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Economic News, Data and Analysis

IRS on Income distribution and Taxes

IRS has posted an analysis on income and tax distributions based on tax filing data. Shows continuing spread in income levels between the top and the middle-class.
On the tax side, the paper also looks at the combination of federal income tax and payroll taxes using a panel of taxpayers. Core findings below… largest decline in average tax rates occured at the top. Bottom 20 percent actually saw and increase in average tax rates between 1996 and 2003.
The paper uses IRS tax data for estimate the income share for various income groups. The findings echo what others have found; the top end is earning a greater share of income and is taxed less. Those in the middle are earning a smaller share and pay a greater share.
Overall, the data show that the bush tax changes has made the tax code less progressive. While the tax code is still progressive – lowering inequality as measured by a Gini index — it is less effective at narrong the income gap than in the past.
Importantly, the tax share of middle-income taxpayers went up since 2000, while the tax share of the top 5 percent (and above) went down.

“Including Social Security taxes (see Figure E), an interesting trend occurred. Through 2000, the tax share of all the higher income groups up to the 5-percent class increased each year, while the share of all the groups above the 20-percent class went down. However, after 2000, the top 0.1-percent group paid a decreasing share each year, while individuals in the 20-40-percent class paid an increasing share each year. The tax shares of other groups varied between the years. Overall, the top 20 percent paid a lower tax share (68.03 percent) in 2003 than they did in 2000 (70.27 percent), but this share was still higher than they paid in 1996 (66.21 percent).”

Analysis of the Distributions of Income, Taxes, and Payroll Taxes via Cross Section and Panel Data, 1979-2004 (application/pdf Object)
This paper is the seventh in a series examining trends in the distribution of individual incomes and tax burdens based on a consistent and comprehensive measure of income derived from individual income tax returns. In the previous papers, we demonstrated that the shares of income accounted for by the highest income-size classes clearly have increased over time,
and we also demonstrated the superiority of our comprehensive and consistent income measure, the 1979 Retrospective Income Concept, particularly in periods of tax reform. In this paper, we continue the analysis of individual income and tax distributions,
adding for eight years (1996 – 2003) Social Security and Medicare taxes to this analysis and using panel data (for 1996 – 2003).

Looking at average taxes for the combined income groups (Figure F), while all groups’ average tax rated declined over the period between 1996 from 2003 by 11.6 percent, the largest decline was in the higher income groups. The average tax rate of the top 5-percent group went down by 13.8 percent (from 28.0 percent to 24.2 percent) and the 5-to-10-percent group by 12.9 percent. The rates fell for all groups below the 80-percent level. The bottom 20-percent group, however, paid 19.1 percent higher average tax rates in 2003 than in 1996 (from 8.9 percent to 10.6 percent).

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Filed under: Economics

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