Thursday, March 26, 2009

PRESENT LAW RELATED TO THE INDIVIDUAL INCOME
AND SOCIAL INSURANCE TAXES AS IN EFFECT
FOR 2009 AND BACKGROUND DATA RELATED
TO THE DISTRIBUTION OF FEDERAL TAXES
Scheduled for a Public Hearing
Before the
SENATE COMMITTEE ON FINANCE
on March 26, 2009



Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
March 24, 2009
JCX-21-09
i
CONTENTS
Page
INTRODUCTION .......................................................................................................................... 1
I. SUMMARY OF PRESENT-LAW FEDERAL TAX SYSTEM ........................................... 2
A. Individual Income Tax ..................................................................................................... 2
B. Social Insurance Taxes .................................................................................................... 8
II. BACKGROUND DATA RELATED TO THE DISTRIBUTION OF INCOME AND
TAXES .................................................................................................................................. 9
1
INTRODUCTION
The Senate Committee on Finance has scheduled a public hearing on March 26, 2009 on
middle income tax relief options. This document,1 prepared by the staff of the Joint Committee
on Taxation, provides a summary of the present-law Federal tax system with respect to the
individual income tax and payroll taxes, as in effect for 2009. The document provides
background data on the historical distribution of Federal tax liabilities from 1980 to 2005, as well
as projections of the distribution of tax liabilities for 2009.
The current Federal tax system has four main elements: (1) an income tax on individuals
and corporations (which consists of both a “regular” income tax and an alternative minimum
tax); (2) payroll taxes on wages (and corresponding taxes on self-employment income); (3)
estate, gift, and generation-skipping transfer taxes, and (4) excise taxes on selected goods and
services. This document provides a broad overview of the first two of these elements, excluding
the corporate income tax.
A number of aspects of the Federal tax laws are subject to change over time. For
example, some dollar amounts and income thresholds are indexed for inflation. The standard
deduction and tax rate brackets are examples of amounts that are indexed for inflation. The
amount of earnings subject to the Social Security tax is adjusted annually for wage growth. In
general, the Internal Revenue Service adjusts these numbers annually and publishes the inflationadjusted
amounts in effect for a tax year prior to the beginning of that year. Where applicable,
this document generally includes dollar amounts in effect for 2009 and notes whether dollar
amounts are indexed for inflation.
In addition, a number of the provisions in the Federal tax laws have been enacted on a
temporary basis or have parameters that vary by statute from year to year.2 For example, Public
Law 110-343 (the Emergency Economic Stabilization Act of 2008, the Energy Improvement and
Extension Act of 2008, and the Tax Extenders and Alternative Minimum Tax Relief Act of
2008) and Public Law 111-5 (American Recovery and Reinvestment Act of 2009) extended a
number of expired or soon to expire provisions on a temporary basis. In addition, many of the
provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 initially were to
expire at the end of 2010; some provisions of that Act have been modified subsequently or made
permanent. For simplicity, this document generally describes the Federal tax laws in effect in
2009 and generally does not include references to provisions as they may be in effect for future
years or to termination dates for expiring provisions.
1 This document may be cited as follows: Joint Committee on Taxation, Present Law Related to
the Individual Income and Social Insurance Taxes as in Effect for 2009 and Background Data Related to
the Distribution of Federal Taxes (JCX-21-09), March 24, 2009. This document can be found on the
website at www.jct.gov.
2 See Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2008-2020 (JCX-
20-09), March 9, 2009.
2
I. SUMMARY OF PRESENT-LAW INDIVIDUAL INCOME TAX
AND SOCIAL INSURANCE TAXES
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.3 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.
Adjusted gross income
Under the Internal Revenue Code of 1986 (the “Code”), gross income means “income
from whatever source derived” except for certain items specifically exempt or excluded by
statute. Sources of income include, among other things, 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,4 trusts or estates.5 Statutory exclusions from gross income
include death benefits payable under a life insurance contract, interest on certain State and local
bonds, employer-provided health insurance, employer-provided pension contributions, and
certain other employer-provided benefits. Gross income is also reduced by other items like trade
or business expenses and capital losses.
An individual’s adjusted gross income (“AGI”) is determined by subtracting certain
“above-the-line” deductions from gross income. These deductions include, among other things,
contributions to a tax-qualified retirement plan by a self-employed individual, contributions to
3 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.
4 In general, partnerships and S corporations 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.
5 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 “passthrough”
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.
3
certain individual retirement arrangements (“IRAs”), one-half of self-employment taxes, certain
moving expenses, and alimony payments.
Taxable income
In order to determine taxable income, an individual reduces AGI by any personal
exemption deductions and either the applicable standard deduction or his or her itemized
deductions. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and
any dependents. For 2009, the amount deductible for each personal exemption is $3,650. This
amount is indexed annually for inflation. The deduction for personal exemptions is reduced or
eliminated for taxpayers with incomes over certain thresholds, which are indexed annually for
inflation. The applicable thresholds for 2009 are $166,800 for single individuals, $250,200 for
married individuals filing a joint return and surviving spouses, $199,950 for heads of households,
and $125,100 for married individuals filing separate returns.
