections not earmarked by law to finance other funds, including virtually all income taxes and many excise taxes….”

[140] “2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 142: “The Social Security Act does not permit expenditures from the OASI [Old-Age & Survivors Insurance] and DI [Disability Insurance] Trust Funds for any purpose not related to the payment of benefits or administrative costs for the OASDI [Social Security] program.”

[141] “Internal Revenue Manual.” Internal Revenue Service. Accessed February 1, 2018 at <www.irs.gov>

Part 1, Chapter 34, Section 1.2, Definition 57a (<www.irs.gov>):“The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[142] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[143] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[144] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[145] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

b) Dataset: “Table 2.4 – Composition of Social Insurance and Retirement Receipts and of Excise Taxes: 1940–2027.” Executive Office of the President of the United States, Office of Management and Budget, March 28, 2022. <www.govinfo.gov>

c) Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

d) Report: “Present Law and Background Information on Federal Excise Taxes.” United States Congress, Joint Committee on Taxation, January 2011. <www.jct.gov>

Page 1: “Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the Highway Trust Fund) for designated expenditure programs, and revenues from other excise taxes (e.g., alcoholic beverages) go to the General Fund for general purpose expenditures.”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[146] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[147] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[148] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[149] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[150] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[151] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[152] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[153] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

b) Dataset: “Table 2.4 – Composition of Social Insurance and Retirement Receipts and of Excise Taxes: 1940–2028.” Executive Office of the President of the United States, Office of Management and Budget, March 13, 2023. <www.govinfo.gov>

c) Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

d) Report: “Present Law and Background Information on Federal Excise Taxes.” United States Congress, Joint Committee on Taxation, January 2011. <www.jct.gov>

Page 1: “Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the Highway Trust Fund) for designated expenditure programs, and revenues from other excise taxes (e.g., alcoholic beverages) go to the General Fund for general purpose expenditures.”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[154] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[155] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[156] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

[157] Calculated with data from:

a) Dataset: “Historical Budget Data.” Congressional Budget Office, January 2020. <www.cbo.gov>

Tab: “3. Revenues Since 1962, by Major Source, in Billions of Dollars.”

b) Report: “A Budget for America’s Future: Analytical Perspectives, Fiscal Year 2021.” Executive Office of the President of the United States, Office of Management and Budget, March 2020. <www.govinfo.gov>

Page 133: “Table 11–4. Receipts by Source—Continued (In millions of dollars) … 2019 Actual … Source … Excise taxes … Total, Federal [general] funds [=] 34,927 … Total, Excise taxes [=] 99,452”

NOTE: An Excel file containing the data and calculations is available upon request.

[158] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[159] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

[160] “Internal Revenue Manual.” Internal Revenue Service. Accessed January 11, 2011 at <www.irs.gov>

Part 1, Chapter 34, Section 1 (<www.irs.gov>): “The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[161] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 3–4:

A. Individual Income Tax

In General

A United States citizen or resident alien generally is subject to the U.S. individual income tax on his or her worldwide taxable income.8 Taxable income equals the taxpayer’s total gross income less certain exclusions, exemptions, and deductions. Graduated tax rates are then applied to a taxpayer’s taxable income to determine his or her individual income tax liability. A taxpayer may face additional liability if the alternative minimum tax applies. A taxpayer may reduce his or her income tax liability by any applicable tax credits.

Gross Income

Under the Code, gross income means “income from whatever source derived” except for certain items specifically exempt or excluded by statute.9 Sources of income include compensation for services, interest, dividends, capital gains, rents, royalties, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts (other than certain death benefits), pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations, partnerships,10 estates or trusts.11 Statutory exclusions from gross income include death benefits payable under a life insurance contract, interest on certain State and local bonds, the receipt of property by gift or inheritance, as well as employer-provided health insurance, pension contributions, and certain other benefits.

8 Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A nonresident alien generally is subject to the U.S. individual income tax only on income with a sufficient nexus to the United States. A U.S. citizen or resident who satisfies certain requirements for presence in a foreign country also is allowed a limited exclusion ($103,900 in 2018, Joint Committee staff calculation) for foreign earned income and a limited exclusion of employer-provided housing costs. Sec. 911.

9 Sec. 61.

10 In general, partnerships and S corporations (i.e., corporations subject to the provisions of subchapter S of the Code) are treated as pass-through entities for Federal income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of such entities is passed through and taxed to the owners at the individual level. A business entity organized as a limited liability company (“LLC”) under applicable State law generally is treated as a partnership for Federal income tax purposes if it has two or more members; a single-member LLC generally is disregarded as an entity separate from its owner for Federal income tax purposes.

11 In general, estates and most trusts pay tax on income at the entity level, unless the income is distributed or required to be distributed under governing law or under the terms of the governing instrument. Such entities determine their tax liability using a special tax rate schedule and are subject to the alternative minimum tax. Certain trusts, however, do not pay Federal income tax at the trust level. For example, certain trusts that distribute all income currently to beneficiaries are treated as pass-through or conduit entities (similar to a partnership). Other trusts are treated as being owned by grantors in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust.

[162] Form 9452: “Filing Assistance Program.” Internal Revenue Service, 2018. Accessed January 12, 2021 at <www.irs.gov>

“Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)”

[163] Report: “The Federal Revenue Effects Of Tax-Exempt And Direct-Pay Tax Credit Bond Provisions.” Joint Committee On Taxation, July 16, 2012. <www.jct.gov>

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other requirements are met.

[164] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 3–4:

Sources of gross income for individual taxpayers in 2011 include: wages and salaries (70.8 percent); Social Security and pensions and individual retirement arrangements (“IRAs”) (10.6 percent); business, farm and schedule E income (e.g., rents) (7.7 percent); capital gains (4.7 percent); dividend income (2.4 percent); interest income (2.3 percent); and other income (1.4 percent). … Different maximum marginal tax rates apply to different sources of income.

[165] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 6: “Adjusted gross income is used to determine income tax liability. It is total income from taxable sources minus certain exempted amounts, such as contributions to deductible individual retirement accounts and interest on student loans.”

[166] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 4:

An individual’s adjusted gross income (“AGI”) is determined by subtracting certain “above-the-line” deductions from gross income. These deductions13 include trade or business expenses, capital losses, contributions to a qualified retirement plan by a self-employed individual, contributions to certain individual retirement accounts (“IRAs”), certain moving expenses for members of the Armed Forces, certain education-related expenses, and certain charitable contributions.14 …

13 Sec. 62 Alimony and separate maintenance payments generally are deductible by the payor spouse for divorce and separation instruments executed before January 1, 2019.

[167] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 4–5:

Taxable Income

In General

To determine taxable income, an individual reduces AGI [adjusted gross income] by the applicable standard deduction or his or her itemized deductions,15 and by the deduction for qualified business income.16

A taxpayer may reduce AGI by the amount of the applicable standard deduction to arrive at taxable income. The basic standard deduction varies depending on a taxpayer’s filing status. For 2020, the amount of the standard deduction is $12,400 for a single individual and for a married individual filing separately, $18,650 for a head of household, and $24,800 for a married individual filing jointly and for a surviving spouse. An additional standard deduction is allowed with respect to any individual who is elderly (i.e., above age 64) or blind.17 The amounts of the basic standard deduction and the additional standard deductions are indexed annually for inflation.

In lieu of taking the applicable standard deductions, an individual may elect to itemize deductions. The deductions that may be itemized include State and local taxes (up to $10,000 annually ($5,000 for married taxpayers filing separately), in aggregate of income or sales taxes, real property taxes, and certain personal property taxes), home mortgage interest, charitable contributions, certain investment interest, medical expenses (in excess of 7.5 percent of AGI), and casualty and theft losses attributable to Federally declared disasters (in excess of 10 percent of AGI and in excess of $100 per loss).

[168] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2: “Tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer’s tax liability depends on their filing status….”

[169] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, November 2005. <www.cbo.gov>

Page 8:

Similarly, with tax credits, taxpayers often gradually lose the ability to claim a credit as their income nears the upper limit of the specified range for the credit. In that case, an additional dollar of earnings still faces the statutory rate, but in addition, the credit that can be subtracted from tax liability is reduced at the rate of the credit phaseout. Those taxpayers face an effective marginal rate equal to the sum of their statutory rate and the credit phaseout rate.

A few tax benefits disappear immediately once a taxpayer reaches a certain income level rather than gradually phasing out over a range of income. Those “cliffs” can create very high effective marginal rates. For example, single taxpayers with income between $60,000 and $80,000 can deduct up to $2,000 of tuition from their income, but those with income above $80,000 cannot claim the deduction at all. Someone who earned an additional $1,000 that pushed income over that threshold would lose $2,000 in deductions, causing taxable income to rise by $3,000. The taxpayer would face an effective marginal rate three times his or her statutory rate: for instance, a taxpayer in the 25 percent bracket would face an effective marginal rate of 75 percent.

[170] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2: “Tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer’s tax liability depends on their filing status….”

[171] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 6–8:

To determine regular tax liability, a taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, with the marginal tax rate increasing as a taxpayer’s income increases.25 Separate rate schedules apply based on an individual’s filing status. For 2020, the regular individual income tax rate schedules are as follows:

Table 1.–Federal Individual Income Tax Rates for 2020 …

NOTE: The following information is derived from Table 1:

Single Individuals

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$9,875

10%

–

$9,875

$40,125

12%

$30,250

$40,125

$85,525

22%

$45,400

$85,525

$163,300

24%

$77,775

$163,300

$207,350

32%

$44,050

$207,350

$518,400

35%

$311,050

$518,400

infinity

37%

infinity

Heads of Households

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$14,100

10%

–

$14,100

$53,700

12%

$39,600

$53,700

$85,500

22%

$31,800

$85,500

$163,300

24%

$77,800

$163,300

$207,350

32%

$44,050

$207,350

$518,400

35%

$311,050

$518,400

infinity

37%

infinity

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$19,750

10%

–

$19,750

$80,250

12%

$60,500

$80,250

$171,050

22%

$90,800

$171,050

$326,600

24%

$155,500

$326,600

$414,700

32%

$88,100

$414,700

$622,050

35%

$207,350

$622,050

infinity

37%

Infinity

Married Individuals Filing Separate Returns

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$9,875

10%

–

$9,875

$40,125

12%

$30,250

$40,125

$85,525

22%

$45,400

$85,525

$163,300

24%

$77,775

$163,300

$207,350

32%

$44,050

$207,350

$311,025

35%

$103,675

$311,025

infinity

37%

infinity

[172] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 2: “A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit.”

[173] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

Credits Against Tax

An individual may reduce his or her tax liability by any available tax credits. For example, tax credits are allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain energy conservation expenditures, certain education expenditures, certain child care expenditures, certain health care costs, and for certain elderly or disabled individuals.

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. Three large refundable credits in terms of cost are the child tax credit, the earned income tax credit, and the recovery rebate credit.34 An individual may claim a tax credit for each qualifying child under age 17. The amount of the credit per child is $2,000.35

The aggregate amount of child credits that may be claimed is phased out for individuals with incomes over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000, or fraction thereof, of modified AGI [adjusted gross income] over $400,000 for married individuals filing jointly and $200,000 for all other individuals. To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of $2,500,36 not to exceed $1,400 per child in 2020. The maximum amount of the refundable portion of the credit is indexed for inflation.

For taxpayers with dependents other than qualifying children, such as a 17-year-old child living at home, a full-time college student, or other adult member of the household for whom the taxpayer provides financial support, taxpayers are able to claim a $500 nonrefundable credit. A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37

The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children. For 2020, the maximum EITC for taxpayers is $6,660 with more than two qualifying children, $5,920 with two qualifying children, $3,584 with one qualifying child, and $538 with no qualifying children. The credit amount begins to phase out at an income level of $25,220 for joint-filers with qualifying children, $19,330 for other taxpayers with qualifying children, $14,680 for joint-filers with no qualifying children, and $8,790 for other taxpayers with no qualifying children. The phaseout percentages, or the rates at which the credit amount phases out, are 21.06 percent for taxpayers with two or more qualifying children, 15.98 percent for taxpayers with one qualifying child, and 7.65 percent for taxpayers with no qualifying children. For 2020, a refundable and advanceable recovery rebate credit is available to taxpayers.38 Taxpayers may claim a credit of $1,200 ($2,400 for married individuals filing jointly) plus $500 for each qualifying child.39 This aggregate amount is phased out for individuals with incomes over certain threshold amounts. Specifically, the otherwise allowable amount is reduced by five percent of the amount by which the taxpayer’s AGI exceeds $150,000 for married individuals filing jointly, $112,500 for heads of households, and $75,000 for all other individuals.

36 Families with three or more children may determine the additional child tax credit by taking the greater of (1) the earned income formula, or (2) the alternative formula, i.e. the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income tax credit.

[174] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 1: “For taxpayers with high levels of AGI [adjusted gross income], the personal and dependent exemptions are phased out.”

Page 5: “Itemized deductions are also phased out as income exceeds a certain threshold.”

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government. … Many [tax] credits are phased out as income rises and thus do not benefit higher income individuals.”

Page 8: “The basic exemptions [for alternative minimum tax] are phased out for taxpayers with high levels of AMT income.”

[175] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 135: “Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer.”

[176] “Individual Income Tax Returns Complete Report, 2018.” Internal Revenue Service, September 2020. <www.irs.gov>

Page 24: “In total, taxpayers claimed $109.4 billion in refundable tax credits. … The refundable amount of the additional child tax credit ($34.2 billion), along with the EIC [earned income credit] ($56.2 billion), made up nearly all (95.5 percent) of this refundable portion.”

Page 25:

Item

2018

Amount (millions)

Total refundable credits3,4

$109,439

Earned income credit, total

$64,924

American opportunity credit, total

$6,394

Additional child tax credit, total

$36,235

[3] Includes net premium tax credit, regulated investment company credit, health coverage tax credit, and prior-year returns claiming the refundable prior-year minimum tax credit.

[177] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 6: “Tax liability … Lower rates apply for long-term capital gain and certain dividends; those rates apply for both the regular tax and the alternative minimum tax.”

[178] Report: “Statistics of Income Bulletin.” Internal Revenue Service, Fall 1984. <www.irs.gov>

Page 3: “Today’s estate tax was instituted by the Revenue Act of 1916, 3 years after the inception of the modern income tax in 1913. No 1onger necessary strictly for wartime revenue, the estate tax was to serve the dual purposes of producing revenue and redistributing wealth.”

[179] Report: “Federal Individual Income Tax Rates History: Nominal Dollars, Income Years 1913–2013.” Tax Foundation. Accessed October 30, 2018. <files.taxfoundation.org>

[180] Report: “Federal Individual Income Tax Rates History: Inflation Adjusted (Real 2012 Dollars) Using Average Annual CPI During Tax Year, Income Years 1913–2013.” Tax Foundation. Accessed October 30, 2018. <files.taxfoundation.org>

[181] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 7–8: “Table 1.–Federal Individual Income Tax Rates for 2020”

[182] Constructed with the dataset: “U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Tax Bracket Tax Rates and Tax Base for Regular Tax, Tax Years 1913–2019.” Tax Policy Center, August 2, 2019. <www.taxpolicycenter.org>

[183] Calculated with data from:

a) Dataset: “U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Tax Bracket Tax Rates and Tax Base for Regular Tax, Tax Years 1913–2019.” Tax Policy Center, August 2, 2019. <www.taxpolicycenter.org>

b) Dataset: “Table 3.4. Personal Current Tax Receipts.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised July 31, 2020. <apps.bea.gov>

c) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 30, 2020. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[184] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 20–23 (of PDF): “Table 12. State Individual Income Tax Rates, as of January 1, 2021.”

