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The Tax Burden of the Median American Family

4 min readBy: Claire Hintz

Download Special Report No. 96

Executive Summary

The total 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. burden of a median two-income family dipped below 40 percent in 1998, according to a new study by the Tax Foundation.

J.D. Foster, Ph.D., executive director and chief economist of the Tax Foundation, unveiled the new study at a tax policy conference on Capitol Hill. Titled “The Tax Burden of the Median American Family” (No. 96 in the Foundation’s Special Report series), the study confirms that even adjusting for 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. , recent prosperity has resulted in higher taxes. The $26,759 total tax burden that a median two-earner family paid in 1998 is the highest ever.

Taxes as a Percentage of Median Family Income Federal, state and local taxes claimed 39.0 percent of a median two-income family’s total income ($68,605), down from 40.9 percent in 1997 and down from the historical high of 41.5 percent in 1996. The median one-income family’s tax burden was 37.6 percent of its 1998 income ($36,579), down from a high of 38.6 percent in 1997.

Against a backdrop of steadily rising tax burdens, the Taxpayer Relief Act of 1997 reduced federal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es on the median family so dramatically that federal income taxes as a percentage of total income were about the same in 1998 as they were in 1955. The almost two percent decline in the two-earner family’s total tax burden between 1997 and 1998 can be attributed almost entirely to this legislation. It brought such substantial tax relief to the median family because its new tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s, the Per-Child Tax Credit and the Hope and Lifetime Learning Education Credits, are especially valuable to the demographic group that the median family falls into.

Two factors are primarily responsible for the general trend of higher tax burdens over recent decades – the upward trend in state and local taxation and the increase in the federal payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. used to fund social insurance programs:

  • State and local taxes combined took 8.8 percent of the two-earner family’s income in 1975, but 23 years later that share had grown to 13.1 percent. For the one-earner family, state and local taxes make up an even larger share of the total tax burden and have been growing even faster. In 1975, state/local taxes took 9.4 percent of family income, but in 1998 they took 15.0 percent.
  • Payroll taxes have also climbed sharply. Although the rate has not increased since 1990, the amount of income subject to the tax has increased so rapidly that the median family’s growing wages have not been able to catch up to the cap. In 1998, the combined rate was 15.3 percent (employer and employee each paid 7.65 percent) on wages and salaries up to $68,400 for Social Security, Disability Insurance, and Medicare.

In 1975, when the combined rate was 11.7 percent and the tax applied to the first $14,100 in wages, the two-earner median family paid 9.5 percent of its total income in payroll taxes, compared to 12.6 percent in 1998. As for the one-earner median family, payroll taxes took 9.7 percent of its income in 1975, and that grew to 12.4 percent in 1998.

To a large extent, as seen in the two pie charts, the growth in tax burdens has crowded out other important parts of the family budget, such as saving. In fact, taxes now claim a greater share of the median two-income family’s income (39.0 percent) than food (8.9 percent), clothing (3.9 percent), housing (15.9 percent), and transportation (6.9 percent) – combined.

Taxpayers pay such a wide variety of taxes at the federal, state, and local levels. Some are easy to detect, like a personal income tax or a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , but many taxes go unseen. That happens when third parties–people who do business with taxpayers–have to pay taxes that end up being passed on to taxpayers in the form of higher prices or lower income. For example, employers pay half of all payroll taxes, and these taxes diminish salaries. Also, when corporations pay their own taxes, they pass that cost on. Unfortunately, taxpayers are mostly unaware of these hidden taxes even though they make up a significant fraction of the family’s real tax burden.

This lack of transparency in the national tax system is a great flaw that this study helps to remedy. For historical comparison, this study presents a fifty-year series of the aggregate tax burden on one- and two-earner families.