Congressional Budget Office Report Shows Federal Income Tax Becoming More Progressive

January 08, 2007

The Congressional Budget Office recently released Historical Effective Tax Rates: 1979 to 2004. Many are sure to chime in with the usual rhetoric about the top income earners receiving a greater share of the 2001 and 2003 tax cuts and the tax code therefore being less progressive.

In-depth analysis of the report shows, however, that the top 1% of income earners are paying a majority of the income tax burden and the code has actually become more progressive.

In 2000, the top 1% of income earners represented 1.1 million households and earned 17.8% of all income. That year they paid 36.5% of all individual income taxes. The bottom four income quintiles in 2000 represented 85.6 million households, earned 45.7% of all income, but paid only 18.7% of all individual income taxes. Therefore the top 1% of income earners, consisting of 84.5 million fewer households, paid 17.8% percent more of the federal income tax burden than the bottom 80% of income earners.

In 2003 and 2004 the story is much the same except that the individual income tax code actually became more progressive, as Table 1 shows.

Table 1: Top 1% Pay a Greater Share of the Individual Income Tax Burden

Year

Households in Top 1% of Income Earners

Households in Bottom 80% of Income Earners

% of All Income Earned by Top 1 % of Income Earners

% of All Income Earned by Bottom 80 % of Income Earners

% of Individual Income Taxes Paid by Top 1% of Income Earners

% of Individual Income Taxes Paid by Bottom 80% of Income Earners

Difference in % of Individual Income Tax Burden Paid by Top 1% and Bottom 80% of Income Earners

2000

1.1 million

85.6 million

17.8 %

45.7 %

36.5 %

18.7 %

17.8 %

2003

1.1 million

88.8 million

14.3 %

48.6 %

34.6 %

15.2 %

19.4 %

2004

1.2 million

89.7 million

16.3 %

47.3 %

36.7 %

14.7 %

22%

Source: Congressional Budget Office, Tax Foundation.

Between 2000 and 2004 the top 1% of income earners' share of income fell, while the bottom 80% of income earners' share rose, but they paid a larger share of the individual income tax burden: 36.5 % in 2000 compared to 36.7 % in 2004.

In 2004 the top 1% of income earners, 1.2 million households, paid 22% more of the individual income tax burden than the bottom 80% of income earners, 89.7 million households.

Although the bottom 80% of income earners pay a small fraction of the federal income tax burden, the bottom 40% of income earners  pay nothing at all and actually have a negative tax burden-a trend that has been growing in recent years.

According to the Tax Foundation, the number of non-payers, taxpayers who either have no income tax liability or have none after taking advantage of all the credits and deductions available, has increased significantly since 2000. In 2000 the Tax Foundation estimates that about 30 million tax returns had no liability, but by 2004 that figure had grown to 42 million.

An 8.66% increase in the number of non-paying returns has knocked millions more out of the income tax system, a situation that does not bode well for its long-term stability.

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