[185] Report: “Local Income Taxes in 2019.” By Jared Walczak. Tax Foundation, July 2019. <files.taxfoundation.org>

Page 2:

Although the majority of U.S. cities and counties do not impose a local income tax, they are imposed by 4,964 jurisdictions in 17 states. Ranging from de minimis wage taxes in some states to a statewide average of nearly 2.3 percent of adjusted gross income in Maryland (see Table 1), these taxes are a long-standing and significant source of revenue for many cities in Rust Belt states in the northeastern United States.

All counties in Indiana and Maryland impose a local income tax. In Ohio, 649 municipalities and 199 school districts have income taxes, while 2,506 municipalities and 472 school districts in Pennsylvania impose local income or wage taxes. (Three-quarters of all local income tax jurisdictions, though not three-quarters of the taxed population, are in those two states.) Many cities, counties, and school districts in Iowa, Kentucky, and Michigan also have these taxes, which are more sporadically levied in other states.

[186] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[187] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 29: “Social Insurance taxes comprise old-age and survivors insurance, disability insurance, hospital insurance, railroad retirement, railroad social security equivalent account, employment insurance, employee share of Federal employees retirement, and certain non-Federal employees retirement.”

[188] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy & Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

[189] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 2: “The principal social insurance (employment) taxes are the Federal Insurance Contributions Act (FICA) and Self-Employment Contributions Act (SECA) taxes that fund the Social Security and Medicare systems.”

[190] “Financial Report of the United States Government: Fiscal Year 2014.” U.S. Department of the Treasury, February 26, 2015. <www.fiscal.treasury.gov>

Page 165: “Social Insurance The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, and Black Lung were developed to provide income security and health care coverage to citizens under specific circumstances as a responsibility of the Government.”

[191] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[192] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

Page 69: “Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.”

[193] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 23: “CBO [Congressional Budget Office] further assumed—as do most economists—that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share of payroll taxes in households’ before-tax income and in households’ taxes.”

[194] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397:

The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor. Recent evidence in Gruber (1997), based on the Chilean payroll tax, for example, suggests that workers bear most of the burden of any increase in the tax rate.

[195] “2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[196] Webpage: “Current Law Distribution of Taxes.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). October 26, 2013. <www.taxpolicycenter.org>

“A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers.”

[197] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 134:

Much of the progressivity of the federal tax system derives from the largest source of revenues, the individual income tax, for which average tax rates rise with income. The next largest source of revenues, social insurance taxes, has average tax rates that vary little across most income groups—although the average rate is lower for higher-income households, because earnings above a certain threshold are not subject to the Social Security payroll tax and because earnings are a smaller portion of total income for that group. The average social insurance tax rate is higher than the average individual income tax rate for all income quintiles except the highest one (see Figure 4-4). The impact of corporate taxes on households also rises with household income—with the largest effect by far on the top quintile (under the assumption that the corporate tax reduces after-tax returns on capital). By contrast, the average excise tax rate falls as income rises.

NOTE: For later data and more detail, see the table “Effective Federal Tax Burdens.”

[198] Calculated with data from the report: “The Budget and Economic Outlook: 2021 to 2031.” Congressional Budget Office, February 11, 2021. <www.cbo.gov>

Tab: “4. Payroll Tax Revenues Projected in CBO’s [Congressional Budget Office’s] February 2021 Baseline, by Source, Billions of Dollars” <www.cbo.gov>

“2020 … Social Security [=] 965 … Medicare [=] 292 … Unemployment Insurance [=] 43 … Railroad Retirement [=] 4 … Other Retirementa [=] 5 … Total [=] 1,310 … a Consists primarily of federal employees’ contributions to the Federal Employees Retirement System and the Civil Service Retirement System.”

CALCULATION: ($965 + $292 + $43) / $1,310 = 99.2%

[199] Report: “The Budget and Economic Outlook: 2019 to 2029.” Congressional Budget Office, January 2019. <www.cbo.gov>

Page 93:

The two largest sources of payroll taxes are those that are dedicated to Social Security and Medicare Part A [the Hospital Insurance program]. Much smaller amounts come from unemployment insurance taxes (most of which are imposed by states but produce amounts that are classified as federal revenues); employers’ and employees’ contributions to the Railroad Retirement system; and other contributions to federal retirement programs, mainly those made by federal employees (see Table 4-2). The premiums that Medicare enrollees pay for Part B (the Medical Insurance program) and Part D (prescription drug benefits) are voluntary payments and thus are not counted as tax revenues; rather, they are considered offsets to spending and appear on the spending side of the budget as offsetting receipts.

[200] Calculated with data from:

a) Dataset: “Table 3.6. Contributions for Government Social Insurance.” U. S. Department of Commerce, Bureau of Economic Analysis. Last revised July 31, 2020. <apps.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 30, 2020. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[201] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Social Security … 2019 [=] 914”

CALCULATION: $914 / $1,243 = 73.5%

[202] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

“The OASDI [Old-Age, Survivors, and Disability Insurance] tax rate for wages paid in 2021 is set by statute at 6.2 percent for employees and employers, each.”

[203] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. This amount is also commonly referred to as the taxable maximum. For earnings in 2021, this base is $142,800.

[204] Report: “Summary of Major Changes in the Social Security Cash Benefits Program: 1935–1996.” By Geoffrey Kollmann. Congressional Research Service. Updated December 20, 1996. <www.ssa.gov>

Pages 13–14: “1977 Amendments … After 1981, the base would be adjusted automatically to keep up with average wages as under the prior law.”

[205] Actuarial Note: “Average Wages for Indexing Under the Social Security Act and the Automatic Determinations for 1979–81.” By Eli N. Donkar. United States Social Security Administration, Office of the Chief Actuary, May 1981. <www.ssa.gov>

“The amended Act requires the use of an average wage for indexing described in various sections of the law as ‘the average of the total wages (as defined in regulations of the Secretary…).’ Such general language leaves a wide range of possibilities for a definition of such a wage series.”

[206] “The 1936 Government Pamphlet on Social Security.” United States Social Security Administration. <www.ssa.gov>

The taxes called for in this law will be paid both by your employer and by you. For the next 3 years you will pay maybe 15 cents a week, maybe 25 cents a week, maybe 30 cents or more, according to what you earn. That is to say, during the next 3 years, beginning January 1, 1937, you will pay 1 cent for every dollar you earn, and at the same time your employer will pay 1 cent for every dollar you earn, up to $3,000 a year. Twenty-six million other workers and their employers will be paying at the same time.

After the first 3 year—that is to say, beginning in 1940—you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

[207] Calculated with data from the footnote above and the webpage: “CPI Inflation Calculator.” United States Department of Labor, Bureau of Labor Statistics. Accessed November 2, 2020 at <www.bls.gov>

“3,000 in January 1949 has the same buying power as $32,246.38 in January 2020 …

The CPI inflation calculator uses the Consumer Price Index for All Urban Consumers (CPI-U) U.S. city average series for all items, not seasonally adjusted. This data represents changes in the prices of all goods and services purchased for consumption by urban households.

CALCULATION: 6% combined employer and employee payroll tax rate × $32,246 inflation-adjusted taxable maximum = $1,935

[208] Calculated with data from the footnote above and:

a) Webpage: “Social Security & Medicare Tax Rates.” United States Social Security Administration, Office of the Chief Actuary. Accessed November 2, 2020 at <www.ssa.gov>

“Tax rates as a percent of taxable earnings … 1990 and later … Rates for employees and employers, each … OASDI [Social Security] [=] 6.2%”

b) Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed November 2, 2020 at <www.ssa.gov>

“ Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. … Year [=] 2020 … Amount [=] $137,700”

CALCULATIONS:

  • $137,700 × 12.4% = $17,075
  • $17,075 / $1,935 = 8.8

[209] Booklet: “Medicare Coverage of Skilled Nursing Facility Care.” Centers for Medicare and Medicaid Services, January 2015. <www.medicare.gov>

Page 8:

Skilled care is health care given when you need skilled nursing or therapy staff to treat, manage, observe, and evaluate your care. Examples of SNF [Skilled Nursing Facility] care include intravenous injections and physical therapy. Care that can be given by non-professional staff isn’t considered skilled care. People don’t usually stay in a SNF until they’re completely recovered because Medicare only covers certain SNF care services that are needed daily on a short‑term basis (up to 100 days).

Page 29: “… Medicare doesn’t cover custodial care if it’s the only kind of care you need.”

Page 47: “Custodial care—Nonskilled personal care, like help with activities of daily living like bathing, dressing, eating, getting in or out of a bed or chair, moving around, and using the bathroom. It may also include the kind of health-related care that most people do themselves, like using eye drops. In most cases, Medicare doesn’t pay for custodial care.”

[210] Report: “Medicare Primer.” By Patricia A. Davis and others. Congressional Research Service. Updated May 21, 2020. <fas.org>

Page 1:

Medicare consists of four distinct parts:

• Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers. Since 2013, workers with income of more than $200,000 per year for single tax filers (or more than $250,000 for joint tax filers) pay an additional 0.9% on income over those amounts.

• Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%).

• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Parts A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through the HI and SMI trust funds.

• Part D covers outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments.

[211] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Medicare … 2019 [=] 278”

CALCULATION: $278 / $1,243 = 22.4%

[212] “2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2020. <www.cms.gov>

Pages 10–11:

For HI [Hospital Insurance, a.k.a. Medicare Part A], the primary source of financing is the payroll tax on covered earnings. Employers and employees each pay 1.45 percent of a worker’s wages, while self-employed workers pay 2.9 percent of their net earnings. Starting in 2013, high-income workers pay an additional 0.9-percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples). Other HI revenue sources include a portion of the Federal income taxes that Social Security recipients with incomes above certain unindexed thresholds pay on their benefits, as well as interest paid from the general fund on the U.S. Treasury securities held in the HI trust fund.

[213] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes. But households also bear the burden of the taxes paid by businesses. In the judgment of CBO [Congressional Budget Office] and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”

[214] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. … This limit changes each year with changes in the national average wage index. …

For Medicare’s Hospital Insurance (HI) program, the taxable maximum was the same as that for the OASDI [Social Security] program for 1966–1990. Separate HI taxable maximums of $125,000, $130,200, and $135,000 were applicable in 1991–93, respectively. After 1993, there has been no limitation on HI-taxable earnings.

[215] Webpage: “History of SSA-Related [U.S. Social Security Administration] Legislation: 103rd Congress.” United States Social Security Administration. Accessed April 13, 2015 at <www.socialsecurity.gov>

“PL 103-66 The Omnibus Budget Reconciliation Act of 1993 (enacted 8/10/93). Section 13207 repeals the limitation on the amount of earnings subject to the HI [Medicare Hospital Insurance] tax beginning in 1994.”

[216] Calculated with data from:

a) Vote 406: “Omnibus Budget Reconciliation Act of 1993.” U.S. House of Representatives, August 5, 1993. <clerk.house.gov>

b) Vote 247: “Omnibus Budget Reconciliation Act of 1993.” U.S. Senate, August 6, 1993. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote†

Number

Portion

Number

Portion

Number

Portion

Republican

0

0%

219

100%

0

0%

Democrat

267

85%

47

15%

0

0%

Independent

1

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[217] “2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2020. <www.cms.gov>

Page 10: “Starting in 2013, high-income workers pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples).”

[218] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 24:

Additional Hospital Insurance Tax on Certain High-Income Individuals

The employee portion of the HI [hospital insurance] tax is increased by an additional tax of 0.9 percent on wages received in excess of a specific threshold amount.82 However, unlike the general 1.45 percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of married filing jointly, $125,000 in the case of married filing separately, and $200,000 in any other case (unmarried individual, head of household or surviving spouse).83 …

The same additional HI tax applies to the HI portion of SECA [Self-Employment Contributions Act] tax on self-employment income in excess of the threshold amount. Thus, an additional tax of 0.9 percent is imposed on every self-employed individual on self-employment income in excess of the applicable threshold amount.84

82 Sec. 3101(b), as amended by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.

83 These threshold amounts are not indexed for inflation.

84 Sec. 1402(b).

[219] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Unemployment Insurance … 2019 [=] 41”

CALCULATION: $41 / $1,243 = 3.4%

[220] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 23:

In addition to FICA taxes [Federal Insurance Contribution Act, a.k.a. Social Security and Medicare payroll taxes], the Federal Unemployment Tax Act (“FUTA”) imposes tax on employers equal to six percent of the total wages of each employee (up to $7,000) on covered employment. Generally, employers are eligible for a Federal credit equal to 5.4 percent for State unemployment taxes paid by the employer, yielding a 0.6 percent effective tax rate. FUTA taxes are used to fund programs maintained by the States for the benefit of unemployed workers.

[221] Entry: “C Corporation.” Farlex Financial Dictionary, 2012. <financial-dictionary.thefreedictionary.com>

A business that is legally completely separate from its owners. Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits. The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation.

[222] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 23–24:

Forms of Business Organization

The Internal Revenue Code recognizes several different forms of business organization and their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.49

Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders’ liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as “C corporations.” As explained more fully above, in the report’s section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax. In contrast, corporations that qualify as “S corporations” are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax. …

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners’ contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships (“master limited partnerships”) are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax.

[223] Webpage: “Forming a Corporation.” Internal Revenue Service. Last updated December 23, 2020. <www.irs.gov>

“The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.”

[224] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 10:

Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view, it is misleading to compare the tax burden of a corporation with that of an individual.

[225] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “Corporate profits are taxed twice, once by the corporate income tax and once by the personal income tax. The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[226] Entry: “C Corporation.” Farlex Financial Dictionary, 2012. <financial-dictionary.thefreedictionary.com>

A business that is legally completely separate from its owners. Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits. The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation.

[227] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 23–24:

Forms of Business Organization

The Internal Revenue Code recognizes several different forms of business organization and their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.49

Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders’ liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as “C corporations.” As explained more fully above, in the report’s section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax. In contrast, corporations that qualify as “S corporations” are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax. …

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners’ contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships (“master limited partnerships”) are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax.

Limited liability companies (LLCs) have some of the characteristics of both partnerships and corporations. Under IRS “check the box” regulations, LLCs can elect to be taxed either as corporations or as partnerships. Other specially defined business entities include real estate investment trusts (REITs), which are required to engage primarily in passive investment in real estate and securities. Qualifying REITs are permitted to deduct dividends they pay to shareholders, which effectively exempts REITs from the corporate income tax. Regulated investment companies (RICs), who invest primarily in securities and distribute most income, are also permitted to deduct dividends. The simplest forms of business organization are sole proprietorships. Sole proprietorships have only one owner; there is no legal distinction between the business and the business’s owner. For tax purposes, business profits earned by a sole proprietor are taxed to the owner under the individual income tax. The corporate income tax does not apply.

49 For more information see CRS Report R40748, Business Organizational Choices: Taxation and Responses to Legislative Changes.

[228] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

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The preceding figures have showed the importance of the individual income tax and corporate income tax to the Federal tax system. However, it is important to recognize that not all businesses are organized as corporations and, consequently, the taxation of active business income occurs both for taxpayers that file Form 1120 (the corporate income tax return) and for taxpayer who file Form 1040 (the primary individual income tax return).

Businesses may be organized under a number of different legal forms. Owners of a business sometimes conduct their activities as sole proprietorships, which do not involve a legal entity separate from the owner. However, for a variety of business or other reasons, a business often is conducted through a separate legal entity. Common reasons to use a separate legal entity include the ability to pool the capital and other resources of multiple owners, the protection of limited liability accorded by State law to the owners of qualifying entities (but generally not to sole proprietors), and an improved ability to access capital markets for investment capital.

