Americans paid $129 billion more in income taxes in 2015 than they did in 2014, according to data released today by the IRS. While taxpayers’ incomes grew by 6.1 percent from the year before, their overall taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. bill grew by 10.0 percent.
The new data is the public’s first look at the taxes that Americans paid last year on the income they earned in 2014. The table below shows some of the top-line statistics:
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Preliminary Data for Income Tax Returns for Tax Year 2014 |
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|
2013 |
2014 |
Change |
|
|
Adjusted gross income |
$9,110,586,632,000 |
$9,667,712,667,000 |
6.1% |
|
$6,409,682,294,000 |
$6,919,673,678,000 |
8.0% |
|
|
Total tax liability |
$1,290,494,472,000 |
$1,419,614,722,000 |
10.0% |
|
Effective tax rate |
14.16 percent |
14.68 percent |
|
|
Source: IRS, Statistics of Income, Preliminary Data |
Starting with the first line in the table, we see that, in 2014, taxpayers earned $9.67 trillion in adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” – a broad measure of income that includes salaries, interest, dividends, capital gains, business income, and even alimony payments. Overall, taxpayers earned 6.1 percent more income in 2014 than in 2013. This makes sense: not only did the U.S. economy grow in 2014, but inflation drove prices and wages higher, leading to a higher income figure.
However, Americans did not pay taxes on the entire $9.67 trillion of adjusted gross income that they earned. After subtracting exemptions and deductions, taxpayers were left with $6.92 trillion in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . Between 2013 and 2014, while overall income rose by 6.1 percent, taxable income rose even faster – by 8.0 percent. This is because a taxpayers’ exemptions and deductions do not grow as quickly as their income does: total deductions only grew by 2.4 percent in 2014 and total exemptions only grew by 1.0 percent.
Finally, while Americans’ taxable incomes grew by 8.0 percent in 2014, their total income tax bill grew yet faster – by 10.0 percent. This is because, as taxpayers’ incomes increase, they can be pushed up into higher tax brackets, leading to a larger tax bill. In addition, taxpayers with rising incomes are often no longer able to claim some of the more generous credits in the tax code, such as the Child Tax Credit.
Overall, for the 2014 tax year, Americans paid $1.42 trillion in income taxes on $9.67 trillion of adjusted gross income – an overall (or “effective”) tax rate of 14.68 percent. To contrast, Americans paid an effective tax rate of 14.16 percent for the 2013 tax year.
So why did taxes go up on income Americans earned in 2014? It’s not because Congress changed any laws or raised taxes on anyone. And it’s not just because Americans’ incomes increased: even though Americans earned 6.1 percent more income in 2014, their income taxes rose by 10.0 percent. Rather it’s because the federal income tax is designed to increase faster than Americans’ incomes do. As Americans earn more money, they are pushed up into higher tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and are less eligible for tax credits, leading to higher taxes overall.
The fact that the federal income tax grows faster than Americans’ incomes is an important feature of the federal tax code. This phenomenon is often known as “real bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. ”: even though federal tax brackets are adjusted every year for inflation, they are adjusted for price inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , not the growth of incomes. Since incomes grow faster than prices, Americans on the whole move up to higher and higher tax brackets over time.
Last week, the Congressional Budget Office released its projections of federal revenue for the next decade. Between 2016 and 2026, federal income tax revenues are projected to grow from 8.8 percent of GDP to 9.6 percent of GDP. And indeed, the CBO references “real bracket creep” no fewer than eleven times in the report, to explain why federal income tax revenue is expected to grow faster than the economy.
This spring, when Americans are doing their taxes, they will probably again see their tax bills go up, compared to last year. It’s not just because their incomes have increased, and it’s not because Congress made any big changes to the tax code. It’s because of real bracket creep, a structural feature of the federal income tax.
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