A taxpayer also may reduce AGI by the amount of the applicable standard deduction. The
basic standard deduction varies depending upon a taxpayer’s filing status. For 2009, the amount
of the standard deduction is $5,700 for single individuals and married individuals filing separate
returns, $8,350 for heads of households, and $11,400 for married individuals filing a joint return
and surviving spouses. An additional standard deduction is allowed with respect to any
individual who is elderly or blind.6 The amounts of the basic standard deduction and the
additional standard deductions are indexed annually for inflation. Finally, a taxpayer may reduce
AGI by an additional standard deduction for State and local property taxes paid of $500 ($1,000
for joint filers) and for qualified motor vehicle taxes.
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 income taxes (or, in
lieu of income, sales taxes), real property and certain personal property taxes, home mortgage
interest, charitable contributions, certain investment interest, medical expenses (in excess of 7.5
percent of AGI), casualty and theft losses (in excess of $500 per loss and in excess of 10 percent
of AGI), and certain miscellaneous expenses (in excess of two percent of AGI7). The total
amount of most itemized deductions allowed is reduced for taxpayers with incomes over a
certain threshold amount, which is indexed annually for inflation.8 The threshold amount for
2009 is $166,800 ($83,400 for married individuals filing separate returns).
6 For 2009, the additional amount is $1,100 for married taxpayers (for each spouse meeting the
applicable criterion) and surviving spouses. The additional amount for single individuals and heads of
households is $1,400. If an individual is both blind and aged, the individual is entitled to two additional
standard deductions, for a total additional amount (for 2009) of $2,200 or $2,800, as applicable.
7 Certain expenses are not subject to the two percent of AGI limitation (e.g., certain interest
expense, State and local taxes, theft and casualty losses, gambling losses, and medical expenses).
8 Certain itemized deductions are not reduced (i.e., medical expenses, investment interest, theft
and casualty losses and gambling losses).
4
Tax liability
In general
A taxpayer’s net income tax liability is the greater of (1) regular individual income tax
liability reduced by credits allowed against the regular tax, or (2) tentative minimum tax reduced
by credits allowed against the minimum tax. The amount of income subject to tax is determined
differently under the regular tax and the alternative minimum tax, and separate rate schedules
apply. Lower rates apply for long-term capital gains; those rates apply for both the regular tax
and the alternative minimum tax.
Regular tax liability
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, and the marginal tax rate increases as a
taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status.
For 2009, the regular individual income tax rate schedules are as follows:
5
Table 1.–Federal Individual Income Tax Rates for 2009
If taxable income is: Then income tax equals:
Single Individuals
Not over $8,350 .................................................................. 10% of the taxable income
Over $8,350 but not over $33,950 ...................................... $835 plus 15% of the excess over $8,350
Over $33,950 but not over $82,250 .................................... $4,675 plus 25% of the excess over $33,950
Over $82,250 but not over $171,550 .................................. $16,750 plus 28% of the excess over $82,250
Over $171,550 but not over $372,950 ............................... $41,754 plus 33% of the excess over $171,550
Over $372,950 .................................................................... $108,216 plus 35% of the excess over $372,950
Heads of Households
Not over $11,950 ................................................................ 10% of the taxable income
Over $11,950 but not over $45,500 .................................... $1,195 plus 15% of the excess over $11,950
Over $45,500 but not over $117,450 .................................. $6,227.50 plus 25% of the excess over $45,500
Over $117,450 but not over $190,200 ................................ $24,215 plus 28% of the excess over $117,450
Over $190,200 but not over $372,950 ................................ $44,585 plus 33% of the excess over $190,200
Over $372,950 .................................................................... $104,892.5 plus 35% of the excess over $372,950
Married Individuals Filing Joint Returns and Surviving Spouses
Not over $16,700 ................................................................ 10% of the taxable income
Over $16,700 but not over $67,900 .................................... $1,670 plus 15% of the excess over $67,900
Over $67,900 but not over $137,050 .................................. $9,350 plus 25% of the excess over $67,900
Over $137,050 but not over $208,850 ................................ $26,637.50 plus 28% of the excess over $137,050
Over $208,850 but not over $372,950 ................................ $46,741.50 plus 33% of the excess over $208,850
Over $372,950 .................................................................... $100,894.50 plus 35% of the excess over
$372,950
6
Married Individuals Filing Separate Returns
Not over $8,350 .................................................................. 10% of the taxable income
Over $8,350 but not over $33,950 ...................................... $835 plus 15% of the excess over $8,350
Over $33,950 but not over $68,525 .................................... $4,675 plus 25% of the excess over $33,950
Over $68,525 but not over $104,425 .................................. $13,318.75 plus 28% of the excess over $68,525
Over $104,425 but not over $186,475 ................................ $23,310.75 plus 33% of the excess over $104,425
Over $186,475 .................................................................... $50,447.25 plus 35% of the excess over $186,475
Alternative minimum tax liability
An alternative minimum tax 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. The
tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not
exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28
percent of the remaining taxable excess. The taxable excess is so much of the alternative
minimum taxable income (“AMTI”) as exceeds the exemption amount. The maximum tax rates
on net capital gain and dividends used in computing the regular tax are also used in computing
the tentative minimum tax. AMTI is the taxpayer’s taxable income increased by the taxpayer’s
“tax preference items” and adjusted by redetermining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax treatment of those
items.