The tax consequences of using a separate entity depend on the type of entity through which the business is conducted. Partnerships, certain closely held corporations that elect to be taxed under subchapter S of the Code (referred to as “S corporations”),6 and limited liability companies that are treated as partnerships are treated for Federal income tax purposes as passthrough entities whose owners take into account the income (whether or not distributed) or loss of the entity on their own tax returns.

In contrast, the income of a C corporation7 is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation’s after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.8

6 To be eligible to make an election under subchapter S a corporation must generally (1) be an eligible domestic corporation; (2) not have more than 100 shareholders (taking into account applicable attribution rules); (3) have as shareholders only individuals (other than nonresident aliens), estates, certain trusts and certain tax-exempt organizations; and (4) have only one class of stock.

7 A C corporation is a corporation that is subject to subchapter C of the Code, which provides rules for corporate and shareholder treatment of corporate distributions and adjustments. C corporations generally are subject to the corporate-level tax rate structure set forth in section 11 of the Code.

8 Business entities also include specialized corporations which are not subject to entity level tax, or which are allowed a deduction for distributions to shareholders, under the Federal income tax rules. Federal tax rules applicable to these entities generally require that they distribute substantially all their income and require that they meet other specified limitations on activities, assets, and types of income, for example. These types of entities include regulated investment companies (RICs) (mutual funds in common parlance), real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), and cooperatives. In addition, some business activities are conducted through tax-exempt entities, whether as activities subject to unrelated business income tax (UBIT), or as permitted under the Federal tax rules relating to tax-exempt organizations.

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B. Overview of Business Entities Other Than Corporations

Significant business activity is conducted through entities other than corporations. Such business entities include passthrough entities such as partnerships (including limited liability companies (“LLCs”)) and S corporations. For Federal income tax purposes, these passthrough entities generally are not subject to tax at the entity level. Rather, the owners—that is, partners or S corporation shareholders—are subject to tax on their shares of the entity’s income, gain, loss, deduction, and credit, whether or not distributed.47 The tax treatment of passthrough entities differs from the generally applicable entity level tax on income of C corporations. In addition, noncorporate business income is generated by sole proprietorships and farms.48

Allowable deductions for businesses conducted in passthrough entity form are generally the same as allowable deductions for businesses conducted in corporate form. However, the calculation of these deductions is affected by the fact that they are taken into account for tax purposes by the partners or S corporation shareholders rather than by the partnership or S corporation at the entity level.

There are no limitations on the identity of a partner in a partnership under present law. Thus, a partner in a business conducted through a partnership (including an LLC taxable as a partnership) can generally be an individual, a corporation, or another partnership, for example. Permissible shareholders of S corporations are restricted to individuals (other than nonresident aliens), estates, certain trusts, and certain tax-exempt organizations, and may not exceed 100 in number (taking into account applicable attribution rules).

47 Partners and S corporation shareholders who are individuals generally report this income on Schedule E.

48 This income is generally reported by individuals on Schedules C and F.

[229] Report: “Corporate Tax Integration: In Brief.” By Jane G. Gravelle. Congressional Research Service, October 31, 2016. <fas.org>

Pages 1–2:

The United States has a “classical” corporate tax system, modified by lower taxes on dividends and capital gains. Corporate taxable profits are subject to a 35% rate for large corporations. Firms distribute after-tax profits as dividends or retain earnings for investment; the latter increases the firm’s value, creating capital gains.

If all profits were taxed at the statutory rate, distributed as a dividend, and then taxed at ordinary rates to a shareholder in the 35% bracket, the total tax on a corporate investment would be 58% (a 35% corporate tax and an additional 35% on the remaining 65% of profit) compared with a tax rate of 35% on noncorporate investment, for a 23 percentage point difference. Those effects, however, are smaller because of favorable treatment of dividends and capital gains (the top rate is 23.8%); options to invest stock through tax-exempt accounts, such as retirement plans, that pay no shareholder-level tax; and tax preferences that lower the effective corporate tax rate more than the effective noncorporate rate.

[230] Webpage: “Briefing Book: Key Elements of the U.S. Tax System.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). Accessed January 18, 2020 at <www.taxpolicycenter.org>

Income earned by C-corporations (named after the relevant subchapter of the Internal Revenue Code) is subject to the corporate income tax at a 21 percent rate. This income may also be subject to a second layer of taxation at the individual shareholder level, whether on dividends or on capital gains from the sale of shares.

Suppose a corporation earns $1 million in profits this year and pays $210,000 in federal taxes. If the corporation distributes the remaining $790,000 to its shareholders as dividends, the distribution would be taxable to shareholders. Qualifying dividends are taxed at a top rate of 20 percent, plus a 3.8 percent tax on net investment income. As a result, if the shares were held by high-income individuals only $601,980 would be left, and the combined tax rate on the income would be 39.8 percent = 0.21 + (1–0.21) * 0.238. …

Choice of Organizational Form: Double taxation can encourage businesses to organize as pass-through businesses (S-corporations, partnerships, limited liability companies, or sole proprietorships) instead of C-corporations. Pass-through profits are taxed only once at a top rate of 37 percent (or 29.6 percent if eligible for the 20 percent Section 199A deduction). By no coincidence, the share of business activity represented by pass-through entities has been rising (figure 1). However, businesses that wish to list their shares for public trading generally need to organize as C-corporations.

[231] Report: “A Proposal to Reform the Taxation of Corporate Income .” By Eric Toder and Alan D. Viard. Tax Policy Center (a joint project of the Urban Institute and Brookings Institution), June 17, 2016. <www.taxpolicycenter.org>

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Many businesses do not pay corporate income tax. Instead, their income is allocated to owners and subject only to individual income tax (and, in some circumstances, self-employment tax). Owners of these “flow-through” businesses, which include partnerships and limited liability companies, subchapter S corporations, and many businesses organized as sole proprietorships, pay individual income tax on their business profits at rates of up to 39.6 percent. Although there are two separate flow-through tax regimes, one for partnerships (including limited liability companies taxed as partnerships) and another for S corporations, both regimes follow the same general principle of flowing the business’s income through to the owners.

In 2012, 95 percent of US business taxpayers were organized as flow-through businesses not subject to corporate income tax. Most were small businesses, but many were large and medium-sized businesses. In all, flow-through firms accounted for 39 percent of gross business receipts and 64 percent of net business income.

[232] Report: “Testimony Of The Staff Of The Joint Committee On Taxation Before The Joint Select Committee On Deficit Reduction.” U.S. Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

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To be eligible to make an election under subchapter S a corporation must generally (1) be an eligible domestic corporation; (2) not have more than 100 shareholders (taking into account applicable attribution rules); (3) have as shareholders only individuals (other than nonresident aliens), estates, certain trusts and certain tax-exempt organizations; and (4) have only one class of stock.

[233] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[234] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. <www.cbo.gov>

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.

[235] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear.”

[236] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 11:

CBO [Congressional Budget Office] allocates 75 percent of the corporate income tax to households in proportion to their share of capital income and 25 percent to households in proportion to their share of labor income. For more discussion of the incidence of the corporate income tax, see Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012)….

[237] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[238] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 23:

Researchers disagree about how to allocate corporate income taxes (and taxes on capital income generally). CBO’s approach is to allocate 75 percent of corporate income taxes to owners of capital in proportion to their income from interest, dividends, rents, and adjusted capital gains. That measure excludes some forms of capital income that are more difficult to measure, such as investment earnings in tax-preferred retirement accounts and unrealized capital gains.16 For the purposes of that allocation, CBO adjusts capital gains by scaling them to their long-term historical level given the size of the economy and the applicable tax rate; that method reduces the effects of large annual variations in the total amount of gains realized. CBO allocates the remaining 25 percent of corporate income taxes to workers in proportion to their income from labor.17

17 For a more detailed discussion about how CBO allocates corporate taxes, see Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012), <www.cbo.gov>.

[239] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. <www.fas.org>

Page 4: “The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital.”

b) Working paper: “International Burdens of the Corporate Income Tax.” By William C. Randolph. Congressional Budget Office, August, 2006. <www.cbo.gov>

Pages 51–52: “In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears –71 percent, and the excess burden equals about 4 percent of the revenue.”

[240] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 9–10:

The base of the corporate income tax is net income, or profits, as defined by the tax code. In general this is gross revenue less the cost of doing business. Deductible costs include materials, interest, and wage payments. Another important deductible cost is depreciation—an allowance for declines in the value of a firm’s tangible assets, such as machines, equipment, and structures.

In broad economic terms, the base of the corporate income tax is the return to equity capital. Wages are tax deductible, so labor’s contribution to corporate revenue is excluded from the corporate tax base. Income produced by corporate capital investment includes that produced by corporate investment of borrowed funds, and that produced by investment of equity, or funds provided by stockholders. Profits from debt-financed investment are paid out as interest, which is deductible. Thus, the return to debt capital is excluded from the corporate tax base. Equity investments are financed by retained earnings and the sale of stock. The income equity investment generates is paid out as dividends and the capital gains that accrue as stock increases in value. Neither form of income is generally deductible. Thus, the base of the corporate income tax is the return to equity capital.

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When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business is simply exchanging one asset—for example, cash—for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost. Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years.

The tax code contains a set of rules that govern the rate at which depreciation deductions can be claimed. The rules determine the tax depreciation rate by specifying a recovery period and a depreciation method for different types of assets. An asset’s recovery period is the number of years over which deductions for the asset’s full cost must be spread. The applicable depreciation method determines how depreciation deductions are distributed among the different years of the recovery period. The slowest method is straight-line, in which equal deductions are taken each year. Declining balance methods, in which a fixed fraction of the cost less prior depreciation is deducted, cause larger shares to be taken in earlier years.

Because of the time value of money, a tax deduction of a given dollar amount is worth more to a business the sooner it can be claimed. Further, the sooner a tax deduction can be claimed, the sooner the tax savings it generates can be invested and earn a return. It follows that the tax rules governing when depreciation deductions can be claimed are quite important to businesses. If depreciation deductions can be claimed faster than an asset actually declines in value, a tax benefit exists; depreciation is said to be accelerated. If, on the other hand, depreciation deductions can be claimed more slowly than the corresponding asset actually depreciates, a tax penalty occurs. Only if depreciation deductions are claimed at the rate an asset actually depreciates do taxes confer neither a tax benefit nor a tax penalty.

[241] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 26–28:

III. OVERVIEW OF THE CORPORATE INCOME TAX

A. Structure of the Corporate Income Tax …

In General

Corporations organized under the laws of any of the 50 States (and the District of Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable income.29

The taxable income of a corporation generally is comprised of gross income less allowable deductions. Gross income generally is income derived from any source, including gross profit from the sale of goods and services to customers, rents, royalties, interest (other than interest from certain indebtedness issued by State and local governments), dividends, gains from the sale of business and investment assets, and other income.

Allowable deductions include ordinary and necessary business expenses, such as salaries, wages, contributions to profit-sharing and pension plans and other employee benefit programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable organizations (subject to an income limitation), advertising, interest expense, certain losses, selling expenses, and other expenses. Expenditures that produce benefits in future taxable years to a taxpayer’s business or income-producing activities (such as the purchase of plant and equipment) generally are capitalized and recovered over time through depreciation, amortization or depletion allowances. A net operating loss incurred in one taxable year typically may be carried back two years or carried forward 20 years and allowed as a deduction in another taxable year. Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends received by a corporation from another corporation (provided certain ownership requirements are satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to certain manufacturing activities.

The Code also specifies certain expenses that typically may not be deducted, such as expenses associated with earning tax-exempt income,30 certain entertainment expenses, certain executive compensation in excess of $1,000,000 per year, a portion of the interest on certain high-yield debt obligations that resemble equity, and fines, penalties, bribes, kickbacks and illegal payments.

In contrast to the treatment of capital gains in the individual income tax, no separate rate structure exists for corporate capital gains. Thus, the maximum rate of tax on the net capital gains of a corporation is 35 percent. A corporation may not deduct the amount of capital losses in excess of capital gains for any taxable year. Disallowed capital losses may be carried back three years or carried forward five years. …

Alternative Minimum Tax

A corporation is subject to an alternative minimum tax which is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation’s regular income tax liability. The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of a $40,000 exemption amount.31 Credits that are allowed to offset a corporation’s regular tax liability generally are not allowed to offset its minimum tax liability. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax in future years.

Alternative minimum taxable income is the corporation’s taxable income increased by the corporation’s tax preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Among the preferences and adjustments applicable to the corporate alternative minimum tax are accelerated depreciation on certain property, certain expenses and allowances related to oil and gas and mining exploration and development, certain amortization expenses related to pollution control facilities, net operating losses and certain tax-exempt interest income. In addition, corporate alternative minimum taxable income is increased by 75 percent of the amount by which the corporation’s “adjusted current earnings” exceeds its alternative minimum taxable income (determined without regard to this adjustment). Adjusted current earnings generally are determined with reference to the rules that apply in determining a corporation’s earnings and profits.

A corporation with average annual gross receipts of not more than $7.5 million is exempt from the alternative minimum tax.

29 Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A foreign corporation generally is subject to the U.S. corporate income tax only on income with a sufficient nexus to the United States.

30 For example, the carrying costs of tax-exempt State and local obligations and the premiums on certain life insurance policies are not deductible.

31 The exemption amount is phased out for corporations with income above certain thresholds, and is completely phased out for corporations with alternative minimum taxable income of $310,000 or more.

[242] Report: “Overview of the Federal Tax System in 2020.” Congressional Research Service. Updated November 10, 2020. <fas.org>

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The corporate income tax is designed as a tax on corporate profits (also known as net income). Broadly defined, corporate profit is total income minus the cost associated with generating that income.52 Business expenses that may be deducted from income include employee compensation; the decline in value of machines, equipment, and structures (i.e., depreciation); general supplies and materials; advertising; and interest payments (subject to certain limitations).53 Businesses may also be allowed 100% first-year depreciation or to expense the costs of certain property.54 The corporate income tax also allows for a number of other special deductions, credits, and tax preferences that reduce taxes paid by corporations. Oftentimes, these provisions are intended to promote particular policy goals (promoting charitable giving or encouraging investment in renewable energy, for example). A corporation’s tax liability can be calculated as follows:

Taxes = [(Total Income – Deductible Expenses) × Tax Rate] – Tax Credits.

[243] Webpage: “Topic No. 704 Depreciation.” U.S. Internal Revenue Service. Updated January 25, 2021. <www.irs.gov>

You generally can’t deduct in one year the entire cost of property you acquired, produced, or improved and placed in service for use either in your trade or business or income-producing activity if the property is a capital expenditure. Instead, you generally must depreciate such property. Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost. …

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. … You may depreciate property that meets all the following requirements:

1. It must be property you own.

2. It must be used in a business or income-producing activity.

3. It must have a determinable useful life.

4. It must be expected to last more than one year.

5. It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

[244] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 29: “Marginal tax rates are the rates that taxpayers pay on the next dollar of income that is earned. Marginal tax rates can be presented as both marginal statutory rates and marginal effective rates.”

[245] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, 2005. <www.cbo.gov>

Page 1: “In general, the type of tax rate that most directly affects decisions about whether to engage in more of an activity is the effective marginal tax rate—the percentage of an additional dollar of income that will have to be paid in taxes.”

Page 2:

The effective marginal tax rate depends on features of tax law besides statutory rates. Most taxpayers’ effective marginal rate is the same as their statutory marginal rate. But in some cases, the two rates differ because of the phasing in or out of particular tax provisions. …

A person’s effective marginal tax rate influences many different decisions about working: whether to take on an overtime shift, bargain for wages or fringe benefits, get a second job, or enter the labor force at all.

[246] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Pages 73–74:

Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people’s incentive to save. However, because that higher marginal tax rate also decreases people’s return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO’s analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.

