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Executive Summary
The distribution of 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.
burdens by family income class is of major importance to the general public and policy makers, yet the information examining this distribution is quite limited due to the difficulty involved in producing such estimates. The Tax Burden By Income Class 1986-1987 study prepared by the Tax Foundation helps provide a comprehensive tax burden distribution analysis.
The current demand for increased government services, combined with the severe Federal budget deficit and budgetary problems in numerous states, creates a fiscal environment ripe for revenue enhancement. What types of taxes could be implemented to address these fiscal demands and who will bear their burden? These will be the first questions in any serious consideration of new tax initiatives.
Earlier tax burden distribution results were presented in the Tax Foundation’s 1981 study Allocating Tax Burdens and Government Benefits by Income Class, 1972-73 and 1977. To assist in understanding who pays the taxes, the Tax Foundation has expanded upon its previous body of research and employed the most recent data available in order to produce the present comprehensive analysis of the tax burden distribution by level of government as well as by type of tax. The detailed study results presented in Exhibit 7 show the tax burden borne by each family income class for 1986. Provisional 1987 results are presented in Exhibit A1 of Appendix A.
The overall total tax burden results produced by the study show a generally proportional tax structure, with the exception of families in the lowest and highest income brackets. Both bear a larger than average tax burden. Furthermore, the tax burden distribution shows great disparities by income class in absorbing the burden of a specific type of tax.
Not surprisingly, the 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. represents the most progressive element of the tax structure; while sales, excise, and 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. es prove to be regressive. The major excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es examined separately in the study—specifically those on motor fuel, tobacco products, and alcoholic beverages—were the most regressive.
Alternative tax incidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy. assumptions were analyzed in order to suggest the degree to which the tax burden estimates are affected by the study’s choice of assumptions. The alternative assumptions focus on three taxes—the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, and the employer’s share of social insurance taxes.
Examining the difference in effective tax rates caused by using the most progressive and most regressive set of incidence assumptions reveals that the overall tax burden distribution is not altered significantly. For the middle classes the difference is minimal, averaging less than a 2 percent variation. In the lowest income bracket, greater regressivity is seen when the tax incidence is assumed to fall more heavily on consumption. Progressivity is increased in the highest income bracket when taxes are primarily shifted to dividend and property income. For the tax burden as a whole, the differences in effective rates between the two extreme sets of assumptions were relatively small.
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