The exemption amounts for 2009 are: (1) $70,950 in the case of married individuals
filing a joint return and surviving spouses; (2) $46,700 in the case of other unmarried
individuals; (3) $35,475 in the case of married individuals filing separate returns; and
(4) $22,500 in the case of an estate or trust. The exemption amounts are phased out by an
amount equal to 25 percent of the amount by which the individual’s AMTI exceeds (1) $150,000
in the case of married individuals filing a joint return and surviving spouses, (2) $112,500 in the
case of other unmarried individuals, and (3) $75,000 in the case of married individuals filing
separate returns or an estate or a trust. These amounts are not indexed for inflation.
Among the preferences and adjustments applicable to the individual alternative minimum
tax 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 and mining exploration and development, certain tax-exempt interest income, and a
portion of the amount of gain excluded with respect to the sale or disposition of certain small
business stock. In addition, personal exemptions, the standard deduction, and certain itemized
deductions, such as State and local taxes and miscellaneous deductions items, are not allowed to
reduce alternative minimum taxable income.
7
Special capital gains and dividends rates
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.
Capital losses generally are deductible in full against capital gains. In addition,
individual taxpayers may deduct up to $3,000 of capital losses from ordinary income in each
year. Any remaining unused capital losses may be carried forward indefinitely to another
taxable year.
A separate rate structure applies to capital gains and certain qualified dividends. For
2009, the maximum rate of tax on the adjusted net capital gain of an individual is 15 percent. In
addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a
zero-percent rate. These rates apply for purposes of both the regular tax and the alternative
minimum tax.
Credits against tax
The individual may reduce his or her tax liability by any available tax credits. Tax credits
are allowed for certain business expenditures, certain foreign income taxes paid or accrued,
certain education expenditures, certain child care expenditures, and with respect to children
under 17 and for certain elderly or disabled individuals. In addition, credits are allowed for
earned income (the Making Work Pay credit), including a refundable earned income tax credit
(“EITC”) for low-income workers who satisfy certain requirements. The amount of the EITC
varies depending upon the taxpayer’s earned income and whether the taxpayer has one, two,
more than two, or no qualifying children. In 2009, the maximum EITC is $5,656.50 for
taxpayers with more than two qualifying children, $5,028 for taxpayers with two qualifying
children, $3,043 for taxpayers with one qualifying child, and $457 for taxpayers with no
qualifying children. Credits allowed against the regular tax are not uniformly allowed against
the alternative minimum tax.
8
B. Social Insurance Taxes
Social security benefits and certain Medicare benefits are financed primarily by payroll
taxes on covered wages. The Federal Insurance Contributions Act (“FICA”) imposes tax on
employers based on the amount of wages paid to an employee during the year. The tax imposed
is composed of two parts: (1) the old age, survivors, and disability insurance (“OASDI”) tax
equal to 6.2 percent of covered wages up to the taxable wage base ($106,800 in 2009); and (2)
the Medicare hospital insurance (“HI”) tax amount equal to 1.45 percent of covered wages. In
addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of
tax imposed on the employer. The employee level tax generally must be withheld and remitted to
the Federal government by the employer.
As a parallel to FICA taxes, the Self-Employment Contributions Act (“SECA”) imposes
taxes on the net income from self employment of self employed individuals. The rate of the
OASDI portion of SECA taxes is equal to the combined employee and employer OASDI FICA
tax rates and applies to self employment income up to the FICA taxable wage base. Similarly,
the rate of the HI portion is the same as the combined employer and employee HI rates and there
is no cap on the amount of self employment income to which the rate applies.9
In addition to FICA taxes, employers are subject to a Federal unemployment insurance
payroll tax equal to 6.2 percent of the total wages of each employee (up to $7,000) on covered
employment. Employers are eligible for a Federal credit equal to 5.4 percent for State
unemployment taxes. For 2009, the current 0.8 percent average tax rate (i.e., 6.2 minus 5.4) is
composed of a permanent tax rate of 0.6 percent and a temporary surtax rate of 0.2 percent.
Federal unemployment insurance payroll taxes are used to fund programs maintained by the
States for the benefit of unemployed workers.