[247] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation, September 12, 2011. <www.jct.gov>

Pages 26–27:

The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers’ decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return.29 Other studies have argued that large behavioral responses to changes in the net return need not occur.30 Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results.31 Some find personal saving responds strongly to increases in the net return to saving,32 while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives,34 while others find little or no increase as retirement plan savings substitute for other saving.35 With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.

[248] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary. For businesses, pass-through entities experience a reduction in effective tax rates via a new deduction, which is also temporary. The statutory corporate tax rate is permanently reduced. Many deductions, credits, and other provisions for businesses are also modified. The act also substantively changes the international tax system, generally moving the U.S. tax system towards a territorial system.

Page 19: “P.L. 115-97 … Corporate taxable income is taxed at a flat rate of 21%. Special rules are provided for certain taxpayers, such as public utilities. (Section 13001 of P.L. 115-97)”

[249] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 12: “The corporate income tax rate is a flat 21%.”

[250] Report: “2019 Instructions for Form 1120. U.S. Corporation Income Tax Return.” U.S. Department of the Treasury, Internal Revenue Service, January 31, 2020. <www.irs.gov>

Page 18: “Multiply taxable income (page 1, line 30) by 21%.”

[251] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[252] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[253] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[254] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[255] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[256] Entry: “capital gain.” Merriam-Webster’s Collegiate Dictionary, Encyclopædia Britannica Ultimate Reference Suite 2004.

“the increase in value of an asset (as stock or real estate) between the time it is bought and the time it is sold”

[257] Entry: “capital gain.” Collins English Dictionary. HarperCollins, 2003. <www.thefreedictionary.com>

“the amount by which the selling price of a financial asset exceeds its cost”

[258] Publication: “544: Sales and Other Dispositions of Assets, for Use in Preparing 2019 Returns.” Internal Revenue Service, March 4, 2020. <www.irs.gov>

Pages 20–21:

Capital gain or loss. Generally, you will have a capital gain or loss if you sell or exchange a capital asset. You also may have a capital gain if your section 1231 transactions result in a net gain. …

Capital Assets

Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. For exceptions, see Noncapital Assets, later.

The following items are examples of capital assets.

• Stocks and bonds.

• A home owned and occupied by you and your family.

• Household furnishings.

• A car used for pleasure or commuting.

• Coin or stamp collections.

• Gems and jewelry.

• Gold, silver, and other metals.

• Timber grown on your home property or investment property, even if you make casual sales of the timber.

Personal-use property. Generally, property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.

Investment property. Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. This treatment does not apply to property used for the production of income. See Business assets, later, under Noncapital Assets.

Release of restriction on land. Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset.

Noncapital Assets

A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.

1. Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Inventories are discussed in Pub. 538, Accounting Periods and Methods. But, see the Tip below.

2. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above.

3. Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Sales of this type of property are discussed in chapter 3.

4. Real property used in your trade or business or as rental property, even if the property is fully depreciated.

5. A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs):

a. Created by your personal efforts,

b. Prepared or produced for you (in the case of a letter, memorandum, or similar property), or

c. Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. …

6. U.S. Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price.

7. Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements.

a. It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer.

b. The instrument is clearly identified in the dealer’s records as meeting (a) by the end of the day on which it was acquired, originated, or entered into.

8. Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into.

9. Supplies of a type you regularly use or consume in the ordinary course of your trade or business.

[259] Entry: “dividend.” World Book Encyclopedia Dictionary, 2007 Deluxe Edition.

“money earned as profit by a company and divided among the owners or stockholders of the company”

[260] Entry: “dividend.” Collins English Dictionary. HarperCollins, 2003. <www.thefreedictionary.com>

“1. a. a distribution from the net profits of a company to its shareholders”

[261] Glossary: “Understanding Taxes Teacher Site.” Internal Revenue Service, 2015. <apps.irs.gov>

“interest income The income a person receives from certain bank accounts or from lending money to someone else.”

[262] Article: “Dividends, Double Taxation of.” By Joseph J. Cordes. Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Taxation that comes about in the U.S. tax system because corporate profits are taxed once by the corporate income tax and then again when these profits are distributed to shareholders.

Income that is earned by corporations in the United States is currently subject to two levels of tax. Corporate profits are subject to the corporate income tax. When these profits are distributed to the shareholders who own the corporations, these distributions are also included in the shareholders’ taxable income.

[263] Webpage: “Forming a Corporation.” Internal Revenue Service. Last updated December 23, 2020. <www.irs.gov>

“The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.”

[264] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 28:

A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation’s current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation. Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.

[265] Article: “Capital Gains Taxation.” By Gerald E. Auten (U.S. Treasury Department). Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

“In addition, the capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income that can raise both equity and efficiency concerns.”

[266] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 10:

Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view, it is misleading to compare the tax burden of a corporation with that of an individual.

[267] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 8:

[T]he income of a C corporation7 is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation’s after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.

[268] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 3–6: “A. Individual Income Tax … Lower rates apply for long-term capital gains and certain dividends; those rates apply for both the regular tax and the alternative minimum tax.”

Pages 8–9:

Preferential Rates on Capital Gain and Dividends

In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income. Any net capital gain of an individual is taxed at maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated as long-term if the asset is held for more than one year. Qualified dividend income is generally taxed at the same rate as net capital gain.

[269] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 10: “Any net capital gain of an individual generally is taxed at rates lower than rates applicable to ordinary income.”

[270] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 3: “Long-term capital gains—that is, gain on the sale of assets held more than 12 months—and qualified dividend income are taxed at lower tax rates. Net investment income is also subject to an additional tax for taxpayers above certain income thresholds.”

Page 5:

Tax Rates

As was noted above, income earned from long-term capital gains and dividends is taxed at lower rates. The maximum rate on long-term capital gains and dividends is 20%. This 20% rate applies to taxpayers in the 39.6% bracket (single filers with taxable income above $406,750; married filers with taxable income above $432,200). Taxpayers in the 25%, 28%, 33%, and 35% tax brackets face a 15% tax rate on long-term capital gains and dividends. The tax rate on capital gains and dividends is 0% for taxpayers in the 10% and 15% tax brackets.

Page 19:

Capital Gains

Under current income tax law, a capital gain or loss can result from the sale or exchange of a capital asset. If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Under current law, capital assets held for more than 12 months are considered long-term assets, while assets held 12 months or less are considered short-term assets. … Capital gains on short-term assets are taxed at regular income tax rates.

[271] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 28:

Treatment of Corporate Distributions

The taxation of a corporation generally is separate and distinct from the taxation of its shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation’s current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation.32 Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.33 Although subject to a second tax when distributed, shareholders in a corporation may benefit from deferral of this tax on undistributed corporate income (e.g., corporate income reinvested in the business). …

32 A distribution in excess of the earnings and profits of a corporation generally is a tax-free return of capital to the shareholder to the extent of the shareholder’s adjusted basis (generally, cost) in the stock of the corporation; such distribution is a capital gain if in excess of basis. A distribution of property other than cash generally is treated as a taxable sale of such property by the corporation and is taken into account by the shareholder at the property’s fair market value. A distribution of common stock of the corporation generally is not a taxable event to either the corporation or the shareholder.

33 This double taxation is mitigated by a reduced maximum tax rate of 15 percent generally applicable to dividend income of individuals (prior to 2013). Note that amounts paid as interest to the debtholders of a corporation generally are subject to only one level of tax (at the recipient level) because the corporation generally is allowed a deduction for the amount of interest expense paid or accrued.

[272] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 8–10:

Preferential Rates on Capital Gains and Dividends …

The maximum rate of tax on the adjusted net capital gain of an individual depends on the individual’s taxable income and filing status. Theses maximum rates apply for purposes of both the regular tax and the alternative minimum tax. For 2020, the adjusted net capital gains rate schedules are as follows:

Table 2.─Adjusted Net Capital Gain Maximum Rates for 2020

Filing Status and Rate Start Amount (Taxable Income)

Rate

Married Individuals Filing Joint Returns and Surviving Spouses

Heads of Households

Single Individuals

Married Individuals Filing Separate Returns

Estates and Trust

$0

$0

$0

$0

$0

0%

$80,000

$53,600

$40,000

$40,000

$2,650

15%

$496,600

$469,050

$441,450

$248,300

$13,150

20%

Net Investment Income

An additional tax is imposed on net investment income in the case of an individual, estate, or trust.29 In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income30 over the threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.31 Thus, for taxpayers with modified adjusted gross income in excess of those thresholds, the rate on certain capital gains and dividends is 23.8 percent while the maximum rate on other investment income, including interest, annuities, royalties, and rents, is 40.8 percent.

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property (with certain exclusions33), over (2) deductions properly allocable to such gross income or net gain.

29 Sec. 1411.

30 Modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under section 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income).

31 These thresholds are not indexed for inflation.

Pages 7–8: “Table 1.–Federal Individual Income Tax Rates for 2020”

NOTE: The following information is derived from Table 1:

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Taxable Income

Lower Threshold

Taxable Income

Lower Threshold

Lower Threshold

Lower Threshold

$0

$0

$0

$0

$19,750

$19,750

$19,750

$19,750

$80,250

$80,250

$80,250

$80,250

$171,050

$171,050

$171,050

$171,050

$326,600

$326,600

$326,600

$326,600

$414,700

$414,700

$414,700

$414,700

$622,050

$622,050

$622,050

$622,050

[273] Publication: “550: Investment Income and Expenses (Including Capital Gains and Losses), for Use in Preparing 2019 Returns.” Internal Revenue Service, April 3, 2020. <www.irs.gov>

Pages 67–68:

Table 4-4. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from …

THEN your maximum capital gain rate is …

collectibles gain

28%

eligible gain on qualified small business stock minus the section 1202 exclusion

28%

unrecaptured section 1250 gain

25%

other gain1 and the regular tax rate that would apply is 37%

20%

other gain1 and the regular tax rate that would apply is 22%, 24%, 32%, or 35%

15%

other gain1 and the regular tax rate that would apply is 10% or 12%

0%

1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2019, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. See Table 4-4 for details. …

 28% rate gain. This gain includes gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock minus the section 1202 exclusion.

Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

Gain on qualified small business stock. If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. The eligible gain minus your section 1202 exclusion is a 28% rate gain. …

Unrecaptured section 1250 gain. Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

[274] Publication: “550: Investment Income and Expenses (Including Capital Gains and Losses), For Use in Preparing 2019 Returns.” Internal Revenue Service, April 3, 2020. <www.irs.gov>

Page 5:

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest. Certain distributions commonly called dividends are actually interest. You must report as interest so-called “dividends” on deposits or on share accounts in:

• Cooperative banks,

• Credit unions,

• Domestic building and loan associations,

• Domestic savings and loan associations,

• Federal savings and loan associations, and

• Mutual savings banks.

The “dividends” will be shown as interest income on Form 1099-INT.

Money market funds. Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Certificates of deposit and other deferred interest accounts. If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Interest subject to penalty for early withdrawal. If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings, later, for more information on how to report the interest and deduct the penalty.

Money borrowed to invest in certificate of deposit. The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3.

[275] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 3: “Taxable interest income is added to a taxpayer’s AGI [adjusted gross income] and taxed according to the taxpayer’s marginal tax rate. Interest that is earned on tax-exempt securities, such as those issued by state and local governments, is not subject to taxation.”

[276] Webpage: “Find Out if Net Investment Income Tax Applies to You.” Internal Revenue Service. Last updated June 11, 2020. <www.irs.gov>

If an individual has income from investments, the individual may be subject to net investment income tax. Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status. 

The statutory threshold amounts are:

• Married filing jointly—$250,000,

• Married filing separately—$125,000,

• Single or head of household—$200,000, or

• Qualifying widow(er) with a child—$250,000.

[277] “2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2019. <www.cms.gov>

Page 21: “The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 pay an additional Medicare contribution of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds.”

[278] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 9–10:

Net Investment Income

An additional tax is imposed on net investment income in the case of an individual, estate, or trust.29 In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income30 over the threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.31 Thus, for taxpayers with modified adjusted gross income in excess of those thresholds, the rate on certain capital gains and dividends is 23.8 percent while the maximum rate on other investment income, including interest, annuities, royalties, and rents, is 40.8 percent

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property (with certain exclusions33), over (2) deductions properly allocable to such gross income or net gain.

29 Sec. 1411.

30 Modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under section 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income).

26 These thresholds are not indexed for inflation.

[279] Article: “Capital Gains Taxation.” By Gerald E. Auten (U.S. Treasury Department). NTA Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Economic Issues in Capital Gains Taxation

Inflation

Taxing nominal gains raises the effective tax rate on real capital gains and can impose a tax in cases of real economic losses. Several studies have shown that a large percentage of reported capital gains reflect the effects of inflation, and that capital gains of lower- and middle-income taxpayers commonly represent not only nominal gains but real economic losses. Indexing the cost or basis of assets for changes in the price level has frequently been proposed to correct for inflation.

[280] Statement of U.S. Senator Connie Mack (Republican, Florida). Congressional Record, May 6, 1999. <www.gpo.gov>

Page S4830: “Indexing capital gains for inflation will end the Government’s unfair practice of taxing people on phantom gains due to inflation.”

[281] Book: Quantitative Investing for the Global Markets: Strategies, Tactics, and Advanced Analytical Techniques. Edited by Peter Carman. Fitzroy Dearborn Publishers, 1997.

Pages 25–26: “World stock and bond markets can be expected to continue to grow, although not at the explosive pace of the past few decades. Some of the past growth has been due to rises in nominal asset prices that merely compensate for inflation; such rises are likely to be at lower rates in the future. But we should be concerned not with nominal quantities but with real ones.”

[282] Report: “Effects of Federal Tax Policy on Agriculture.” By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. <www.ers.usda.gov>

Pages 37–38:

Land Prices and Ownership of Capital Assets

Farmland is a key asset because the supply of land available is relatively more limited than other farm assets. Low land prices facilitate entry into farming while high land prices make entry difficult. If a prospective farmer is unable to buy land or to arrange a rental agreement with a landlord, there is no way to enter land-based farming. Farmland historically has been a good tax investment during inflationary periods and has, therefore, been attractive to both farm and nonfarm investors. Its value as an inflationary hedge comes both from the deductibility of nominal interest payments on loans and the appreciation of land values on a tax-deferred basis.

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. If the real rate of return is low relative to inflation, then most of the nominal capital gain is due to inflation and the effective tax rate on the real return could exceed 100 percent.8 …

8 For example, after a 1-year period with 3-percent inflation and a 4-percent nominal capital gain, a 25-percent capital gains tax yields a 100-percent effective tax on the real return.

[283] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 8: “In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income.”

[284] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 21–22:

One perplexing problem associated with taxing income involves the issue of tax deferral. Ideally, a tax levied on income should be assessed when the income accrues to the taxpayer. However, as a result of many factors, taxes are often deferred into the future. This can happen when income is taxed when it is realized, rather than when it accrues or when there is a mismatch between when income is earned and the expenses associated with earning that income. Since money has a time value (a dollar today is more valuable than a dollar in the future), tax deferral effectively lowers the tax rate on the income in question.

Income from capital gains can be used to illustrate the benefits of tax deferral. For capital gains, the tax is assessed when the gain is realized rather than as it accrues. If a capital asset is acquired for $100 and appreciates at a rate of 10% per annum, by the end of the first year it has appreciated in value to $110 and by the end of the second year it is worth $121. Assuming a marginal tax rate of 15%, if the gain were realized at the end of the second year, then a tax of $3.15 ($21 times 15%) would be levied on the realized appreciation. The after-tax return would be $17.85.

