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CBO: Overall Federal Taxing and Spending is Progressive

Tax Foundation - Mon, 2014-11-17 13:45

This week, the CBO released its estimate of the distribution of household income and federal taxes. This report measures both average household income and average federal tax burden by income quintile in 2011.

There are many important parts to this report, but the main feature of this report is its estimation of the distribution of household income and federal taxes. The CBO finds:

The median household in the United States earned $66,400 in pre-tax income plus government transfers. However, the distribution of income is skewed to the top. Households at every income level benefits from government transfers (Social Security, Medicare, etc.), but low income households rely on them the most. Conversely, low income individuals pay the lowest average effective federal tax rate (1.9 percent of household income). The top quintile paid the highest (23.4 percent). Although taxes are progressive at the federal level, certain taxes are more progressive than others. The corporate income tax is born by all households, not just the highest income households

The Distribution of Median Household Income is Skewed to the Top

The CBO’s measure of income is called “market income.” This measures not just wage income, but also business income and capital income (capital gains and dividends from investments). In addition, they add in the value of major government transfers: Social Security, Medicare, Medicaid, and other in-kind cash benefits.

In 2011, the Distribution of household income was skewed towards the top. The lowest quintile earned approximately $24,600. The middle quintile earned approximately $66,400. The top quintile earned an average $245,700. Across all households the average income was $93,900.

All Households Benefit from Government Transfers, but Low-Income Households rely on them the Most

Part of the CBO’s measure of income is transfers from the federal government. The CBO shows that all households benefit from government transfers, but low-income households rely on them the most. In the lowest quintile, government transfers make up 37 percent of total pre-tax income.

As you go up the income scale, the share of income from government transfers declines, but does not go away. This is due to the fact that Social Security and Medicare are universal programs with respect to income, unlike programs like the Temporary Assistance for Needy Families and Food Stamps.

Government transfers make up 35 percent of the income of second quintile households, and 25 percent of middle quintile households. Once you hit the top two quintiles, the reliance declines quickly to 14 percent of total income for fourth quintile households and 4 percent for top quintile households.

The Federal Tax System is Progressive

In contrast with the government transfers, which decrease as you go up the income scale, federal taxes increase in importance as you go up the income scale. As household income increases, average tax burden increases. The lowest income quintile paid a total effective income tax rate of 1.8 percent. The second quintile paid 7 percent. Middle income households paid 11.2 percent and the fourth quintile paid 15.2 percent. The top income quintile paid an effective tax rate of 23.4 percent, an effective tax rate two times higher than the middle quintile and 13 times higher than households in the lowest quintile.

The Distribution of Different Federal Taxes

Although the total tax burden is progressive, not all federal taxes are progressive. The distribution of these taxes varies by both the type of tax and the income level.

The federal individual income tax is highly progressive with respect to income ranging from negative 7.5 percent for households in the bottom quintile to 14.2 percent for households in the top quintile.

In contrast, excise taxes are slightly regressive, meaning that their burden goes down as household income goes up. The lowest quintile households pay the highest rate: 1.6 percent of income, while top quintile households pay the lowest: 0.4 percent.

Payroll taxes and corporate taxes are both rather flat. For the corporate income tax, the CBO assumes that the tax is born 75 percent by shareholders and 25 percent by laborers. What this means is that shareholders, which are disproportionately high-income households, bear most of the burden. This gives the corporate tax its slight progressive feature.

It is important to emphasize, however, that although the CBO states that corporate income taxes are born mostly by shareholders, there is by no means a consensus on this. Some estimates could place most of the corporate income tax on labors rather than their shareholders, which could drastically change the perceived progressivity of this tax.

Either way, everyone ends up bearing some of the corporate tax.

While there are some limitations to the CBO’s report—especially the exclusion of state and local taxes and some major public goods provided by governments—this report is important in understanding that the United States’ federal government has progressive tax and spending policies.

For more on the distribution of taxing and spending policy see here.

Categories: Tax news

Household Incomes Have Stagnated in the Last Decade

Tax Foundation - Mon, 2014-11-17 12:30

Household incomes have stagnated in recent years. From 1980 to 2000, when the economy was growing at a higher rate, real household income increased from $47,668 to $56,800, where it peaked. But since 2000, and after two recessions, median household income in the United States has declined. In 2013, median household income was $51,939, the lowest it has been since 1995.

For more charts like this, please see our new chart book, Business in America: Illustrated.

Categories: Tax news

Temporary Could Mean Permanent When It Comes To Taxes

Tax Foundation - Mon, 2014-11-17 11:15

Milton Friedman once said that “nothing is more permanent than a temporary government program.” However, it turns out that nothing may be as permanent as a temporary tax increase, either. According to a new report from the Urban Institute, many of the temporary taxes created to fill state budget gaps during the 2008 recession have stuck around passed their expiration date.

The group found that between 2008 and 2011, 14 states and the District of Colombia enacted 25 temporary tax increases, 10 of which have been expended or been made permanent and three of which have been replaced with other increases. Of the remaining 12, nine have expired and three are still in their in original periods.

