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A Note on Effective Federal Tax Rates: 1979-2002

The Congressional Budget Office (CBO) recently published data on the effective tax rates paid by households in the United States for the years 1979 through 2002.[1] Between 2001 and 2002, the effective tax rate fell for all households from 21.4 percent to 20.7 percent. The share of total tax liabilities increased for the middle and fourth quintiles, while the share of total tax liabilities fell for the bottom two quintiles as well as the top. (See Box: Effective Tax Rates below for more information on this measure of tax rates.)

Upon first glance, the data appear to show that federal tax rates have become more progressive over the past 23 years. For example, if you quickly look at the effective tax rate and/or the tax share paid by quintiles, it looks as if the tax federal system has become more progressive.

However, assessing the progressivity of the tax code by examining the tax share or the effective tax rate by quintile can be misleading. Over time, the historical effective tax rate for each income class can change either as a result of changing tax laws, or it can be the result of changing household incomes within each income group. Assessing the change in effective tax rates does not by itself lead to conclusions about the progressivity of the tax code.

The income data provided by the CBO show that those in the bottom quintile saw their average incomes stagnate—average pretax incomes rose by just $100 over the last 23 years, from $14,300 in 1979 to $14,400 in 2002. By contrast, those in the top quintile saw their average incomes rise by over $50,000, from $121,000 to $175,900. (See figure 1 below.)

Since the tax code is progressive and rising incomes lead to greater marginal tax rates, even if there were no changes to the tax code over the last 25 years, the quintile data would show, over time, increasing effective tax rates at the top.

The seemingly more progressive tax structure observed in this data can thus be explained in part by rising income inequality, and not necessarily a more progressive income tax code.

In fact, it is troubling that despite the large income gains at the top, the effective tax rates for these groups have not increased at all since 1979, and have in fact fallen. (See figure 2 below.)

John Irons is the associate director for tax and budget policy at the Center for American Progress.


[1] Congressional Budget Office, "Historical Effective Federal Tax Rates: 1979 to 2002," March 2005, available at http://www.cbo.gov/showdoc.cfm?index=6133&sequence=0&from=7.

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