In contrast is the case of a $100 investment in an interest-bearing account earning a 10% rate of return with no deferral. At the end of the first year, the account would yield $10 in interest. Tax on the interest, assuming a 15% marginal income tax rate, would be $1.50, leaving $108.50 in the account. By the end of the second year, the account would yield $10.85 in interest. Tax on the second year’s interest would be $1.63, leaving $117.72 in the account, for an after-tax return over the two-year period of $17.72.

It is apparent from the examples above that the investment in the asset yielding capital gains income earns a higher after-tax return than the comparable investment in an interest-bearing account. In essence, the reason for this result is simply that, for the asset producing a capital gain, the tax on the appreciation in the first year was deferred, with the deferred tax remaining in the account and earning interest.

[285] Report: “Effects of Federal Tax Policy on Agriculture.” By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. <www.ers.usda.gov>

Page 38:

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. … Longer holding periods help reduce the effective tax rate by compounding the real rate of return, but effective tax rates often remain high relative to the marginal tax rate. Although inflation also increases effective tax rates on interest and dividends, the effect on capital gains is often perceived to be greater because of the magnitude of capital sales and the proportion of the sale price that gains represent after long holding periods.

Effective tax rates always exceed the taxpayer’s marginal bracket in an inflationary environment unless part of the nominal gain is excluded from taxation. If part of the gain is excluded, then the effective rate may drop below the taxpayer’s marginal rate under certain combinations of holding periods and real rates of return. Since lowering capital gains tax rates below ordinary tax rates is effectively similar to providing an exclusion, current law helps to reduce the effect of taxing inflationary gains. For example, using a hypothetical 30-year holding period with 2-percent annual real capital appreciation, 4-percent inflation, and tax law from 1996, an individual in the 28-percent ordinary tax bracket faced effective capital gains tax rates on real returns of 52 percent. Under current law with the 20- percent capital gains tax rate (an effective exclusion of 29 percent), the effective tax rate in the scenario drops to 37 percent. Under pre-1986 tax law with the 60-percent exclusion, the scenario would result in a 21-percent effective tax rate on the real return.

Tax timing issues also benefit the investor who borrows. Deductible interest expenses reduce tax liability during the current year, while capital gains taxes are deferred until the asset is sold. Deferring capital gains taxes slightly increases the implicit after-tax rate of return. This increases with longer holding periods and can be especially important for those who intend to hold assets indefinitely.

Before the current policy of a maximum tax rate on capital gains, deferring capital gains until an asset was sold could create problems at the time of sale because unusually large gains may have pushed the taxpayer into a higher marginal tax bracket. In such cases, the potential for higher taxes may have been reduced somewhat by making land sales on the installment method or by selling the land in smaller parcels over time.

[286] Report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office (CBO), January 28, 2020. <www.cbo.gov>

Supplementary dataset: “Revenue Projections, by Category—January 2020.” <www.cbo.gov>

Tab: “6. Actual and Projected Capital Gains Realizations and Tax Receipts in CBO’s [Congressional Budget Office’s] January 2020 Baseline … Capital Gains Tax Receiptsb … Percentage of individual income tax receipts … 2019 [=] 11.2 … b Fiscal year basis. This measure is CBO’s estimate of when tax liabilities resulting from capital gains realizations are paid to the Treasury.”

[287] Calculated with data from the report: “An Update to the Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, September 2, 2020. <www.cbo.gov>

Supplementary dataset: “Revenue Projections, by Category—September 2020” <www.cbo.gov>

Tab “3. Detailed Individual Income Tax Projections in CBO’s [Congressional Budget Office’s] September 2020 Baseline … Billions of Dollars … Calculation of Adjusted Gross Income … 2020 … Taxable interest and ordinary dividends (excludes qualified dividends) [=] 205 … Qualified dividends [=] 235 … Capital gain or lossa [=] 819 … Total income [=] 12,567”

CALCULATIONS:

  • $819 capital gains / $12,567 total = 6.5%
  • ($235 qualified dividends + $205 interest and ordinary dividends) / $12,567 total = 3.5%

[288] Report: “Fiscal Fact No. 693: State Individual Income Tax Rates and Brackets for 2020.” By Katherine Loughead. Tax Foundation, February 2020. <files.taxfoundation.org>

Page 5: “Top State Marginal Individual Income Tax Rates, 2020 … CA 13.30% … HI 11.00% … NJ 10.75% … NJ** 5.00% … TN** 1.00% … WA 0% … NV 0% … WY 0% … SD 0% … TX 0% … FL 0% … Local income taxes are not included. … ** State only taxes interest and dividends income.”

[289] Tax Policy Center Briefing Book. Urban-Brookings Tax Policy Center. Updated May 2020. <www.taxpolicycenter.org>

Pages 618–619 (of PDF):

Five states and the District of Columbia treat capital gains and losses the same as under federal law. They tax all realized capital gains, allow a deduction of up to $3,000 for net capital losses, and permit taxpayers to carry over unused capital losses to subsequent years.

Other states provide exemptions and deductions that go beyond the federal rules. New Hampshire fully exempts capital gains, and Tennessee taxes only capital gains from the sale of mutual fund shares. Arizona exempts 25 percent of long-term capital gains, and New Mexico exempts 50 percent. Massachusetts has its own system for taxing capital gains, while Hawaii has an alternative capital gains tax. Pennsylvania and Alabama only allow losses to be deducted in the year that they are incurred, while New Jersey does not allow losses to be deducted from ordinary income.

The remaining states that tax income generally follow the federal treatment of capital gains, except for various state-specific exclusions and deductions.

Most states tax capital gains at the same rate as ordinary income, while the federal government provides a preferential rate.

[290] Report: “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 2:

Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the “Budget Act”) as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”4 Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. …

4 Congressional Budget and Impoundment Control Act of 1974 (Pub. L. No. 93-344), sec. 3(3). The Budget Act requires CBO [Congressional Budget Office] and the Treasury to publish detailed lists of tax expenditures annually. The Joint Committee staff issued reports prior to the statutory obligation placed on the CBO and continued to do so thereafter. In light of this precedent and a subsequent statutory requirement that the CBO rely exclusively on Joint Committee staff estimates when considering the revenue effects of proposed legislation, the CBO has always relied on the Joint Committee staff for the production of its annual tax expenditure publication. See Pub. L. No. 99-177, sec. 273, codified at 2 USC 601(f).

[291] Report: “Analytical Perspectives, Budget of the United States Government, Fiscal Year 2015.” White House Office of Management and Budget, 2014. <www.govinfo.gov>

Page 162: “Reduce the value of certain tax expenditures.—The Administration proposes to limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent.”

[292] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

The best place to begin is the list of tax preferences that the Treasury Department compiles each year for the president’s budget. This year, that list identifies more than 170 distinct preferences in the individual and corporate income taxes. These preferences fall into five categories.

First, credits reduce a taxpayer’s liability dollar for dollar. If a taxpayer’s total liability is low enough, and a credit is refundable, it can even result in a direct payment from the government to the taxpayer. …

Second, deductions reduce the amount of income subject to tax. …

Third, deferrals allow taxpayers to postpone the date at which income gets taxed. …

Fourth, exclusions and exemptions allow certain types of income to avoid taxation entirely. …

Finally, preferential rates tax certain types of income at lower levels. …

The estimated revenue losses from these five kinds of preferences total more than $1 trillion annually, almost as much as we collect from individual and corporate income taxes combined, and almost as much as we spend on discretionary programs.

[293] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark. The Treasury, for instance, uses a comprehensive, progressive income tax as its benchmark, with a few adjustments to reflect the practical realities of administering the tax system. Other analysts believe a broad-based consumption tax would be a better benchmark. …

Although this disagreement reflects a fundamental debate about tax policy, it does not undermine the basic fact that tax preferences are enormous. Indeed, most provisions that are preferences relative to an income-tax-based system are also preferences relative to a system built around a consumption tax.

[294] Report: “Estimates of Federal Tax Expenditures.” Joint Committee on Taxation, March 14, 1978. <www.jct.gov>

Page 2: “Estimates of tax expenditures are difficult to determine and are subject to important limitations.”

[295] “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 6: “One of the most difficult issues in defining tax expenditures for business income relates to the tax treatment of capital costs. Under present law, capital costs may be recovered under a variety of alternative methods, depending upon the nature of the costs and the status of the taxpayer.”

Page 13: “The Joint Committee staff and Treasury lists of tax expenditures differ in at least six respects.”

[296] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Pages 7–8:

Unfortunately, it is not always straightforward to decide which provisions should be classified as spending substitutes and which are fundamental tax policy choices. We provide a few clear examples, while noting that it is sometimes hard to distinguish the two categories.

Clear Spending Substitutes. Clear spending substitutes are those tax expenditures that encourage selected activities or aid specific groups of taxpayers and could be replaced by similar programs delivered as direct outlays. Examples are renewable energy credits, the home mortgage interest deduction, the exclusion from tax of employer-provided health insurance and health benefits, and tuition tax credits. All these provisions subsidize identifiable activities (renewable energy, housing investment, health insurance, and college tuition), try to promote definable social goals (reduced greenhouse gas emissions, increased homeownership, broader health insurance coverage, and increased college attendance), and could be designed as outlays administered by program agencies (e.g., the Departments of Energy, Housing and Urban Development, Health and Human Services, and Education).

[297] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 37:

As noted above, one of the largest individual tax expenditure provisions is the deductibility of home mortgage interest expense by individuals. What does it mean to eliminate this tax expenditure? As of what date would mortgage interest no longer be deductible? Would the repeal apply to all existing mortgages or only to mortgages undertaken after the effective date? Either choice could be said to substantially eliminate the tax expenditure. These decisions will affect taxpayer’s behavior regarding owning versus renting, the size of a home that they may choose to purchase, as well as the amount of debt they undertake and the choice of assets that they may retain in their portfolios. These decisions will affect the magnitude of revenues that redound to the Federal Treasury from the elimination of the tax expenditure and, as discussed below, these revenues will generally be less than the value of the estimated tax expenditure.

[298] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 59–60:

The general business credit is the sum of various business credits determined under the [tax] Code. The component credits of the general business credit are listed below.

Table A-16.−Components of the General Business Credit for 2011* …

Energy credit (sec. 48) Credit for investing in certain solar, geothermal, fuel cell, and other energy property …

Advanced energy project credit (sec. 48C) Credit for investing in facilities that manufacture certain renewable power or other advanced energy equipment or products …

Renewable electricity production credit (sec. 45) Credit for producing power from wind, biomass, and other renewable resources …

Biodiesel fuels credit (sec. 40A) Credit for producing biodiesel …

Alternative fuel refueling property credit (sec. 30C) Credit for installing certain biofuel, electric, and alternative fuel refueling property …

* Excludes expired and phased-out credits.

[299] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7:

Dependent Care Credit14

This credit is provided for the costs of paid care for dependents, mostly children. The maximum credit rate is 35% of costs. The value of the credit is capped at $3,000 for one dependent and $6,000 for two or more dependents. The credit rate is reduced when the taxpayer’s adjusted gross income (AGI) exceeds $15,000, but is no less than 20% for higher-income taxpayers.

14 For more, see Congressional Research Service Report RS21466, Dependent Care: Current Tax Benefits and Legislative Issues.

[300] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 1, 2012. Modified 6/15/12. <www.sec.gov>

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[301] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (assistant director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[302] Report: “Overview of the Federal Tax System as in Effect for 2015.” U.S. Congress, Joint Committee on Taxation, March 30, 2015. <www.jct.gov>

Page 3: “The deductions that may be itemized include … charitable contributions….”

[303] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 8:

The Hope credit and the Lifetime Learning credit were added to the code in 1997. The Hope credit has been temporarily replaced by the American Opportunity Tax Credit (AOTC) for 2009 through 2017. The maximum value of the AOTC credit is $2,500 per student annually for the first four years of college. Prior to 2009, the maximum value of the Hope credit was $1,800, limited to the first two years of college. The Hope credit is scheduled to remain available after the AOTC expires at the end of 2017. The AOTC is partially refundable. Both the Hope credit and the AOTC phase out for higher-income individuals.

Additionally, qualified expenditures on tuition and related expenses may qualify taxpayers for the Lifetime Learning credit. The Lifetime Learning credit rate is 20% of costs up to $10,000 for qualified tuition and related expenses. The credit is capped at $2,000. The Lifetime Learning credit is nonrefundable and phases out for higher-income individuals.

[304] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 37:

Another significant individual tax expenditure arises because pension benefits that accrue to individuals, either in defined contribution pension plans or in defined benefit pension plans, are not subject to the individual income tax. In the case of an employer’s contribution to an individual’s defined contribution pension plan, elimination of the tax expenditure could mean: counting the employer’s specific dollar contribution as part of the individual’s current taxable income. But the treatment of existing accounts is less clear. Would existing accounts still benefit from deferral of tax on earnings? It is even less clear what elimination of this tax expenditure means in the context of a defined benefit accrual. Often the accrual value attributable to any specific individual depends upon economic outcomes that are not currently known to either the employer or the employee.

[305] “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 4:

All employee compensation is subject to tax unless the Code contains a specific exclusion for the income. Specific exclusions for employer-provided benefits include: coverage under accident and health plans,8 accident and disability insurance, group term life insurance, educational assistance, tuition reduction benefits, transportation benefits (parking, van pools, and transit passes), dependent care assistance, adoption assistance, meals and lodging furnished for the convenience of the employer, employee awards, and other miscellaneous fringe benefits (e.g., employee discounts, services provided to employees at no additional cost to employers, and de minimis fringe benefits). Each of these exclusions is classified as a tax expenditure in this report.

[306] Report: “Estimates of Federal Tax Expenditures.” Joint Committee on Taxation, March 14, 1978. <www.jct.gov>

Pages 1–2:

The Concept of Tax Expenditures

Tax expenditure data are intended to show the cost to the Federal Government, in terms of revenues it has foregone, from tax provisions that either have been enacted as incentives for the private sector of the economy or have that effect even though initially having a different objective. The tax incentives usually are designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives. These provisions take the form of exclusions, deductions, credits, preferential tax rates, or deferrals of tax liability. Tax expenditures also are analogous to uncontrolled expenditures made through individual entitlement programs because the taxpayer who can meet the criteria specified in the Internal Revenue Code may use the provision indefinitely without any further action by the Federal Government. This is possible because provisions in the Internal Revenue Code rarely have expiration dates that would require specific congressional action to continue the availability of the tax provision. For many provisions, the revenue loss is determined by the taxpayer’s level of income and his tax rate bracket. From the viewpoint of the budget process, fiscal policy and the allocation of resources, uncontrollable outlays or receipts restrict the range of adjustments that can be made in public policy. One of the initial purposes of the enumeration of tax expenditures was to provide Congress with the information it would need to select between a tax or an outlay approach to accomplish a goal of public policy.

Pages 4–5:

Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses. Most other tax benefits to individual taxpayers are classified as exceptions to normal income tax law.

The Joint Committee staff views the personal exemptions and the standard deduction as defining the zero-rate bracket that is a part of normal tax law. An itemized deduction that is not necessary for the generation of income is classified as a tax expenditure, but only to the extent that it, when added to a taxpayer’s other itemized deductions, exceeds the standard deduction.

[307] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences—preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise. …

To illustrate, consider a dilemma that President Obama faced in constructing his 2012 budget. …

… The president thus structured his special, one-time payment as a $250 refundable tax credit for any retiree who did not qualify for Social Security. In Beltway parlance, he offered these men and women a tax cut.

But was it really a tax cut? The president’s $250 credit would have the same budgetary, economic, and distributional effects as his $250 boost in Social Security benefits. Both would deliver extra money to retirees, and both would finance those payments by adding to America’s growing debt. One benefit would arrive as a Social Security check, the other as a reduced tax payment or a refund. These superficial differences aside, however, the proposed tax credit would be, in effect, a spending increase.