State

Policy

Status

Arizona

Increase sales tax from 5.6% to 6.6%

Expired

California

Increase personal income by 0.25 percent

Expired but replaced

California

Increases sales tax from 7.25% to 8.25%

Expired but replaced

Colorado

Increased tobacco product tax

Permanent

Connecticut

Add 10% corporate income tax surcharge

Extended and increased to 20%

Delaware

Increase top rate ($60,000) from 5.95% to 6.95%

Permanent at 6.6%

Delaware

Increase minimum tax

Permanent

Delaware

Calculate estate tax based on 2001 federal law

Permanent

D.C.

Increase sales tax from 5.75% to 6%

Expired

Hawaii

Increase lodging tax from 7.25% to 9.25%

Permanent

Hawaii

Create new top rate plus exemption phase-out

Still in temporary period

Illinois

Increase corporate rate from 4.8% to 7%, phasedown in 2015 to 5.25%

Still in temporary period, but possible extension

Illinois

Increase individual tax from 3% to 5%, phasedown in 2015 to 3.75%, 3.25% after 2024

Still in temporary period, but possible extension

Kansas

Increase sale tax from 5.7% to 6.3%

Permanent at 6.15%

Maryland

Create top rate of 6.25% over $1 million

Expired

Nevada

Additional tax on wages over $62,500

Extended

Nevada

Increase sales tax from 6.5% to 6.85%

Extended

New Jersey

Increase taxes on over $400,000 and create top bracket for over $1 million

Expired

New York

Tax on $500,000 plus at 8.97%, married filing jointly $300,000 plus at 7.85%. Limited deductions for $1 million plus earners.

Replaced with another temporary tax

North Carolina

Create corporate tax surcharge and expand credits

Expired

North Carolina

Added 3% surcharge to top earners

Expired

North Carolina

Increase sales tax from 6.75% to 7.75%

Expired

Oregon

Increased corporate rate for business over $250,000

Expired

Oregon

Increased taxes $250,000-$500,000 to 10.8% and 11% above $500,000

Expired

Oregon

Added 50 cent surcharge per bottle of distilled liquor

Extended

While most increases were one percent or less, some states aggressively increased rates. Illinois experienced one of the most significant temporary tax increases, raising its flat tax from 3 percent to 5 percent on individual income and 4.8 percent to 7 percent on corporate income. These programs are still under their original temporary periods. However, as the first rollback quickly approaches, discussions are already underway to make them permanent. Hawaii will likely face the same debate.

The fact that half of temporary taxes become permanent should be no surprise. In most situations, the tax increases have been extended at least once, if not more. This effectively creates a new tax baseline in the minds of many taxpayers and lawmakers, making it more difficult to argue for a “tax cut” that actually restores the original rates, as promised.

Even those that have expired didn’t do so without a fight. Maryland considered making its tax increase on top earners permanent in order to create a special teacher pension fund. Arizona’s increase on sales taxes was another that drew debate over permanence when a special interest group lobbied for a permanent increase, though voters rejected the initiative.

Rather than temporary increases, lawmakers should look to broad tax bases and eliminating special carve-outs, keeping rates lower for all tax payers.

Follow Josh on Twitter.

Categories: Tax news

Tick-tock on 2015 Obamacare health plans - Bankrate.com

Google IRS Federal Income Tax - Mon, 2014-11-17 04:41

Bankrate.com

Tick-tock on 2015 Obamacare health plans
Bankrate.com
April 15, 2015: This is the deadline for Americans to file federal income tax, which for the first time will include a proof of health insurance form. ... If you received a tax subsidy to help with your premiums this year, you can expect a letter from ...

and more »
Categories: Tax news

Expired law could cause tax bills of homeowners, Sandy victims to soar - Newsworks.org

Google IRS Federal Income Tax - Mon, 2014-11-17 03:08

Newsworks.org

Expired law could cause tax bills of homeowners, Sandy victims to soar
Newsworks.org
The Mortgage Forgiveness Debt Relief Act exempted homeowners from paying taxes on debt forgiven by the bank that would otherwise be considered income by the IRS. Before this law, if you got rid of your home in a short sale or were foreclosed upon, ...

and more »
Categories: Tax news

IRS Disregards Own Revenue Ruling in Barnes Decision - JD Supra (press release)

Google IRS Federal Income Tax - Sun, 2014-11-16 14:22

JD Supra (press release)

IRS Disregards Own Revenue Ruling in Barnes Decision
JD Supra (press release)
Barnes understood that either a dividend distribution or a loan from ASA would trigger a significant federal tax liability. A distribution to the extent of earnings and profits would result in a taxable dividend under Internal Revenue Code Sections 301 ...

Categories: Tax news

Short sale can have grave tax implications - NorthJersey.com

Google IRS Federal Income Tax - Sat, 2014-11-15 23:30

Short sale can have grave tax implications
NorthJersey.com
If you fall within this definition, you might not have to declare the amount listed on the 1099C as income. The IRS has a worksheet you can use and may have to use when you file your federal income taxes to claim the exclusion and avoid having to ...