9 For purposes of computing net earnings from self employment, taxpayers are permitted a
deduction equal to the product of the taxpayer’s earnings (determined without regard to this deduction)
and one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of
net earnings. This deduction reflects the fact that the FICA rates apply to an employee’s wages, which do
not include FICA taxes paid by the employer, whereas a self-employed individual’s net earnings are
economically equivalent to an employee’s wages plus the employer share of FICA taxes.
9
II. BACKGROUND DATA RELATED TO THE DISTRIBUTION
OF INCOME AND TAXES
Historical trends in the distribution of income and taxes
The following tables and figures show historical trends from 1980 to 2005 in the
distribution of income and Federal taxes across households, as well as measures of average tax
rates by income category.10 By 2005, approximately 113 million households are represented in
the data.
Table 2 shows the average real (i.e., inflation-adjusted) pre-tax and after-tax household
income for each income quintile11 for selected years from 1980 to 2005. All income quintiles
experienced real gains in income, though the rate of growth was highly correlated to income.
For example, the average real pre-tax income of the lowest quintile grew only $800 dollars (from
$15,100 to 15,900) from 1980 to 2005, while the highest income quintile grew by $103,500
(from $127,800 to $231, 300) over the same period. On a percentage basis, the average real pretax
income of the lowest income quintile grew 5.3 percent over the 25-year period, while the
remaining quintiles grew by 14.7, 18.7, 27.4, and 81.0 percent respectively. Similar figures with
respect to after-tax income were 10.1 for the lowest quintile, and 20.4, 25.2, 33.9, and 85.4
percent, respectively, for the other quintiles.
10 The historical data comes from Congressional Budget Office, Historical Effective Federal Tax
Rates: 1979 to 2005, December 2007.
11 The Congressional Budget Office methodology adjusts household income by household size
(by dividing household income by the square root of the number of individuals per household) prior to
ranking households by quintile. Thus there is no specific unadjusted household income range that defines
the top and bottom of the quintile of households for all households, but rather separate ranges for each
household size. For a household of three, the middle income quintile ranges from $52,828 to $78,289 (of
unadjusted income) for 2005. Across all households, for 2005 the median household income is $64,800.
10
Table 2.−Average Pre-tax and After-tax Income and Income Shares,
by Comprehensive Household Income Quintile, 1980-2005
Average Real Pre-Tax Income (2005 Dollars)
Year Lowest
Quintile
Second
Quintile
Middle
Quintile
Fourth
Quintile
Highest
Quintile
1980 15,100 32,600 49,300 66,900 127,800
1985 14,300 32,200 49,600 69,400 143,900
1990 15,300 33,800 51,600 72,900 159,000
1995 16,000 35,200 53,200 75,800 171,100
2000 16,600 37,700 57,000 84,500 222,600
2005 15,900 37,400 58,500 85,200 231,300
Average Real After-Tax Income (2005 Dollars)
1980 13,900 28,000 40,100 52,500 92,900
1985 12,900 27,400 40,600 55,200 109,400
1990 13,900 28,900 42,400 57,800 119,000
1995 15,000 30,500 44,000 60,300 123,500
2000 15,500 32,800 47,500 67,100 160,400
2005 15,300 33,700 50,200 70,300 172,200
Share of Pre-Tax Income (Percent)
1980 5.7 11.0 15.7 22.1 45.8
1985 4.8 10.1 15.2 21.9 48.6
1990 4.6 10.0 15.1 21.6 49.5
1995 4.6 9.7 14.9 21.3 50.2
2000 4.0 8.6 13.5 19.6 54.8
2005 4.0 8.5 13.3 19.8 55.1
Share of After-Tax Income (Percent)
1980 6.8 12.1 16.5 22.3 42.8
1985 5.5 10.9 15.8 22.0 46.7
1990 5.3 10.8 15.8 21.9 47.3
1995 5.5 10.9 15.9 21.9 46.8
2000 4.9 9.7 14.7 20.2 51.3
2005 4.8 9.6 14.4 20.6 51.6
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Comprehensive household income equals pretax cash income plus income from other
sources. Pretax cash income is the sum of wages, salaries, self-employment income, rents,
taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and
retirement benefits plus taxes paid by businesses (corporate income taxes and the employer’s
share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and
employee contributions to 401(k) retirement plans. Other sources of income include all in-kind
benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school
lunches and breakfasts, housing assistance, and energy assistance). Households with negative
income are excluded from the lowest income category but are included in totals.
11
Income categories are defined by ranking all people by their comprehensive household
income adjusted for household size—that is, divided by the square root of the household’s size.
(A household consists of the people who share a housing unit, regardless of their relationships.)
Quintiles, or fifths, contain equal numbers of people.
Individual income taxes are distributed directly to households paying those taxes (that is,
the economic incidence of the tax is assigned to the individual remitting the tax and is not
assumed to be shifted to other parties). Social insurance, or payroll, taxes are distributed to
households paying those taxes directly or paying them indirectly through their employers.