[308] Working paper: “Tax Expenditures: The Size and Efficiency of Government, and Implications for Budget Reform.” By Leonard E. Burman and Marvin Phaup. National Bureau of Economic Research, August 2011. <www.nber.org>

Page 1: “Tax expenditures are not treated as spending at all, but as reductions in taxes. Their hidden nature has made tax expenditures irresistible to policymakers of both parties—many political or policy goals can be achieved through stealthy spending programs that are framed as tax cuts.”

Page 23: “[T]he largest new construction program is not financed by cash expenditures overseen by the Department of Housing and Urban Development, but the low-income housing credit. One of the largest cash assistance programs for low-income families is the earned income tax credit. And so on. All of these programs could be carried out with cash expenditures….”

[309] Report: “Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets.” U.S. Energy Information Administration, November 1992. <www.justfacts.com>

Page 21:

Tax expenditures are reductions in Government revenues resulting from preferential tax treatment for particular taxpayers. They are termed tax expenditures because the objectives they are intended to achieve can also be reached by a direct expenditure of Government funds. …

Many tax expenditure programs are functionally equivalent to direct expenditure programs. The basis for selecting one or the other approach to provide benefits to taxpayers is not always clear. Several factors may be considered during the selection process. Tax expenditures, in particular, may be less subject to annual review in the normal budget cycle. Also, tax expenditure programs are less visible than direct expenditure programs in the budget process.

[310] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

“The rationale for viewing the preferences as expenditures, rather than mere tax breaks, was (and is) that their budgetary, economic, and distributional effects are often indistinguishable from those of spending programs.”

[311] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Page 6:

Policymakers have long recognized that many social and economic goals can be pursued using tax preferences, not just government spending programs. Such preferences are recorded as revenue reductions, making the government appear smaller, but often have the same effects on income distribution and resource allocation as equivalent spending programs (Bradford 2003; Burman and Phaup 2011; Marron 2011). A complete measure of government size should treat these preferences as spending, not revenue reductions. Doing so raises measures of both spending and revenues, without affecting the deficit, and gives a different picture of the economic resources that the government directs.

[312] Webpage: “Ten Facts About the Child Tax Credit.” Internal Revenue Service. Last reviewed or updated March 5, 2020. <www.irs.gov>

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

1. Amount—With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

2. Qualification—A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

3. Age Test—To qualify, a child must have been under age 17—age 16 or younger—at the end of 2010.

4. Relationship Test—To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

5. Support Test—In order to claim a child for this credit, the child must not have provided more than half of their own support.

6. Dependent Test—You must claim the child as a dependent on your federal tax return.

7. Citizenship Test—To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.

8. Residence Test—The child must have lived with you for more than half of 2010. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.

9. Limitations—The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

10. Additional Child Tax Credit—If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

[313] “2010 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. <taxpayeradvocate.irs.gov>

Executive Summary: Preface & Highlights: “The Most Serious Problems Encountered by Taxpayers.” <taxpayeradvocate.irs.gov>

Pages xi–xii:

The IRS should revise its approach to social programs and incentives administered through the Code.

Over the last decade, the Internal Revenue Code has become filled with special incentives and programs that benefit groups of individual and business taxpayers.21 These provisions are known as “tax expenditures.”22 They can take many forms, including deductions, credits, or preferential tax rates. While some are easy for the IRS to administer—they are simply a matter of using information reported on the tax return and checking it against third party information reporting—others require information to which the IRS does not have access, thereby requiring it to do extensive and intrusive auditing in order to ensure compliance. Some of these provisions are designed to assist low income populations, which present socio-economic, education, mobility, and functional and language literacy challenges. When the tax administrator is tasked with delivering benefits to this population—and charged with ensuring compliance with the eligibility rules and guarding against fraud—the IRS’s traditional revenue collection approach just doesn’t work. Something different is needed—an approach that recognizes that the IRS no longer is just a revenue collection agency but is also a benefits administrator.

[314] Working paper: “Is the European Welfare State Really More Expensive? Indicators on Social Spending, 1980–2012; and a Manual to the OECD [Organization for Economic Cooperation and Development] Social Expenditure Database (SOCX).” By Willem Adema, Pauline Fron, and Maxime Ladaique. Organization for Economic Cooperation and Development, 2011. <www.oecd-ilibrary.org>

Page 25: “Tax breaks for social purposes: Governments also make use of the tax system to directly pursue social policy goals.”

Page 29:

Tax Breaks for Social Purposes (TBSPs) are defined as:

“those reductions, exemptions, deductions or postponements of taxes, which: a) perform the same policy function as transfer payments which, if they existed, would be classified as social expenditures; or b) are aimed at stimulating private provision of benefits.” …

Governments sometimes also use the tax system to stimulate the take-up of private social insurance coverage by individuals and/or employment-related plans.

NOTE: For more details about tax breaks for social purposes, see the next footnote.

[315] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark. The Treasury, for instance, uses a comprehensive, progressive income tax as its benchmark, with a few adjustments to reflect the practical realities of administering the tax system. Other analysts believe a broad-based consumption tax would be a better benchmark. …

Although this disagreement reflects a fundamental debate about tax policy, it does not undermine the basic fact that tax preferences are enormous. Indeed, most provisions that are preferences relative to an income-tax-based system are also preferences relative to a system built around a consumption tax.

[316] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Page 6:

Policymakers have long recognized that many social and economic goals can be pursued using tax preferences, not just government spending programs. Such preferences are recorded as revenue reductions, making the government appear smaller, but often have the same effects on income distribution and resource allocation as equivalent spending programs (Bradford 2003; Burman and Phaup 2011; Marron 2011). A complete measure of government size should treat these preferences as spending, not revenue reductions. Doing so raises measures of both spending and revenues, without affecting the deficit, and gives a different picture of the economic resources that the government directs.

[317] Report: “Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets.” U.S. Energy Information Administration, November 1992. <www.justfacts.com>

Page 21:

Tax expenditures are reductions in Government revenues resulting from preferential tax treatment for particular taxpayers. They are termed tax expenditures because the objectives they are intended to achieve can also be reached by a direct expenditure of Government funds. …

Many tax expenditure programs are functionally equivalent to direct expenditure programs. The basis for selecting one or the other approach to provide benefits to taxpayers is not always clear. Several factors may be considered during the selection process. Tax expenditures, in particular, may be less subject to annual review in the normal budget cycle. Also, tax expenditure programs are less visible than direct expenditure programs in the budget process.

[318] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on municipal bonds] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[319] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[320] Report: “High-Income Tax Returns for Tax Year 2014.” By Justin Bryan. Internal Revenue Service Statistics of Income Bulletin, Summer 2017. <www.irs.gov>

Page 15:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[321] Book: The Bill of Rights and the States: The Colonial and Revolutionary Origins of American Liberties. Edited by Patrick T. Conley and John P. Kaminski. Madison House Publishers, 1992.

Chapter: “The Bill of Rights: A Bibliographic Essay.” By Gaspare J. Saladino.

Page 484:

The best historical treatments of the legislative history of the Bill of Rights in the first federal Congress are in the general accounts by Rutland, Dumbauld, Brant, Schwartz, and Levy, and in David M. Matteson, The Organization of the Government under the Constitution (1941; reprint edition, New York, 1970). All agree that James Madison, against considerable odds, took the lead in the House of Representatives, and that without his efforts there probably would have been no Bill of Rights. Madison’s amendments, a distillation of those from the state conventions (especially Virginia’s) were, for the most part, those that the House eventually adopted.

[322] Article: “Madison, James.” By Robert J. Brugger (Ph.D., Editor, Maryland Historical Magazine, Maryland Historical Society). World Book Encyclopedia, 2007 Deluxe Edition.

Madison, James (1751–1836), the fourth president of the United States, is often called the Father of the Constitution. He played a leading role in the Constitutional Convention of 1787, where he helped design the checks and balances that operate among Congress, the president, and the Supreme Court. He also helped create the U.S. federal system, which divides power between the central government and the states.

[323] Book: The Debates in the Federal Convention of 1787, Which Framed Constitution of the United States of America, Reported by James Madison, a Delegate From the State of Virginia. Edited by Gaillard Hund and James Brown Scott. Oxford University Press, 1920. <avalon.law.yale.edu>

June 6, 1787:

All civilized Societies would be divided into different Sects, Factions, & interests, as they happened to consist of rich & poor, debtors & creditors, the landed, the manufacturing, the commercial interests, the inhabitants of this district or that district, the followers of this political leader or that political leader, the disciples of this religious Sect or that religious Sect. In all cases where a majority are united by a common interest or passion, the rights of the minority are in danger. What motives are to restrain them? A prudent regard to the maxim that honesty is the best policy is found by experience to be as little regarded by bodies of men as by individuals. Respect for character is always diminished in proportion to the number among whom the blame or praise is to be divided. Conscience, the only remaining tie, is known to be inadequate in individuals: In large numbers, little is to be expected from it. Besides, Religion itself may become a motive to persecution & oppression. – These observations are verified by the Histories of every Country antient & modern. In Greece & Rome the rich & poor, the creditors & debtors, as well as the patricians & plebians alternately oppressed each other with equal unmercifulness. What a source of oppression was the relation between the parent cities of Rome, Athens & Carthage, & their respective provinces: the former possessing the power, & the latter being sufficiently distinguished to be separate objects of it? Why was America so justly apprehensive of Parliamentary injustice? Because G. Britain had a separate interest real or supposed, & if her authority had been admitted, could have pursued that interest at our expence. We have seen the mere distinction of colour made in the most enlightened period of time, a ground of the most oppressive dominion ever exercised by man over man. What has been the source of those unjust laws complained of among ourselves? Has it not been the real or supposed interest of the major number? Debtors have defrauded their creditors. The landed interest has borne hard on the mercantile interest. The Holders of one species of property have thrown a disproportion of taxes on the holders of another species. The lesson we are to draw from the whole is that where a majority are united by a common sentiment, and have an opportunity, the rights of the minor party become insecure. In a Republican Govt. the Majority if united have always an opportunity. The only remedy is to enlarge the sphere, & thereby divide the community into so great a number of interests & parties, that in the 1st. place a majority will not be likely at the same moment to have a common interest separate from that of the whole or of the minority; and in the 2d. place, that in case they shd. have such an interest, they may not be apt to unite in the pursuit of it. It was incumbent on us then to try this remedy, and with that view to frame a republican system on such a scale & in such a form as will controul all the evils wch. have been experienced.

[324] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[325] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 2: “A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit.”

[326] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[327] Report: “Options for Reducing the Deficit: 2015 to 2024.” Congressional Budget Office, November 20, 2014. <www.cbo.gov>

Page 38:

Low- and moderate-income people are eligible for certain refundable tax credits under the individual income tax if they meet specified criteria. If the amount of a refundable tax credit exceeds a taxpayer’s tax liability before that credit is applied, the government pays the excess to that person. Two refundable tax credits are available only to workers: the earned income tax credit (EITC) and the refundable portion of the child tax credit (referred to in the tax code as the additional child tax credit).

[328] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

Credits Against Tax

An individual may reduce his or her tax liability by any available tax credits. For example, tax credits are allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain energy conservation expenditures, certain education expenditures, certain child care expenditures, certain health care costs, and for certain elderly or disabled individuals.

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. Three large refundable credits in terms of cost are the child tax credit, the earned income tax credit, and the recovery rebate credit.34 …

A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37 The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children.

[329] Report: “Preview of the 2015 Annual Revision of the National Income and Product Accounts.” By Stephanie H. McCulla and Shelly Smith. U.S. Bureau of Economic Analysis, June 2015. <apps.bea.gov>

Page 2:

Federal Refundable Tax Credits

Federal income tax credits allow taxpayers who meet certain eligibility criteria to reduce the amount they are required to pay in federal income taxes. A tax credit is considered to be “refundable” if any excess of the tax credit over a taxpayer’s total tax liability is paid to the taxpayer as a refund. In contrast, tax credits are considered to be “nonrefundable” if taxpayers can only claim the credit up to the amount of their tax liability.1 Examples of refundable tax credits include the earned income tax credit and the temporary “Making Work Pay” tax credit (see table C).

Table C. Federal Refundable Tax Credit Programs

Major Programs

Program Dates

Earned Income Tax Credit

1975–present

Additional Child Tax Credit

1998–present

2008 Economic Stimulus Payments

2008

American Opportunity Tax Credit

2009–present

Making Work Pay Tax Credit

2010–2011

Health Insurance Premium Assistance Credits

2014–present

…

This change will be carried back to 1976, reflecting the introduction of the earned income tax credit, which is the earliest major refundable tax credit program.

[330] Webpage: “Recovery Rebate Credit.” U.S. Internal Revenue Service. Updated January 14, 2021. <www.irs.gov>

The Recovery Rebate Credit is authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-related Tax Relief Act. It is a tax credit against your 2020 income tax. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe. …

Eligible individuals who did not receive the full amounts of both Economic Impact Payments may claim the Recovery Rebate Credit on their 2020 Form 1040 or 1040-SR.

[331] Report: “Overview of Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (ACA)” By Annie L. Mach. Congressional Research Service, April 23, 2013. <www.fas.org>

Page 11:

Premium Tax Credits

Certain individuals who obtain coverage through an exchange will be eligible to receive health insurance premium tax credits. Premium tax credits are generally available to individuals who

• purchase nongroup coverage through an exchange;

• have household income22 between 100% and 400% of the federal poverty level (FPL);23

• are not eligible for minimum essential coverage;24 and

• are U.S. citizens (or legally residing in the United States).

To receive a premium tax credit, individuals also must be part of a tax-filing unit, as the credits are administered through federal income tax returns.

While the tax credits are generally directed at individuals who do not have access to coverage outside the nongroup market, certain individuals with access to employer-sponsored insurance (ESI) may be eligible for premium tax credits.

[332] Webpage: “Poverty Guidelines for 2021.” U.S. Department of Health & Human Services, January 13, 2021. <aspe.hhs.gov>

2021 Poverty Guidelines for the 48 Contiguous States and the District of Columbia

Persons in Family/Household

Poverty Guideline

For families/households with more than 8 persons, add $4,540 for each additional person.

1

$12,880

2

$17,420

3

$21,960

4

$26,500

5

$31,040

6

$35,580

7

$40,120

8

$44,660

CALCULATIONS:

  • $21,960 × 400% = $87,840
  • $26,500 × 400% = $106,000
  • $31,040 × 400% = $124,160

[333] Report: “Early 2020 Effectuated Enrollment Snapshot.” U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, July 23, 2020. <www.cms.gov>

Pages 3–4: “Table 1: Total Effectuated Enrollment and Enrollees Receiving APTC [Advanced Premium Tax Credit] and CSR [Cost-Sharing Reduction] by State, February 2020 … Total … APTC Enrollment [=] 9,232,225”

Pages 5–6: “Average Total Premium and Average APTC by State, February 2020 … Total … Average APTC per Month [=] $491.53”

CALCULATION: $491.53 × 12 = $5,898.36

[334] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[335] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[336] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[337] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[338] Report: “Individual Income Tax Returns, 2020.” Internal Revenue Service, November 2022. <www.irs.gov>

Pages 23–24: “In total, taxpayers claimed $148.2 billion in refundable tax credits.”

Item

2020

Amount (Millions)

Total refundable credits3 4

$148,170

Earned income credit, total

$59,240

American opportunity credit, total

$5,654

Additional child tax credit, total

$33,665

3 … For 2020, also includes the qualified sick and family leave credit

4 Includes the amount used to offset income tax before credits as well as the amount used to offset all other taxes and the refundable portion.

