Fiscal Fact No. 64
The IRS recently released official 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. statistics by income group for the 2004 tax year, and the new data show that despite what some critics of recent tax policy have suggested, all income groups have witnessed their effective federal income tax rates fall, including lower- and middle-income taxpayers.
Table 1 shows how the tax picture has changed for each income group (as defined by 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.” , or AGI) from 2000 to 2004 when all tax returns within each group are included.
Table 1: Tax Rates Have Fallen for All Income Groups from 2000 to 2004
|
Income Group (AGI) |
Percent of Returns in Income Group that are Taxable |
Share of Total AGI in Income Group |
Share of Total Federal Income Taxes Paid* by Income Group |
Income Taxes Paid as a Percentage of AGI |
Tax Cut** |
||||
|
2000 |
2004 |
2000 |
2004 |
2000 |
2004 |
2000 |
2004 |
||
|
Total |
74.8% |
67.4% |
100% |
100% |
100% |
100% |
14.9% |
11.5% |
3.4% |
|
$1-$5,000 |
18.0% |
6.5% |
0.5% |
0.5% |
-0.2% |
-0.2% |
-4.4% |
-5.6% |
1.2% |
|
$5,000-$10,000 |
43.2% |
32.0% |
1.5% |
1.3% |
-0.7% |
-0.9% |
-6.4% |
-7.7% |
1.3% |
|
$10,000-$15,000 |
57.2% |
48.7% |
2.4% |
2.1% |
-0.5% |
-1.3% |
-3.3% |
-7.1% |
3.8% |
|
$15,000-$20,000 |
64.7% |
54.5% |
3.2% |
2.9% |
0.2% |
-0.9% |
1.0% |
-3.4% |
4.4% |
|
$20,000-$25,000 |
75.7% |
61.1% |
3.5% |
3.2% |
1.1% |
-0.1% |
4.6% |
-0.4% |
5.0% |
|
$25,000-$30,000 |
87.2% |
68.7% |
3.6% |
3.4% |
1.7% |
0.8% |
6.8% |
2.5% |
4.3% |
|
$30,000-$40,000 |
96.0% |
81.1% |
7.4% |
7.1% |
4.2% |
3.2% |
8.5% |
5.1% |
3.4% |
|
$40,000-$50,000 |
98.5% |
89.6% |
7.3% |
7.0% |
4.8% |
4.2% |
9.8% |
6.9% |
2.9% |
|
$50,000-$75,000 |
99.3% |
96.1% |
16.4% |
16.3% |
12.2% |
11.9% |
11.1% |
8.3% |
2.8% |
|
$75,000-$100,000 |
99.8% |
99.0% |
11.6% |
12.9% |
10.5% |
11.0% |
13.5% |
9.8% |
3.7% |
|
$100,000-$200,000 |
99.9% |
99.8% |
16.8% |
19.0% |
19.4% |
22.5% |
17.3% |
13.6% |
3.7% |
|
$200,000-$500,000 |
99.9% |
99.9% |
9.6% |
10.0% |
15.4% |
17.9% |
23.9% |
20.6% |
3.3% |
|
$500,000-$1,000,000 |
99.9% |
99.9% |
4.2% |
4.3% |
8.0% |
9.2% |
28.3% |
24.3% |
3.9% |
|
$1,000,000-$1,500,000 |
99.9% |
99.9% |
1.9% |
1.9% |
3.7% |
4.0% |
29.1% |
24.7% |
4.4% |
|
$1,500,000-$2,000,000 |
99.9% |
99.9% |
1.2% |
1.2% |
2.4% |
2.5% |
29.3% |
25.0% |
4.4% |
|
$2,000,000-$5,000,000 |
99.9% |
99.9% |
3.1% |
2.9% |
6.1% |
6.2% |
29.2% |
24.7% |
4.5% |
|
$5,000,000-$10,000,000 |
99.9% |
99.9% |
1.9% |
1.6% |
3.6% |
3.3% |
28.5% |
23.8% |
4.7% |
|
$10,000,000 or more |
99.9% |
99.9% |
4.7% |
3.8% |
8.0% |
7.0% |
25.3% |
21.1% |
4.3% |
* “Federal income taxes paid” equals income taxes after credits minus the refundable portions of both the Earned Income 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. (EITC) and the additional child tax credit.** “Tax cut” is the percentage point fall in the effective tax rate for that income group from 2000 to 2004.Source: Internal Revenue Service
Several important stories emerge from this table. First, effective tax rates have fallen for every income group. Those in the bottom and middle income groups, as well as millionaires, have seen their tax rates fall. The percentage decrease in tax burden is greatest for those in the lowest income groups between 2000 and 2004.
For example, in 2000 a taxpayer with an AGI of $35,000 who pays 8.54 percent of his income in federal income taxes would pay $2,989 in federal income taxes after credits. Following the tax cuts that push his effective rate down to 5.12 percent, he would pay $1,792 in taxes—a 40 percent decrease in tax burden.
At the other end of the income spectrum, a taxpayer making $1.75 million would see his effective tax rate fall from 29.35 percent to 25 percent. Before the tax cuts, he would pay $513,625 in federal income taxes after credits. Following the tax cuts, he would pay $437,500. This amounts to a 14.8 percent reduction in tax burden.
Second, even though their effective tax rates have fallen, taxpayers in the $75,000 – $500,000 AGI range are shouldering a larger burden of the total taxes paid. This can be seen, for example, in the $100,000 – $200,000 income group, which paid 19.4 percent of all federal income taxes in 2000, yet in 2004 paid 22.5 percent of all income taxes.
There are two reasons for this increase: (1) This income group’s fraction of the total AGI has increased; and (2) taxpayers in these groups are most likely to be hit by the Alternative Minimum Tax (AMT), which has been changed very little since 2000.
Third, as shown by the “percent of returns that are taxable” column, the tax cuts have taken many taxpayers in the low-income groups off the tax rolls entirely. In 2000, approximately 32 million tax returns had no income tax. By 2004, that number had risen to around 43 million returns. This is largely because of the expansion of the Child Tax Credit along with the establishment of the 10 percent tax bracketA 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. .
Finally, in 2004, much more money was returned to low-income earners through the tax code via programs like the Earned Income Tax Credit (EITC) and the Refundable Child Tax Credit than in 2000. Table 1 shows that among lower- and middle-income groups, many taxpayers receive more back from the IRS than they actually pay in federal income taxes. Every AGI group up to $25,000 actually receives more back from the IRS in the aggregate than it pays in federal income taxes.
ConclusionEver since the Bush tax cuts were enacted in 2001 and 2003, much of the political debate has centered on the often-repeated claim that the benefits of the tax cuts accrued only to high-income taxpayers. While the wealthy will save a higher dollar amount from any across-the-board tax cut merely because they pay more in taxes and earn higher incomes, all income groups have had their current tax burdens reduced by the tax cuts.
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