Corporate income taxes are distributed to households according to their share of capital income.
Federal excise taxes are distributed to households according to their consumption of the taxed
good or service.
Figure 1 shows the real average pre-tax and after-tax income of the middle income
quintile from 1980 to 2005.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980 1985 1990 1995 2000 2005
Dollars
Year
Figure 1.−Real Average Pre‐Tax and After‐Tax Income
of Middle Income Quintile
(2005 in Dollars)
Pre‐Tax
After‐Tax
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
12
0
2
4
6
8
10
12
14
16
18
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Average Hourly Earnings (Dollars)
Year
Figure 2.−Average Hourly Earnings of Production Workers
1980‐2008
Constant
2005 Dollars
Current
Dollars
Source: Bureau of Labor Statistics; constant dollar figures obtained by adjusting the current dollar figures by
changes in the Consumer Price Index- All Urban Consumers between the current year and 2005.
Figure 2 shows average hourly wage data for production workers from 1980 to 2008.
Between 1980 and 2008, the average hourly wage grew from $6.85 to $18.08. In real, inflationadjusted
terms, the hourly wage was essentially unchanged, growing from $16.24 to $16.40
(measured in constant 2005 dollars). The lack of growth in real hourly wages is not inconsistent
with the observed real growth in household income, as additional hours worked by households,
or real growth in non-labor income, can explain the difference.
Table 2 also shows the share of pre-tax and after-tax income claimed by each income
quintile. The share of aggregate income claimed by all income quintiles except the highest
quintile fell from 1980 to 2005, on both a pre-tax and an after-tax basis. For example, the middle
income quintile’s share of pre-tax income fell from 15.7 percent of all income in 1980 to 13.3
percent. Comparable figures on an after-tax basis were 16.5 percent and 14.4 percent,
respectively. In contrast, the share of pre-tax income claimed by the highest income quintile
grew from 45.8 percent in 1980 to 55.1 percent in 2005 on a pre-tax basis, and from 42.8 percent
to 51.6 percent on an after-tax basis.
13
Figure 3 shows the share of pre-tax and after-tax income claimed by the middle income
quintile over the entire 1980 to 2005 period.
10
11
12
13
14
15
16
17
1980 1985 1990 1995 2000 2005
Share of Total Income (Percent)
Year
Figure 3.−Shares of Total Income of Middle Income Quintile
1980‐2005
Pre‐Tax
Income
After‐Tax
Income
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Table 3 shows the percentage share of total Federal tax liabilities (individual income,
social insurance, corporate income, and excise taxes), individual income tax liabilities, and social
insurance tax liabilities by household income quintile from 1980 to 2005.12 Over this period, the
share of total Federal liabilities, individual income tax liabilities, and social insurance liabilities
paid by all but the highest income quintile have fallen. For example, the share of total Federal
tax liabilities paid by the middle income quintile fell from 13.3 percent of the total in 1980 to 9.3
percent of the total in 2005. The middle income quintile’s share of individual income tax
liabilities fell over this same period from 10.8 percent of all individual income tax liabilities to
4.4 percent, and social insurance liabilities fell from 19.5 percent of all social insurance liabilities
to 16.7 percent. In contrast, the share of total Federal tax liabilities paid by the highest income
12 See notes to Table 2 for an explanation of the measure of income used here and for
assumptions on the household incidence of the different types of taxes.
14
quintile rose from 56.3 percent of the total in 1980 to 68.7 percent of the total in 2005, while
over the same period their share of individual income tax liabilities rose from 64.8 percent of all
individual income tax liabilities to 86.3 percent, and their social insurance liabilities rose from
36.8 percent of all social insurance liabilities to 43.6 percent.
Table 3.−Shares of Federal Tax Liabilities for All Households,
by Comprehensive Household Income Quintile, 1980-2005
Share of Total Federal Tax Liabilities (Percent)
Year Lowest
Quintile
Second
Quintile
Middle
Quintile
Fourth
Quintile
Highest
Quintile
1980 2.0 7.0 13.3 21.3 56.3
1985 2.3 7.2 13.2 21.3 55.8
1990 1.9 6.8 12.6 20.7 57.9
1995 1.3 5.8 11.4 19.3 61.9
2000 1.1 4.8 9.8 17.5 66.6
2005 0.8 4.1 9.3 16.9 68.7
Share of Individual Income Tax Liabilities (Percent)
1980 0.1 4.2 10.8 20.2 64.8
1985 0.2 4.0 9.9 19.0 66.9
1990 -0.4 3.3 8.9 17.8 70.4
1995 -2.0 1.9 7.7 16.2 76.1
2000 -1.6 1.1 5.7 13.5 81.2
2005 -2.9 -0.9 4.4 13.1 86.3
Share of Social Insurance Tax Liabilities (Percent)
1980 4.4 12.1 19.5 27.2 36.8
1985 4.0 11.2 18.3 26.4 39.9
1990 4.0 11.1 17.8 26.5 40.5
1995 4.1 10.4 16.9 25.9 42.6
2000 4.2 10.2 16.3 25.8 43.3
2005 4.3 10.1 16.7 25.1 43.6
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Note: See Table 2 for table footnotes. Negative shares indicate that on average the taxpayer is getting a refundable
income tax credit.
