Tax Facts You Should Know

 

With the second session of the 110th Congress in full swing and an economic stimulus bill recently passed, it seems that tax day has crept up on us once again. Whether you are waiting anxiously for your refund check or bemoaning the fact that you are writing a check, it's a good time to look at some tax facts and see who really pays what taxes.

 

How much does the federal government really collect?
In 2007, the federal government collected $2.57 trillion in taxes. By 2013, the Office of Management and Budget (OMB) forecasts that those federal receipts could rise as high as $3.43 trillion.

 

To put those numbers in perspective, consider those values as a percentage of gross domestic product (GDP), which is the total market value of final goods and services produced during a year. In 2007, taxes collected by the federal government equaled 18.8% of GDP. For 2008 through 2013, OMB projects that tax receipts will average about the same percentage of GDP. From 1944 through 2005, tax receipts as a percentage of GDP ranged from 14.5% to 20.9%. Thus, the tax bite to the economy has remained relatively stable.

 

 

What kinds of taxes make up these revenues?
Now that you know how much the federal government collects in taxes, you probably wonder what types of taxes generate these revenues. For 2007, OMB data show that 45.3% were individual income taxes ($1.2 trillion), 33.9% were social insurance and retirement receipts ($870 billion), 14.4% were corporate income taxes ($370 billion), 3.9% were other taxes (i.e., $26 billion in estate and gift taxes, $26 billion in customs duties, and $48 billion in miscellaneous receipts), and 2.5% were excise taxes ($74 billion).

 

Has it always been this way? Sort of. Since 1944, the individual income tax has comprised the largest portion of federal receipts (ranging from 39.5% to 49.9%). Since 1967, social insurance and retirement receipts have accounted for the second largest portion of federal tax revenues (7.6% to 21.9%), while corporate income taxes have accounted for the third largest slice of the tax revenue pie (6.2% to 19.6%). However, from 1944 through 1967, the corporate income tax accounted for the second largest portion of revenues; it was overtaken by social insurance and retirement revenue receipts in 1967.

 

Who pays?
So who pays all these taxes? For 2005, the most recent year for which information is available, IRS data indicate that taxpayers with adjusted gross income (AGI) in the top 1% of the population bore 39% of the total national income tax burden, while those in the top 5%, 10%, 25%, and 50% bore 60%, 70%, 86%, and 97%, respectively, of that burden. Those in the bottom 50% paid a paltry 3%! This proves, in part, the steep progressivity of the income tax system. 

 

Who pays what?
Effective Individual Tax Rates
Effective individual tax rates measure the percentage of individual income taxes paid by various income groups. A Congressional Budget Office (CBO) study, Historical Effective Tax Rates: 1979 to 2005, reports that for 2005 the bottom quintile's effective individual income tax rate was negative 6.5%, dropping 6.5 percentage points from 0% over the previous 26 years. And the middle class is doing pretty well, too, with an effective individual income tax rate of 3% for 2005, a drop of 60% from the 7.5% it paid 26 years ago. The effective individual income tax rate for the top 20% of income earners has dropped 1.6 percentage points, from 15.7% to 14.1%,
a drop of only 10% over the past 26 years. And the top 1% that some claim pay no tax? Their effective individual income tax rate was 19.4% for 2005, down from the 21.8% rate of
26 years ago.

 

Effective Federal Tax Rates
The same CBO study examined the effective federal tax rate, which measures the percentage of income, payroll, and excise taxes of all taxpayers. For 2005, the top 20% of all taxpayers had an effective federal tax rate of 25.5%, while the lowest 20% had an effective rate of 4.3%; the middle class paid tax at an effective rate of 14.2%. Further, the top 10% of filers had an effective federal tax rate of 27.4%; the top 5%, a rate of 28.9%; and the top 1%, a whopping 31.2%. Like the IRS statistics, the CBO data indicate that our tax system is quite progressive.

 

Although all taxpayers have seen a drop in their effective federal tax rate over the last 26 years, who has seen the greatest decrease? CBO numbers reveal that the bottom 20% has seen a 46% decline in their effective federal tax rates. Likewise, the second and middle quintiles saw a decrease of 31% and 24%, respectively. The upper middle class? Their effective federal tax rates decreased only 18%. And the top 20% of income earners? A drop of just 7%.

 

The Bush Tax Cuts
What about the Bush tax cuts? Since 2000, when Bush entered office, the share of federal tax liabilities borne by the lowest and middle quintiles has decreased, while the share borne by the highest quintile has increased. In 2000, the lowest quintile bore 1.1% of total federal tax liabilities compared with 0.9% in 2004, the year that all of the Bush tax cuts were in effect. Thus, the federal tax liability of the lowest quintile dropped 18%. However, the highest quintile paid 67.2% of these liabilities in 2004, an increase of 1% in their liability since 2000, when they paid 66.6%. These numbers don't comport with the notion that the Bush tax breaks favor the wealthy; instead, they suggest that the wealthy are bearing more of the tax burden.

 

Alternative Minimum Tax
A Joint Committee on Taxation report reveals that in 2006, 2.5% of all taxpayers, and 7.4% of married taxpayers with children, were subject to the alternative minimum tax (AMT). The report shows that in 2010, unless Congress alters the law, 17.9% of all taxpayers and 50.5% of all married taxpayers with children will be subject to the AMT.

 

Taxpayers facing high state and local taxes also are increasingly likely to be snagged by the AMT. According to a 2005 Tax Foundation study, the top five states affected by the AMT are New Jersey (6.8% of taxpayers affected), New York (6%), Connecticut (5.9%), Washington, D.C. (5.2%), and Maryland (5%).
 
So what have we learned? First, we have a steeply progressive tax system. Second, over time, the lower and middle classes-not the wealthy-have benefitted most from tax breaks. Finally, the AMT will continue to strike taxpayers it never intended to hit unless Congress amends the law.