[339] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[340] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[341] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[342] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[343] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[344] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[345] Report: “Individual Income Tax Returns, 2020.” Internal Revenue Service, November 2022. <www.irs.gov>

Pages 23–24: “In total, taxpayers claimed $148.2 billion in refundable tax credits.”

Item

2020

Amount (Millions)

Total refundable credits3 4

$148,170

Earned income credit, total

$59,240

American opportunity credit, total

$5,654

Additional child tax credit, total

$33,665

3 … For 2020, also includes the qualified sick and family leave credit

4 Includes the amount used to offset income tax before credits as well as the amount used to offset all other taxes and the refundable portion.

[346] Report: “General Explanation of the Tax Reform Act of 1986.” Joint Committee on Taxation, May 4, 1987. <www.jct.gov>

Page 6:

The Tax Reform Act of 1986 (the “Act”) represents one of the most comprehensive revisions of the Federal income tax system since its inception. …

… The prior-law tax system intruded at nearly every level of decision-making by businesses and consumers. The sharp reductions in individual and corporate tax rates provided by the Act and the elimination of many tax preferences will directly remove or lessen tax considerations in labor, investment, and consumption decisions. The Act enables businesses to compete on a more equal basis, and business success will be determined more by serving the changing needs of a dynamic economy and less by relying on subsidies provided by the tax code.

… Beginning in 1988, the Act establishes two individual income tax rates—15 percent and 28 percent—to replace more than a dozen tax rates in each of the prior-law rate schedules, which extended up to 50 percent. Significant increases in the standard deduction and modifications to certain personal deductions provide further simplicity by greatly reducing the number of taxpayers who will itemize their deductions.

Page 273:

A principal objective of the Act was to reduce marginal tax rates on income earned by individuals and by corporations. Congress believed that lower tax rates promote economic growth by increasing the rate of return on investment. Lower tax rates also improve the allocation of resources within the economy by reducing the impact of tax considerations on business and investment decisions. In addition, lower tax rates promote compliance by reducing the potential gain from engaging in transactions designed to avoid or evade income tax. Under the Act, the maximum corporate rate is reduced from 46 percent to 34 percent.

Pages 1354–1358: “Table A-1.—Summary of Estimated Budget Effects of the Act (H.R. 3838), Fiscal Years 1987–1991 [Millions of dollars] … Grand total … 1987–91 [=] –257”

[347] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[348] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[349] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[350] Report: “General Explanation of the Tax Reform Act of 1986.” Joint Committee on Taxation, May 4, 1987. <www.jct.gov>

Page 7:

The Act retains the most widely utilized itemized deductions, including deductions for home mortgage interest. State and local income taxes, real estate and personal property taxes, charitable contributions, casualty and theft losses, and medical expenses (above an increased floor). Other deductions that benefited a limited number of taxpayers, added complexity to tax filing, or were subject to abuse are restricted by the Act.

[351] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 61–70:

E. New Tax Expenditures since the Tax Reform Act of 1986

The Tax Reform Act of 1986 “represents one of the most comprehensive revisions of the Federal income tax system since its inception.” Among other considerations, Congress was concerned that erosion of the tax base required tax rates to be higher than otherwise would be necessary. With the elimination of various tax expenditures and other preferences and the enactment of other base-broadening provisions, the Act sharply reduced individual income tax rates. The Act retained some of the tax expenditures most widely utilized by individuals and business tax expenditures believed to be beneficial to the economy.

Numerous changes to the Code have been enacted in subsequent tax legislation. The information that follows provides a list of the new tax expenditures contained in legislation since the passage of the Tax Reform Act of 1986. Modifications and extensions of pre-existing tax expenditures are not listed. Items are grouped by the legislation by which they were created. Items that have since expired are shown in italics. …

NOTE: This list contains 151 tax preferences.

[352] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 1:

The current version of the alternative tax, the alternative minimum tax (AMT), requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. (For details on the calculation of the AMT, see Box 1.) That second set of rules raises marginal tax rates (the tax on an additional dollar of income) for some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system.

Page 2:

The alternative minimum tax (AMT) is defined as the addition to regular income taxes, equal to the amount, if any, by which AMT liability exceeds regular tax liability (after applying appropriate credits). Taxpayers who potentially owe the AMT must recalculate their taxable income as defined by the AMT, apply alternative tax rates, allow for credits and other factors, and compare the resulting tentative AMT liability against their regular tax liability. Even though the AMT is technically the excess of AMT over regular tax liability, taxpayers effectively calculate their taxes under two systems and pay the higher of the two liabilities.

[353] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 1:

There are two AMTs [Alternative Minimum Taxes], one for individuals and the other for corporations.1 This report deals only with the AMT for individuals, which has more taxpayers and generates more tax revenue. …

… The goal of the AMT for individuals is to make everyone with significant income pay some federal income tax. The AMT has a lower top rate than the regular income tax but tries to catch more income in its net by defining taxable income (the tax base) more broadly. Compared to the regular income tax, the AMT has fewer “tax preferences”—deductions and other ways of reducing tax liability.

1 In the tax code, AMT provisions for individuals and corporations are intermingled. The reason is that one target of the AMT is people who own businesses. They can treat themselves as salaried employees subject to the individual income tax or as stockholders subject to corporate taxes.

[354] Paper: “The Expanding Reach of the Individual Alternative Minimum Tax.” By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center, Updated May 2005. <www.urban.org>

Page 4:

Because the alternative minimum tax does not allow exemptions for dependents or deductions for state taxes, it will impose particularly high burdens on taxpayers with children and those in high-tax states.6 Because the AMT exemption for couples is less than double the exemption for singles and because the tax brackets are not adjusted for marital status, the AMT imposes significant marriage penalties. In combination, these issues can raise AMT participation rates dramatically, as spelled out in table 2.

[355] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 12:

Alternative Minimum Tax Liability

The personal credits allowed against the regular tax are generally allowed against the alternative minimum tax (“AMT”). An AMT is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year.44 For 2020, the tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $197,900 ($98,950 in the case of married filing separately)45 and (2) 28 percent of the remaining taxable excess.46

The taxable excess is so much of the alternative minimum taxable income (“AMTI”) as exceeds the exemption amount. AMTI is the taxpayer’s taxable income increased by the taxpayer’s tax preferences and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. For taxable years beginning in 2020, the exemption amount is $113,400 for married individuals filing jointly and surviving spouses, $72,900 for other unmarried individuals, $56,700 for married individuals filing separately, and $25,400 for estates or trusts. The exemption amount is phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds $1,036,800 for married individuals filing jointly and surviving spouses, $518,400 for other individuals, and $84,800 for estates or trusts. These amounts are indexed annually for inflation.

Among the tax preferences and adjustments included in AMTI are accelerated depreciation on certain property used in a trade or business, circulation expenditures, research and experimental expenditures, certain expenses and allowances related to oil and gas, certain expenses and allowances related to mining exploration and development, certain tax-exempt interest income, and a portion of the gain excluded with respect to the sale or disposition of certain small business stock. The standard deduction, and certain itemized deductions, such as the deduction for State and local taxes, are not allowed to reduce AMTI.

[356] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 64:

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.

[357] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Pages 3–4:

Inflation is the most important driver of the long-term growth in receipts from the AMT. Under the regular individual income tax, the tax rate brackets, exemptions, and certain deductions and credits are adjusted automatically to keep pace with inflation. By contrast, the exemption amounts and rate brackets used to calculate the AMT are not indexed. If income grows at the rate of inflation, regular tax liability also rises with inflation; AMT liability grows faster, however, because income is rising but the AMT’s exemption amounts and rate brackets are not. Therefore, as prices rise over time, more and more taxpayers owe the alternative tax. The temporary increases in the AMT’s exemption amounts enacted since 2001 have effectively indexed the AMT for inflation.

Page 5:

As the AMT expands, it will reach taxpayers with different characteristics than those affected by the AMT in the past. Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers who tended to itemize their deductions and used tax preferences that are available to itemizers but disallowed under the alternative tax. In the years to come, however, many taxpayers with lower income will move onto the AMT because it disallows some widely used features of the regular tax, such as the personal exemption (which all taxpayers use) and the standard deduction (which roughly two-thirds of filers use). In 2001, only about 6 percent of the 1 million taxpayers affected by the AMT claimed the standard deduction on their regular tax return. That share is projected to rise to nearly one-third of the projected 27 million taxpayers who will owe the AMT in 2010.

[358] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 5: “The AMT [Alternative Minimum Tax] tends to affect larger families and taxpayers with greater deductions for state and local taxes more than it affects other taxpayers.”

Page 7:

The regular income tax allows a deduction for state and local taxes paid on income and property.11 The deduction provides a considerable subsidy to residents in those jurisdictions because it decreases the net cost to taxpayers of paying deductible state and local taxes. By lowering the net cost of those taxes, the deduction allows state and local governments to impose higher taxes and provide more services than they otherwise could.

The deduction is disallowed under the AMT, so the AMT is more likely to affect taxpayers in higher-tax states, for whom the deduction is more valuable. In 2007, for example, 18 percent of taxpayers in New York (a high-tax state) with AGI between $100,000 and $200,000 paid the AMT, while fewer than 5 percent of taxpayers in the same income group in Florida (a state with no income tax) paid the alternative tax. By curtailing the use of the deduction, the AMT limits the implicit subsidy to state and local governments.

Page 8:

Exemptions for Dependents. The regular tax system offers benefits to larger families, allowing taxpayers to take child tax credits and personal exemptions for themselves and each of their qualifying dependents. Even though the AMT allows child tax credits, it replaces the personal exemptions with a single exemption amount based only on filing status, thereby reducing the tax benefit provided for larger families relative to smaller ones. For example, in 2006, married couples with three dependents and income between $100,000 and $200,000 were three times as likely to have AMT liability as couples with similar income and no dependents.

Other Tax Preferences. The AMT limits other regular income tax preferences, including deductions for medical expenses and for certain mortgage interest. The regular income tax allows taxpayers to deduct medical expenses in excess of 7.5 percent of AGI if they itemize their deductions, but the AMT limits the deduction to expenses exceeding 10 percent of AGI. As a result, the AMT reduces the amount of relief given to taxpayers with large medical expenses in a given year (although that limitation applies only to taxpayers subject to the AMT, who generally have higher income and may be in less need of relief). Similarly, although taxpayers may deduct mortgage interest paid to acquire, build, or improve a primary residence under both the regular and the alternative taxes, the AMT disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt.

[359] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 7: “The most important features of the regular income tax (the tax brackets, standard deduction, exemptions for dependents, and so on) have been automatically indexed for inflation annually since 1985. The AMT [Alternative Minimum Tax] is not indexed. Congress has periodically raised the exemption amounts for the AMT, but not fast enough to keep pace with inflation.”

[360] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 9: “For most of the past decade, lawmakers have chosen to limit the number of taxpayers affected by the AMT by temporarily increasing the exemption amounts. Those amounts were initially increased by EGTRRA [Economic Growth and Tax Relief Reconciliation Act of 2001] in 2001 and subsequently increased and extended for a year or two at a time, most recently by the American Recovery and Reinvestment Act of 2009 (ARRA).”

[361] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 64:

Slightly more taxpayers would become subject to the alternative minimum tax (AMT) over time, although the share of taxpayers who would pay the alternative tax was greatly limited by the American Taxpayer Relief Act of 2012.10

10 The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.

[362] Report: “The Budget and Economic Outlook: 2015 to 2025.” Congressional Budget Office, January 26, 2015. <www.cbo.gov>

Page 94:

The most significant factor pushing up taxes relative to income is real bracket creep. That phenomenon occurs because the income tax brackets and exemptions under both the regular income tax and the alternative minimum tax (AMT) are indexed only to inflation.2 If incomes grow faster than inflation, as generally occurs when the economy is growing, more income is pushed into higher tax brackets. In CBO’s estimates, real bracket creep raises revenues relative to GDP by 0.2 percentage points between 2014 and 2016.

[363] Report: “Federal Individual Income Tax Brackets, Standard Deduction, and Personal Exemption: 1988 to 2021.” Congressional Research Service. Updated February 16, 2021. <crsreports.congress.gov>

Page 2:

Before 2018, each taxpayer was allowed to reduce gross income by a fixed amount (i.e., an exemption) for herself or himself, a spouse, and all qualified dependents. The amount of the exemption was the same for every individual and indexed for inflation. In 2017, the amount was $4,050 per person. Under current law, the personal exemption is $0 from 2018 through 2025, but it will be reinstated in 2026, assuming no legislative changes.

[364] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary.

Page 15:

Personal Exemptions

2017 Tax Law … To calculate taxable income, taxpayers subtract from their adjusted gross income (AGI) the standard deduction or sum of their itemized deductions (whichever is greater) and the appropriate number of personal exemptions for themselves, their spouse (if married), and their dependents. For 2018, before enactment of P.L. 115-97, the person exemption amount would have been $4,150.

IRC Section 151

P.L. 115-97 … Repeals personal exemptions for the taxpayer, their spouse (if married), and their dependents.

Provision expires 12/31/25

(Section 11041 of P.L. 115-97)

State and Local Tax Deduction

2017 Tax Law … State and local (and foreign) income and property taxes are deductible as an itemized deduction. State and local sales taxes paid may be deducted in lieu of income taxes.

IRC Section 164

P.L. 115-97 … Limits itemized deductions for state and local income, sales, and property taxes to $10,000. No deduction is allowed for foreign real property taxes. Property taxes associated with carrying on a trade or business are fully deductible.

Provision expires 12/31/25

(Section 11042 of P.L. 115-97)

Page 19:

Individual Alternative Minimum Tax

2017 Tax Law … A tax is imposed at 26% on an individual’s alternative minimum taxable income (primarily income without a standard deduction, state and local income deduction, or deductions for personal exemptions) less an exemption amount. For 2018 the exemption is $55,400 for singles and $86,200 for married couples. The exemption phases out beginning at $123,100 for singles and $164,100 for married couples. A higher rate of 28% applies to taxpayers with incomes above $95,750 for single filers and $191,500 for married taxpayers filing joint returns. These amounts are indexed for inflation. Prior-year AMT amounts can be credited against regular tax.

IRC Section 55

P.L. 115-97 … Increases the AMT exemption amounts to $70,300 for unmarried taxpayers (single filers and heads of households) and $109,400 for married taxpayers filing joint returns. Exemption phases out at $500,000 for singles and $1,000,000 for married taxpayers filing jointly. These amounts are indexed for inflation.

Provision expires 12/31/2025

(Section 12003 of P.L. 115-97)

[365] Briefing Book. Urban-Brookings Tax Policy Center, 2020. <www.taxpolicycenter.org>

Page 201 (of PDF): “The AMT provisions, along with almost all other individual income tax measures in TCJA, are set to expire at the end of 2025. Thus, barring legislation from Congress, the AMT will return in force in 2026, affecting 6.7 million taxpayers. That number will rise to 7.6 million by 2030.”

Page 240 (of PDF):

Before the enactment of the TCJA [Tax Cuts and Jobs Act], some of the larger AMT preference items included the deduction for state and local taxes (62 percent of all preferences in 2012 according to data from the US Department of the Treasury), personal exemptions (21 percent), and the deduction for miscellaneous business expenses (9.5 percent). Because the TCJA temporarily repealed the latter two provisions and capped the deduction for state and local taxes at $10,000, other preferences, such as the standard deduction and the special AMT rules for the treatment of net operating losses, depreciation, and passive losses, will become more important through 2025.

