Recent Trends in the Federal Tax Burden

Recent Trends in the Federal Tax Burden

Order Code RS20059
Updated March 27, 2000
CRS Report for Congress
Received through the CRS Web
Recent Trends in the Federal Tax Burden
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
In FY1999, federal tax revenue measured as a percentage of Gross Domestic Product
(GDP) was at a record high level; it is projected to remain at high levels into the future.
Yet at the same time, the average federal tax rate within each income group has not risen.
That these two seemingly contradictory trends can occur simultaneously is primarily the
result of the rapid income growth concentrated at the high end of the income distribution
where marginal income tax rates are at their highest, coupled with tax reductions enacted
in the Taxpayer Relief Act of 1997. This report discusses these trends and will be updated
as newer data become available.
Table 1 shows the level of federal tax revenue as a percentage of GDP for selected
fiscal years from 1965 through 2005.
Table 1. Federal Revenue as a Percentage of Gross Domestic Product
(FY1965 - FY1999 actual - FY2000 and FY2005 projections)
1965
1970
1975
1980
1985
1990
1995
1999
2000
2005
17.0%
19.0%
17.9%
18.9%
17.7%
18.0%
18.5%
20.0%
20.3%
19.8%
Source: Congressional Budget Office.
The primary contributor to the recent growth in overall federal tax revenue has been
the increase in federal individual income tax receipts. While the increase in federal
individual income tax receipts can be traced to several factors, the most important has
been the across-the-board increase in real incomes which has put proportionately more
income into the higher marginal income tax brackets.
Of greatest significance has been the rapid growth in income concentrated at the high
end of the income spectrum, where marginal income tax rates are the highest. Table 2
shows the change in the shares of adjusted gross income (AGI) and taxes for high income
taxpayers in 1993, 1997, and 1998.
The data in table 2 indicate that the share of AGI accruing to high income taxpayers
grew dramatically between 1993 and 1998. Taxpayers with AGIs in excess of $200,000
saw their share of AGI increase from 14% to over 21% of the total while taxpayers with
AGIs in excess of $1 million experienced an increase from close to 5% to over 9% of total
AGI. As high income taxpayers' share of total AGI increased so did their share of total
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CRS-2
Table 2. Share of AGI and Tax Liability for High Income Taxpayers
1993
1997
1998*
Share of AGI
$200,000 and above
14.5%
20.3%
21.6%
$1 million and above
4.9%
8.6%
9.3%
Share of tax liability
$200,000 and above
29.8%
37.7%
39.8%
$1 million and above
11.4%
16.9%
18.3%
Source: Congressional Budget Office
*preliminary
federal taxes. This has been the mechanism that has fueled the increase in federal tax
revenues. A larger percentage of total income is now earned by taxpayers at the top of the
income distribution where marginal income tax rates are the highest which, in turn, has
significantly increased federal revenues.
Yet at the same time the average federal tax rate in each income bracket has not
increased. Moreover, as shown in table 3, average federal tax rates were projected to
decrease between 1995 and 1999. The decrease in average federal tax rates over this
period is the result of tax reductions enacted in the Taxpayer Relief Act of 1997 including
the child tax credit, educational related tax reductions, changes in individual retirement
accounts, and reductions in taxes on capital gains income.
Table 3. Federal Effective Tax Rates for All Individuals and Families
Income (thousands of dollars)
1995
1999
10 to 20
11.6%
9.5%
20 to 30
17.0%
15.4%
30 to 40
20.0%
17.8%
40 to 50
22.1%
20.5%
50 to 75
23.9%
22.4%
75 to 100
25.9%
24.6%
100 to 200
27.8%
26.7%
200 plus
35.3%
33.0%
Source: Congressional Budget Office.
As a consequence of the rapid growth in real incomes, especially the growth in real
incomes for higher income taxpayers, the federal government will likely see revenues
increase while, within each income bracket, average federal tax rates will remain stable
or actually decrease over the next few years.