just posted data from the Congressional Budget Office (CBO) indicates that in 2019, before the start of the pandemic, US incomes continued to rise as part of a broad economic expansion. It also shows that, contrary to common perceptionsThe federal tax system is progressive.
The data on household income and tax burdens also comes two years after the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, which significantly changed the US tax system, including major components of personal income tax.
Income growth after taxes and transfers continued to rise in 2019 after declining in 2009 and falling slightly in 2013 and 2016. Since 1979, median income in the bottom quintile has increased by 94%, while median income for the three middle quintiles increased by around 59%. Income for the top quintile after taxes and transfers increased 123 percent since 1979. CBO data shows that labor income is the top source of income for most taxpayers, while business and investment income they are a more important source of income for those who earn more.
Average federal tax rates vary by source of income. For example, individual income taxes are highly progressive, providing a negative effective tax rate for taxpayers in the bottom 20 percent due to refundable tax credits such as the Earned Income Tax Credit (EITC) and the Income Tax Credit. Children (CTC). These credits provide refunds to filers who have no tax liability to offset, creating a negative effective income tax rate. In fact, the median federal tax rate for the lowest quintile was -11.1 percent in 2019. In contrast, taxpayers in the top 20 percent paid an effective income tax rate of 15.4 percent.
Payroll taxes, on the other hand, tend to be more evenly applied, though somewhat regressive, ranging from 9.4 percent in the bottom quintile to 6.5 percent in the top 20 percent. . Excise taxes are regressive, as taxpayers in the bottom quintiles pay higher effective rates than in the top quintiles.
Corporate income taxes are borne across the income distribution, but the effective rates are slightly higher for higher income earners, who tend to own more corporate shares than lower income earners.
As a whole, the federal tax system was progressive in 2019, applying higher effective tax rates at higher income levels. The federal effective tax rate increased from 0.5 percent for the bottom quintile to 30 percent for the top 1 percent of wage earners.
The federal tax code has become more progressive over time. The effective federal tax rate for the bottom quintile averaged about 10.6 percent in the 1980s, but has remained below 3 percent since 2007. By contrast, the effective federal tax rate for the bottom 1 percent higher has remained relatively high during this period, oscillating between 25 and 35 percent since 1979.
Reflecting the increasing progressivity of the federal tax code, the proportion of federal taxes paid by high income earners has increased in recent decades. The richest one percent paid 24.7 percent of all federal taxes in 2019, up from an average of 14.3 percent in the 1980s. By contrast, the share of federal taxes paid by the top 60 bottom percent fell from an average of 22.3 percent in the 1980s to 13.3 percent in 2019.
Contrary to common perceptions, CBO data indicates that: (1) income earned after taxes and transfers has increased in recent decades for all income groups, (2) the federal tax system is progressive and has become more progressive in the last three decades, and (3) the federal system relies heavily on top earners to raise revenue from government services and means-tested transfers. Policymakers should keep these facts in mind when considering proposals to increase the tax burden or reshape the distribution of existing taxes.