15
Figure 4 shows the share of total Federal tax liabilities, individual income tax liabilities,
and social insurance liabilities, attributable to the middle income quintile from 1980 to 2005.
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005
Share of Liability (Percent)
Years
Figure 4.−Share of Federal Tax Liabilities of Middle Income Quintile
1980-2005
Social
Insurance
Individual
Income
Total
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Table 4 shows the average total Federal tax rates by income quintile, as well as the
average rates for the individual income tax and social insurance taxes. All income quintiles
experienced a decline in the average total Federal tax rate, with the smallest decline occurring in
the highest quintile. The decline in the average total tax rate was largely an effect of the decline
in the average individual income tax rate. The average individual income tax rates declined over
all income quintiles, falling by greater amounts the lower the income quintile. Average social
insurance tax rates grew for all income quintiles from 1980 to 2005, with the sharpest growth
occurring in the lowest income quintile.
16
Table 4.−Federal Tax Rates for All Households, by Comprehensive
Household Income Quintile, 1980-2005
Average Total Federal Tax Rate
Year Lowest
Quintile
Second
Quintile
Middle
Quintile
Fourth
Quintile
Highest
Quintile
1980 7.7 14.1 18.7 21.5 27.3
1985 9.8 14.8 18.1 20.4 24.0
1990 8.9 14.6 17.9 20.6 25.1
1995 6.3 13.4 17.3 20.5 27.8
2000 6.4 13.0 16.6 20.5 28.0
2005 4.3 9.9 14.2 17.4 25.5
Average Individual Income Tax Rate
1980 0.2 4.5 8.0 10.7 16.5
1985 0.5 4.0 6.6 8.8 14.0
1990 -1.0 3.4 6.0 8.3 14.4
1995 -4.4 2.0 5.3 7.8 15.5
2000 -4.6 1.5 5.0 8.1 17.5
2005 -6.5 -1.0 3.0 6.0 14.1
Average Social Insurance Tax Rate
1980 5.3 7.6 8.5 8.5 5.5
1985 6.6 8.8 9.5 9.6 6.5
1990 7.2 9.3 9.9 10.3 6.9
1995 7.6 9.1 9.6 10.3 7.2
2000 8.2 9.4 9.6 10.4 6.3
2005 8.3 9.2 9.5 9.7 6.0
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Note: The average tax rate is the tax paid as a percentage of comprehensive household income. See notes to Table
2 for definition of comprehensive household income.
17
Figure 5 shows the average tax rates for total taxes, and separately for individual income
taxes and social insurance taxes, for the middle income quintile.
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005
Average Tax Rate
Year
Figure 5.−Average Tax Rates of Middle Income Quintile
Total
Social
Insurance
Individual
Income
Source: Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2005, December 2007.
Notes: The average tax rate is the tax paid as a percentage of comprehensive household income. See notes to Table
2 for definition of comprehensive household income.
2009 projections of the distribution of income and taxes
In 2009, the mean income13 of all tax returns (excluding dependent filers and those with
negative income, and including nonfilers) is projected to be $59,667. The mean taxable income
of all returns is projected to be $35,154. The median income of all tax returns is projected to be
$33,984; the median taxable income of all tax returns is projected to be $11,026.
The mean income in 2009 of married taxpayers filing jointly with two dependents is
projected to be $115,396, with the median income being $81,329. The mean taxable income for
such taxpayers is $71,434, with the median being $41,198. For 2009, the top 10 percent (in
13 See notes to Table 5 for the definition of income used here.
18
terms of income) of all tax returns receive 44.5 percent of all income and pay 81.7 percent of all
income taxes. The top five percent of all tax returns receive 33.0 percent of all income and pay
68.8 percent of all income taxes. The top one percent of all tax returns receive 18.2 percent of all
income and pay 44.6 percent of all income taxes.
Table 5 shows the projected distribution of income and taxes by income category for
2009 tax returns.14 For example, tax returns with $30,000 to $40,000 of income constitute 9.9
percent of all returns, 5.9 percent of all income, 3.8 percent of total taxes, 0.4 percent of
individual income taxes, and 7.0 percent of social insurance taxes. Similarly, tax returns with
$100,000 to $200,000 of income constitute 10.1 percent of all returns, 23.3 percent of all income,
27.4 percent of total taxes, 26.6 percent of individual income taxes, and 28.5 percent of social
insurance taxes.
