June 1, 1994

Individual Effective Tax Rates in the United States

Download Special Report No. 35

Special Report No. 35

Executive Summary The federal, state, and local governments of the United States impose a wide variety o f taxes on the American people, including taxes on individual incomes, corporate incomes, payrolls, sales, estates, and properties, as well as other miscellaneous taxes, fees, and charges. Accounting for all taxes on the federal and state/local levels, the average taxpayer’s effective average tax rate increases as his income increases, producing what is known as a “progressive” tax structure.

In many cases, effective average tax rates differ substantially from statutory tax rates. Statutory tax rates refer to the rates established in tax law. For example, the state of Mississippi imposes a statutory sales tax rate of 7 percent. For a single taxpayer in 1993, the federal government imposed a statutory marginal income tax rate of 15 percent on each additional (“marginal”) dollar earned by the taxpayer up to an income of $22,100; 28 percent on the marginal income between $22,100 and $53,500 ; and so on for the other statutory rates of 31, 36, and 39.6 percent.

Effective average tax rates, by contrast, represent the actual tax burden of a taxpayer (whether on a single type of tax or on al l taxes combined) divided by that taxpayer’s total income.

A 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.

A 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.

The average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes.