Individual Tax Rates and Tax Burdens: Changes Since 1960

Publication Date: January 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Since 2000, Congress has passed a major tax bill almost every year, beginning with the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) and up through the Tax Relief and Health Care Act of 2006 (P.L. 109-432). For a variety of reasons, tax issues are likely to be high on the agenda of the 110th Congress. First, while fundamental tax reform is unlikely to occur in the near-term, Treasury officials suggest that incremental changes may be made to the tax code. Second, fixing the long-term Social Security and Medicare financial shortfalls will involve benefit reductions, revenues increases, or a combination of the two. And third, a revenue neutral fix of the alternative minimum tax (AMT) will involve either expenditure reductions or revenue increases.

Federal income and social insurance taxes are just two of the many taxes individuals pay. An understanding of all the major taxes individual taxpayers face is important since a change in one tax may affect taxpayer behavior and, thus, affect revenues received by other levels of government. To provide this perspective, this report examines the changes in tax rates and tax burdens on individuals, focusing primarily on income and social insurance taxes.

The federal personal income tax is the largest single source of combined federal, state, and local tax revenue accounting for 27% of the total in 2005. The next largest single source is federal social insurance contributions accounting for 25% of the 2005 total. Overall, direct taxes on personal income (that is, the federal income tax, state and local income taxes, and social insurance contributions) account for 60% of total federal, state, and local tax revenues.

The average federal income tax rate has fluctuated since 1960, but fluctuated around a constant rate of about 9.3%. Currently, the average tax rate is below its 45year average, but has been increasing over the past two years. The average tax rates for both federal social insurance taxes, and state and local income taxes have been steadily increasing since 1960. By 2005, the combined tax burden of social insurance taxes, and state and local income taxes was greater than that of federal income taxes.

The distribution of the tax burden across income categories differs dramatically among the various types of taxes. Overall, federal taxes are progressive, in that higher income taxpayers pay a larger proportion of their income in taxes than lower income taxpayers. At the state and local level, however, the tax burden of the combination of income, property, sales, and excise taxes is highly regressive--lower income taxpayers pay a higher share of their income in state and local taxes than higher income taxpayers.

This report will be updated as further information becomes available.