Table 5 also shows average tax rates by income category for the individual income tax,
social insurance taxes, and for total taxes (including the individual income tax, social insurance
taxes and excise taxes, but not the corporate income tax). Note that the average tax rate reported
here is the tax collected by the relevant tax, divided by total income (not only income subject to
the relevant tax). The average tax rate for social insurance taxes is similar across most tax
returns, ranging between seven and 12 percent for tax returns with income below $500,000, with
substantially lower average rates for those with income above $500,000. In contrast, the average
tax rate under the income tax varies widely, from a negative 10.2 percent to 23.4 percent,
reflecting the existence of refundable tax credits and progressive statutory rates of tax.
14 The income categories and measures of income used in the staff of the Joint Committee
models are not directly comparable to the historical data presented earlier in this pamphlet. Additionally,
the staff of the Joint Committee on Taxation does not estimate the distribution of the corporate income
taxes on account of the uncertainty in the incidence of the corporate income tax. See footnotes to Table 5
for the definition of income used by the staff of the Joint Committee on Taxation.
19
INCOME CATEGORY (1)
$ Billions
Percent
Share
Average
Tax Rate $ Billions
Percent
Share
Average
Tax Rate $ Billions
Percent
Share
Average
Tax Rate
Less than $10,000.................... 30,309 19.3% 142,126 1.5% 4.9 0.3% 3.5% ‐14.4 ‐1.6% ‐10.2% 13.4 1.5% 9.5%
$10,000 to $20,000............... 24,568 15.6% 374,856 4.0% 3.8 0.2% 1.0% ‐32.6 ‐3.7% ‐8.7% 31.4 3.6% 8.4%
$20,000 to $30,000............... 18,764 11.9% 478,320 5.1% 36.1 2.0% 7.6% ‐18.9 ‐2.2% ‐4.0% 50.5 5.7% 10.5%
$30,000 to $40,000............... 15,535 9.9% 556,020 5.9% 70.1 3.8% 12.6% 3.3 0.4% 0.6% 61.9 7.0% 11.1%
$40,000 to $50,000............... 12,665 8.0% 583,809 6.2% 87.4 4.8% 15.0% 18.1 2.1% 3.1% 64.4 7.3% 11.0%
$50,000 to $75,000............... 21,695 13.8% 1,367,713 14.6% 238.7 13.1% 17.5% 74.4 8.5% 5.4% 153.6 17.5% 11.2%
$75,000 to $100,000............... 13,189 8.4% 1,171,035 12.5% 233.2 12.8% 19.9% 85.8 9.8% 7.3% 139.1 15.8% 11.9%
$100,000 to $200,000............... 15,942 10.1% 2,192,174 23.3% 499.7 27.4% 22.8% 233.6 26.6% 10.7% 250.1 28.5% 11.4%
$200,000 to $500,000............... 3,789 2.4% 1,095,203 11.7% 283.5 15.5% 25.9% 196.8 22.4% 18.0% 81.0 9.2% 7.4%
$500,000 to $1,000,000.............. 606 0.4% 419,262 4.5% 112.4 6.2% 26.8% 95.1 10.8% 22.7% 16.2 1.8% 3.9%
$1,000,000 and over............... 320 0.2% 1,010,564 10.8% 253.9 13.9% 25.1% 236.9 27.0% 23.4% 16.4 1.9% 1.6%
Total, All Taxpayers.......... 157,382 100.0% 9,391,082 100.0% 1,824.0 100.0% 19.4% 877.9 100.0% 9.3% 878.0 100.0% 9.3%
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt interest,
[2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 2008 levels.
(2) Includes nonfilers, excludes dependent filers and returns with negative income.
(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees),
and excise taxes (attributed to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax.
Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
Does not include indirect effects.
(4) The average tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
Table 5.−Distribution of Income and Taxes, and Average Tax Rates (2009)
COMBINED INCOME, SOCIAL
INSURANCE, AND EXCISE TAXES
UNDER PRESENT LAW (3) INDIVIDUAL INCOME TAXES EMPLOYMENT TAXES
Number of
Returns (2)
(Thousands)
Share of
Returns
Income
(Millions of
Dollars)
Share of
Income
20
Table 6 shows, by income class, the number of tax returns paying income or social
insurance taxes for which the social insurance taxes are greater than income taxes. Because of
the progressive income tax structure and the generally flat structure of social insurance taxes, the
lower is one’s income the greater is the likelihood social insurance taxes will exceed income
taxes. Thus, for example, in the $40,000 to $50,000 income class 85.1 percent of tax returns
have social insurance taxes greater than income taxes, while in the $100,000 to $200,000 group
63.0 percent of returns have social insurance taxes greater than income taxes.