[366] Calculated with data from:

a) Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 3: “Table 1. Basic data and projections on the alternative minimum tax for individuals”

b) Report: “Individual Income Tax Rates and Shares, 2011.” By Adrian Dungan and Michael Parisi. IRS, Statistics of Income Bulletin, Spring 2014. <www.irs.gov>

Page 14: “Figure F. Alternative Minimum Tax, Tax Years 1986–2011”

c) Report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 8, Lines 38, 39: “Table A. All Individual Income Tax Returns: Selected Income and Tax Items in Current and Constant 1990 Dollars, Tax Years 1990–2018—Continued”

Page 30: “Figure A. Total Number of Returns, and Selected Income and Tax Items for Taxable Returns, Tax Years 1986–2018”

NOTES:

  • Where possible, overlapping data points from the sources above were compared to make sure the sources’ definitions and methodologies were compatible. The maximum differential in any value was 0.1 percentage point.
  • An Excel file containing the data and calculations is available upon request.

[367] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Pages 4–5:

The minimum income tax of 1969. The AMT has its roots in a minimum income tax enacted in 1969. Congress enacted the minimum tax following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns. …

The minimum income tax was an “add-on” tax of 10 percent.12 People had to pay a 10 percent tax on the amount to which their reductions of tax liability (tax preferences) exceeded $30,000. Unlike today’s AMT, the add-on tax did not have rules for calculating taxable income that were separate from the rules for the regular income tax, nor did it have a separate list of reductions of tax liability.

[368] Testimony: “Economic Report of the President.” By Joseph Barr, U.S. Congress, Joint Economic Committee, January 17, 1969.

Page 6:

[T]here is going to be a taxpayer revolt over the income taxes in this country unless we move in this area. Now, the revolt is not going to come from the poor. They do not pay very much in taxes. The revolt is going to come from the middle class. It is going to come from those people with incomes from $7,000 to $20,000 who pay every nickel of taxes at the going rate. They do not have the loopholes and gimmicks to resort to, Mr. Chairman.

However, when these people see, as I see, that in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the “taxpayers” paid the U.S. Government not 1 cent of income taxes, I think those people are going to say it is time to do something about it and I concur.

[369] Paper: “The Expanding Reach of the Individual Alternative Minimum Tax.” By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center. Updated May 2005. <www.urban.org>

Page 1: “In January 1969, Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news created a political firestorm. In 1969, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war.”

NOTE: Just Facts searched for and did not find a primary source to substantiate the claim that “members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war.” It seems implausible that Congress kept records of how many letters each Congressman received on this or any other issue. Nonetheless, as evidenced by the next footnote, Barr’s speech did lead to a public outcry.

[370] Editorial: “The Taxpayer and His Money: It Could Be Better Collected.” Life, August 15, 1969.

Page 30:

Congress is now considering the most drastic reform of the tax system since World War II. The House bill would lighten the burden on all classes of taxpayers, especially the lowest incomes, while offsetting most of this loss of needed revenue by plugging the most glaring “loopholes”—more properly known as tax preferences—now enjoyed by the rich and by certain industries. …

… Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all.

[371] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.

[372] Report: “General Explanation of the Tax Reform Act of 1969, H.R. 13270, 91st Congress, Public Law 91-172.” U.S. Congress, Joint Committee on Internal Revenue Taxation, December 3, 1970. <www.jct.gov>

Page 1:

The Tax Reform Act of 1969 (H.R. 13270) is a substantive and comprehensive reform of the income tax laws. As the House and Senate Committee Reports suggest, there was no prior tax reform bill of equal substantive scope.

The congressional consideration of this Act lasted eleven months and one day. The schedule of the various actions by the committees on the bill was as follows:

January 29, 1969: Announcement by the House Committee on Ways and Means of its hearings on tax reform. …

December 22, 1969: Approval of the Conference Report by both the House and Senate by votes of 381 to 2 and 71 to 6, respectively.

December 30, 1969: Tax Reform Act of 1969 (Public Law 91-172) signed by the President.

From time to time, since the enactment of the present income tax over 50 years ago, various tax incentives or preferences have been added to the internal revenue laws. Increasingly in recent years, taxpayers with substantial incomes have found ways of gaining tax advantages from the provisions that were placed in the code primarily to aid limited segments of the economy. In fact, in many cases these taxpayers have found ways to pile one advantage on top of another. The House and Senate agreed that this was an intolerable situation. It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income.

Page 5:

7. Minimum tax.—This tax, which applies to both individuals and corporations, supplements the action of the specific remedial provisions of the Act in curtailing tax preferences. It is computed by (1) totaling the amount of tax preferences received by the taxpayer (from the broad category of tax preferences specified in the Act), (2) subtracting from this total a $30,000 exemption and the amount of the taxpayer’s regular Federal income tax for the year, and (3) applying a 10-percent tax rate to the remainder.

[373] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.

Excise, Estate, and Gift Tax Adjustment Act of 1970 (P.L. 91-614) Allowed deduction of the “unused regular tax carryover” from the base for the minimum tax.

Revenue Act of 1971 (P.L. 92-178) Imposed minor provisions regarding foreign income.

Tax Reform Act of 1976 (P.L. 94-455) Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.

Tax Reduction and Simplification Act of 1977 (P.L. 95-30) Reduced minimum tax preference for intangible costs of drilling oil and gas wells.

Revenue Act of 1978 (P.L. 95-600) Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.

Economic Recovery Tax Act of 1981 (P.L. 97-34) Lowered AMT rates to correspond with reductions in rates of regular income tax.

Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) Repealed “add-on” minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.

Deficit Reduction Act of 1984 (P.L. 98-369) Made minor changes concerning investment tax credit, intangible drilling costs, and other items.

Tax Reform Act of 1986 (P.L. 99-514) Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.

Revenue Act of 1987 (P.L. 100-203) Made technical corrections related to Tax Reform Act of 1986. Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) Made technical corrections related to Tax Reform Act of 1986.

Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) Made further technical amendments.

Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) Raised AMT rate to 24%.

Energy Policy Act of 1992 (P.L. 102-486) Changes regarding intangible costs of drilling oil and gas wells.

Omnibus Reconciliation Act of 1993 (P.L. 103-66) Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.

Taxpayer Relief Act of 1997 (P.L. 105-34) Changes regarding depreciation and farmers’ installment sales.

Tax Technical Corrections Act of 1998 (P.L. 105-206) Adjusted AMT for new capital gains rates.

Tax Relief Extension Act of 1999 (P.L. 106-170) Changed rules about nonrefundable credits.

Note: There may have been a few other quite minor changes made by bills omitted from this list. The provisions of the AMT for corporations and for individuals are mixed together in the tax code, so many bills apply to both types of AMT.

[374] Report: “Present Law and Background Relating to the Individual Alternative Minimum Tax.” U.S. Congress, Joint Committee on Taxation, June 25, 2007. <www.jct.gov>

Page 5:

The Tax Equity and Fiscal Responsibility Act of 1982 enacted the first comprehensive individual AMT.7 According to the legislative history of that Act, “the committee has amended the present minimum tax provisions applying to individuals with one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits.”8

The AMT provisions enacted in 1982 are the foundation for the present law individual AMT. Under the 1982 Act, in computing AMTI, the deduction for State and local taxes, the deduction for personal exemptions, the standard deduction, and the deduction for interest on home equity loans were not allowed. Incentive stock option gain was included in AMTI. These remain the principal preferences and adjustments under present law. A rate of 20 percent applied to AMTI in excess of an exemption amount of $40,000 ($30,000 for unmarried taxpayers). The exemption amounts were not indexed for inflation, even though the regular rates were scheduled to be indexed for inflation in future years. Nonrefundable credits (other than the foreign tax credit) were not allowed against the AMT.

The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, except that deferral preferences were properly adjusted over time and a minimum tax credit was added. …

8 Tax Equity and Fiscal Responsibility Act of 1982, S. Rpt. No. 97-494 Vol. 1, at 108 (July 12, 1982).

[375] Calculated with data from “Statistics of Income Bulletin, Volume 7, Number 4.” Internal Revenue Service, Spring 1988. <www.irs.gov>

Page 75: “Table 7.-Standard, Itemized, and Total Deductions Reported on Individual Income Tax Returns, Tax Years 1944–1986 [All figures are estimates based on samples-number of returns are in millions; money amounts are in billions of dollars] … Number of returns … 1967 [=] 71.7”

CALCULATION: 155 / 71,700,000 = 0.0002%

[376] “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed January 20, 2021 at <www.bls.gov>

“$200,000 in January 1967 has the same buying power as $1,506,790.27 in January 2018”

[377] Calculated with data from the report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 30: “Figure A. Total Number of Returns, and Selected Income and Tax Items for Taxable Returns, Tax Years 1986–2018” [Money amounts are in billions of dollars, except where indicated] … Tax Year 2018 … Number of taxable returns [=] 100,424,240”

Page 8: “Table A. All Returns: Selected Income and Tax Items in Current and Constant 1990 Dollars, Tax Years 2011–2018—Continued” [All figures are estimates based on samples—money amounts are in thousands of dollars] … Item [=] Alternative minimum tax: Number of returns … 2018 [=] 244,007”

CALCULATION: 244,007 / 100,424,240 = 0.2%

[378] Calculated with data from the report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 35: “Returns with Alternative Minimum Tax Computation Reported on Form 6251: Total Adjustments and Preferences, and Alternative Minimum Taxable Income and Tax, by Size of Adjusted Gross Income, Tax Years 2017 and 2018 [Money amounts are in thousands of dollars]”

NOTE: An Excel file containing the data and calculations is available upon request.

[379] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 2 (of PDF):

For Tax Year 2017, there were almost 7.7 million individual income tax returns with an expanded income of $200,000 or more, accounting for 5.1 percent of all returns filed for the year. Of these, 10,988 returns had no worldwide income tax liability. …

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI) and the “expanded income” concept. The expanded income concept uses items reported on the tax return to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax (AMT) purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.2,3,4

Page 3:

There are also two tax concepts in this article used to classify returns as taxable or nontaxable: “U.S. income tax” and “worldwide income tax.” U.S. income tax is total Federal income tax liability, which includes the AMT, less all credits against income tax, and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits. A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits). Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. income tax concept even though income taxes had been paid to a foreign government. Worldwide income tax addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S. income tax. The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

Page 10: “Of the 10,988 returns without any worldwide income tax and expanded incomes of $200,000 or more, the most important item in eliminating tax, on 42.1 percent of returns, was the exclusion for interest income on State and local Government bonds (‘tax-exempt interest’)….”

Page 15:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[380] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 15, 2012. <www.sec.gov>

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[381] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Pages 3–4: “Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is ownership of dividend paying stocks.5”

[382] Editorial: “The Taxpayer and His Money: It Could Be Better Collected.” Life, August 15, 1969.

Page 30:

Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over 200,000 were in 1967 able to pay no income tax at all. But among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works.

[383] “Form 9452: Filing Assistance Program.” Internal Revenue Service, 2018. Accessed January 20, 2020 at <www.irs.gov>

“Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)”

[384] Report: “The Federal Revenue Effects of Tax-Exempt and Direct-Pay Tax Credit Bond Provisions.” Joint Committee On Taxation, July 16, 2012. <www.jct.gov>

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other requirements are met. During the period 2001–2010, the average annual volume of new tax-exempt bonds issued by State and local governments was $340 billion and the average annual volume of tax-exempt notes (bonds with maturities of less than one year) issued by State and local governments was $60 billion. As of the fourth quarter of 2011, State and local governments had total tax-exempt security liabilities of nearly $3.0 trillion.4

[385] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 7: “Because they do not generate AMT adjustments or preferences, tax-exempt bond interest (not including private activity bonds), itemized deductions for interest expenses, miscellaneous itemized deductions not subject to the 2-percentof-AGI floor, casualty or theft losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, produce nontaxability.”

[386] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[387] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 15:

However, certain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[388] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[389] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 56: “CBO’s [Congressional Budget Office’s] baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged.”

Page 60: “For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP [gross domestic product] because rising real income tends to push a greater share of income into higher tax brackets—a phenomenon known as real bracket creep.”

Page 66: “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.”

[390] Report: “The ‘Fiscal Cliff’ and the American Taxpayer Relief Act of 2012.” By Mindy R. Levit and others. Congressional Research Service, January 4, 2013. <www.fas.org>

Page 1: “On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA; H.R. 8 as enacted), which prevented many—but not all—of the fiscal cliff policies from going into effect.”

Pages 3–6:

ATRA addressed several revenue provisions that had been set to expire at the end of 2012. These included the “Bush-era tax cuts,” provisions related to the estate tax, certain tax provisions enacted or expanded as part of the American Recovery and Reinvestment Act of 2009, the Alternative Minimum Tax (AMT), and a number of temporary tax provisions (also known as “tax extenders”). …

The Bush-era tax cuts included provisions—initially enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27)8—which reduced income tax liabilities from 2002 to 2010. These tax cuts were extended for 2011 and 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The Bush-era tax cuts lowered income taxes in a variety of ways, including by reducing marginal tax rates on ordinary income; reducing tax rates on long-term capital gains and dividends; reduced and ultimately repealed limitations for personal exemptions (PEP) and itemized deductions (Pease);9 and expanded certain tax credits, including the Earned Income Tax Credit (EITC),10 child tax credit,11 adoption tax credit,12 and dependent care tax credit.13 The Bush-era tax cuts also contained provisions to reduce the marriage tax penalty,14 as well as modifying and expanding various education-related tax incentives.

ATRA made a variety of changes to these tax provisions. The law permanently extended and in certain cases modified tax provisions originally included in EGTRRA and JGTRRA. Specifically, ATRA permanently extended the reduced tax rates on both ordinary income and capital gains and dividends for taxpayers with taxable income15 below $400,000 ($450,000 for married taxpayers filing jointly).16 For taxpayers with taxable income above these thresholds, the marginal tax rate on ordinary income rose from 35% to 39.6% on the portion of their income above these thresholds, and the top tax rate on long term capital gains and dividends rose from 15% to 20%. ATRA also reinstated PEP and Pease for taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for married couples filing jointly), allowing these limitations on personal exemptions and overall itemized deductions to expire for those with AGI below these thresholds. ATRA also permanently extended the tax changes to a variety of tax credits, the marriage penalty and education-related tax incentives. …

Estate and Gift Tax

EGTRRA enacted provisions to phase out the estate tax18 over a 10-year period. In 2010, there was no federal estate tax. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reinstated, through 2012, the estate tax. As reinstated, the top rate for the estate tax was lower than it had been in 2009 (35%, as opposed to 45%). The exemption amount, as reinstated, was also higher than it had been in 2009 ($5.0 million, as opposed to $3.5 million). Absent legislative action, after 2012 the estate tax would have returned to pre-EGGTRA rules, with a top rate of 55% and a $1 million exemption level per decedent. ATRA permanently extended the estate tax rules established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,19 except for the top tax rate which was increased from 35% to 40%. Hence, under ATRA, $5 million of a decedent’s estate would be exempt from the estate tax (this threshold is indexed for inflation occurring after 2011 and was $5.12 million per decedent in 2012), and the top rate on estates over this threshold would be 40%. …

19 Thus, ATRA also extends the gift tax levels of a $5.12 million ($5 million indexed for inflation after 2011) exemption and a 40% top rate. In addition, it extends portability rules related to the passing of an exemption amount onto a surviving spouse.

Alternative Minimum Tax (AMT) Patch

The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax.21 …

Crucially, prior to the enactment of H.R. 8, key parts of the AMT—including the exemption amount—were not indexed for inflation. This meant that additional taxpayers—an estimated 27 million in 2012—would be subject to the AMT due to the rise of their nominal income levels over time.22 Over the past decade, Congress had regularly enacted temporary increases of the AMT exemption amount to adjust for inflation and allowed nonrefundable personal tax credits to reduce AMT tax liability (these policies are often known as the AMT “patch”). ATRA permanently adjusts the AMT exemption amount for inflation,23 ending the need for te