The Distribution of Federal Taxes, 2008-11

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Abstract

Overall, the federal tax system is highly progressive. On average, households with higher incomes pay taxes that are a larger share of their income. The tax cuts passed since 2001 have reduced progressivity with the notable exception of the 2008 stimulus package. Almost all provisions of the tax cuts are set to expire by the end of 2010. Barring legislative action, effective tax rates will rise across the income spectrum in 2011 with the largest increases in the upper income classes. This paper summarizes the Tax Policy Center's latest estimates of the distribution of federal taxes for 2008 through 2011.

Introduction

Overall, the federal tax system is highly progressive. On average, households with higher incomes pay taxes that are a larger share of their income. The tax cuts passed since 2001 have reduced the overall progressivity of the federal tax system with the notable exception of the stimulus package passed in early 2008. The tax rebates in the stimulus legislation are in effect for 2008 only, however, and so the progressivity of the tax system will decline markedly in 2009 and 2010 as effective tax rates rise substantially for lower and moderate-income households. At the same time, effective rates will fall for high-income households as the repeal of the limitations on itemized deductions and personal exemptions and the complete repeal of the estate tax become fully phased in. Finally, almost all provisions of the 2001–06 tax cuts are set to expire at the end of 2010. Barring legislative action, effective tax rates will therefore rise across the income spectrum in 2011. The largest increases will be in the upper income classes and so the tax system will become more progressive in 2011 unless the tax cuts are made permanent.

This paper summarizes the Tax Policy Center’s latest estimates of the distribution of federal taxes for 2008 through 2011. We do not include state or local taxes in the analysis. All estimates come from the recently updated Tax Policy Center (TPC) Microsimulation model of the federal tax system. The model is based on the 2004 Public Use File of tax return information released by the Statistics of Income Division of the Internal Revenue Service. Additional tables showing the distribution of federal taxes are available on the TPC website at http://www.taxpolicycenter.org/numbers/index.cfm.

Current-Law Distribution in 2008

The average effective federal tax rate—federal taxes paid as a percentage of cash income—will be 20.9 percent in 2008. The effective tax rate (ETR) will increase with income, rising from 1.1 percent for households in the bottom quintile (the lowest-earning 20 percent of the population) to 26.2 percent for those in the top quintile (table 1). Within the top quintile, ETRs will climb sharply from 21.8 percent for households in the 80th to 90th percentiles to 30.0 percent for those in the top 1 percent of the population. The top 0.1 percent—the richest 1 in 1,000—will pay an average ETR of 31.6 percent.

The overall ETR for the individual income tax will be 9.5 percent in 2008. This tax is the most progressive of the major revenue sources. Refundable credits such as the Earned Income Tax Credit (EITC) and the refundable child tax credit will lead to negative average effective rates for the bottom two quintiles. Rates will increase from 3.3 to 15.0 percent for the three higher quintiles and to 18 percent for the top 1 percent of income earners.

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