INCOME CATEGORY (1)
Individual
Income Taxes
Employment
Taxes
$ Billions $ Billions
Less than $10,000......................... 18.1 ‐14.4 13.4
$10,000 to $20,000..................... 15.9 ‐32.6 31.4
$20,000 to $30,000.................... 15.9 ‐18.9 50.5
$30,000 to $40,000.................... 14.5 3.3 61.9
$40,000 to $50,000.................... 12.1 18.1 64.4
$50,000 to $75,000..................... 21.4 74.4 153.6
$75,000 to $100,000..................... 13.1 85.8 139.1
$100,000 to $200,000................... 15.9 233.6 250.1
$200,000 to $500,000................... 3.8 196.8 81.0
$500,000 to $1,000,000............... 0.6 95.1 16.2
$1,000,000 and over.................... 0.3 236.9 16.4
Total, All Taxpayers.................... 131.5 877.9 878.0
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt interest,
[2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 2008 levels.
(2) Includes nonfilers, excludes dependent filers and returns with negative income.
(3) Less than 50,000.
6.2%
87.9%
85.1%
80.6%
76.8%
63.0%
22.7
Millions of
Returns
99.9%
97.0%
93.1%
3.0
Returns with
Employment Taxes
Greater than Income
Taxes
Returns with
Employment Taxes
Less than Income
Taxes
Millions of Returns
18.0
15.4
14.8
1.7%
1.3%
82.8%
Fraction of Returns
with Employment
Taxes Greater than
Income Taxes
0.2
5.9
3.5
0.6
0.3
Table 6.−Tax Returns with Income or Social Insurance Taxes
0.0
0.0
108.9
Millions of Returns
0.0
0.5
1.1
1.8
1.8
4.1
12.7
10.3
17.2
10.1
10.0
Table 7 shows the average marginal tax rates for labor income and for long-term capital
gain income by income category. A taxpayer’s marginal tax rate is the rate of tax that is owed on
the last dollar of income of the taxpayer. Table 7 reports the average of the marginal tax rates of
each taxpayer in the income category.
The marginal tax rates on labor income reflect the effects of the individual income tax
and the social insurance taxes. They generally rise with income, reflecting the progressive nature
of the individual income tax. The social insurance tax is flat to regressive,15 reflecting the fact
15 Note that this statement reflects only the tax side of social insurance, and not the linked
benefits. Many analysts think it is important to consider the tax and benefits of social insurance together.
21
that the single rate of tax for the Old Age and Survivors Disability Insurance portion of social
insurance taxes does not apply to earnings above an annual cap ($106,800 in 2009).16
The marginal tax rates on long-term capital income are lower than those for labor
income, reflecting both the lower statutory rates of tax applicable to long-term capital gains and
the fact that social insurance taxes do not apply to capital gain income. Marginal tax rates on
long-term capital gains still generally rise with the level of income, reflecting the statutory
structure of the maximum rates of tax on long-term capital gain income, as well as the interaction
of capital gain income with other provision of the income tax that phase out certain tax benefits
as income increases.
Long‐Term Capital
Gains Income
Average Marginal
Tax Rate
Less than $10,000.......................... 0.1%
$10,000 to $20,000........................ 0.1%
$20,000 to $30,000........................ 0.8%
$30,000 to $40,000........................ 3.2%
$40,000 to $50,000........................ 4.5%
$50,000 to $75,000........................ 6.2%
$75,000 to $100,000...................... 7.4%
$100,000 to $200,000.................... 14.8%
$200,000 to $500,000.................... 18.6%
$500,000 to $1,000,000................. 15.2%
$1,000,000 and over...................... 14.8%
Total, All Taxpayers...................... 14.6%
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt interest,
[2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 2008 levels.
(2) For individual income and employment taxes, the average marginal tax rate is equal to the change in taxes from an additional $100
of wages to each spouse with positive wages. For long-term capital gain, the average marginal tax rate equals the change in taxes from
an additional 1% increase in long-term capital gains to each taxpayer with positive long-term capital gains.
Table 7.−Marginal Tax Rates on Labor Income and Long Term Capital Gain, by Income Category (2009)
16.7%
24.3%
Average Marginal
Income Tax Rate (2)
‐10.8%
0.6%
14.2%
13.4%
16.0%
16.0%
16.3%
Average Marginal
Employment Tax
Rate (2)
14.2%
14.2%
14.2%
14.2%
6.2%
31.0%
29.8%
32.1%
13.2% 13.6% 26.8%
Average Combined
Marginal Income and
Employment Tax Rate
Labor Income
3.4%
14.8%
27.6%
30.2%
30.2%
14.2% 30.5%
14.1%
11.9%
7.7%
6.4%
30.8%
36.3%
38.7%
36.2%
38.3%
16 As table 7 shows, the marginal social insurance tax rate is 14.2 percent rather than the sum of
the employer (7.65 percent ) and employee share (7.65 percent ), or 15.3 percent. The reason for this is
that comprehensive income includes the employer share of social insurance tax liability. Hence the
marginal social insurance rate is .153 divided by 1.0765, or 14.2 percent.

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