Categories: Tax news

IRS Announces Tax Guidance Related to Ebola Outbreak in Guinea, Liberia and ... - Community Common

Google IRS Federal Income Tax - Fri, 2014-11-14 13:53

IRS Announces Tax Guidance Related to Ebola Outbreak in Guinea, Liberia and ...
Community Common
The Internal Revenue Service today issued two items of guidance in response to the need for charitable and other relief due to the Ebola outbreak in Guinea, Liberia and Sierra Leone. ... For example, if an employee living in Guinea receives ...

and more »
Categories: Tax news

Tax Policy Is Child’s Play

Tax Foundation - Fri, 2014-11-14 12:15

The economy is growing modestly again, in spite of several increases in taxes on saving and investment since 2012. This has led some people to believe that taxing investment does not matter. In fact, the recession knocked the economy back to a lower-than-optimal starting point, and the subsequent tax increases are making it impossible to recapture lost ground. The level of GDP should be much higher at this stage of the recovery. Looking only at the positive movement in GDP while failing to see its depressed level misses key elements of the economics of taxation.

The economics of taxation can be illustrated by the Milton Bradley board game, Chutes and Ladders. The game is played on a board of ten rows of ten squares each. Players march along a row, then back along the next row up, and so on to the hundredth square at the top. Players move forward by spinning a needle that points to a 1, 2, 3, 4, or 5 square advance. The average spin is three moves forward each turn.

Here’s the catch. There are chutes and ladders printed on the board that connect squares on different levels. If a player lands at the foot of a ladder, he moves his piece to the top of the ladder, a boost of two to five rows on his march. If he lands at the top of a chute, he slides down two to five rows. After each rise or fall, he resumes plodding upward about three squares a turn, but from a higher or lower starting point. From then on, he will be above his pre-ladder or below his pre-chute level going forward, unless he hits an offsetting chute or ladder to put him back on his old trajectory.

Think of the economy as marching along a path like the players in the Chutes and Ladders game, but with a board of infinite height. The amount of capital and employment has adapted to the current tax and regulatory regime, and the average rate of growth is in line with increases in population and technological progress, with more capital added each year to match the growth in the labor force.

The enactment of tax reductions or regulatory changes that make it possible to profitably employ more capital is like landing on a ladder. These policies induce a burst of capital formation and super-normal economic growth until the additional capital is built up. The added amount of capital per worker raises productivity and wages. Output jumps. Then the economy returns to a normal growth rate, but from a higher level. It will always be ahead of where it would have been without the added capital, as long as the better tax treatment of capital is still in place. (A smaller but similar surge can occur if a tax cut on addition labor income boosts hours worked per worker or raises the labor force participation rate. Once the higher levels are reached, growth resumes in line with the change in the working age population.)

Enacting adverse policies that force a reduction in the amount of capital that people are willing to maintain is like hitting a chute. The economy slows, or even contracts for a period, as the amount of capital that can no longer be profitably employed is shed. Productivity and wages fall. Then growth resumes at its regular pace (in line with the normal growth of population and technology), but from a lower level. Resumption of growth after a bad policy shift does not mean that the policy was harmless, only that the amount of damage was finite. The economy will remain below the level it would have reached without the tax increase on capital income as long as the policy remains in place. (A smaller but similar effect occurs from a rise in the tax on labor; there is a drop in the labor supply, then a resumption of normal increase, but from a lower base.)

There is one major difference between the game of chutes and ladders and the practice of public policy. In the game, the chutes and ladders are predetermined at fixed locations on the board, and landing on one is determined by random chance. In the case of public policy, the chutes and ladders represent changes in tax and regulatory policy; they are created by the Congress, and are determined by politics.

Congress can create growth ladders that raise investment, incomes, and employment by enacting pro-growth tax changes. It can also create anti-growth chutes that reduce investment, employment, and income by imposing higher taxes on saving, investment, and employment. If the game of politics were more focused on growing the economy than on growing the government, we’d encounter more ladders and fewer chutes. 

Categories: Tax news

Bailout Act Includes Tax Breaks for the Little Guy

SmartMoney.com - Tax Matters - Wed, 2008-10-08 12:27
The unpopular Fed bailout act does offer some nice tax breaks.
Categories: Tax news

A Smart Tax Move for Short-Term Investors

SmartMoney.com - Tax Matters - Wed, 2008-10-01 11:30
Reduce the tax hit on short-term bets by investing in broad-based equity index options.
Categories: Tax news

Refundable AMT Credit Could Mean Cash Back for You

SmartMoney.com - Tax Matters - Wed, 2008-09-24 09:49
If you exercised incentive stock options and got socked by the AMT, here's some relief.
Categories: Tax news

Borrowing From Your IRA

SmartMoney.com - Tax Matters - Thu, 2008-09-18 08:16
It can be a source for an interest-free short-term loan -- or a bad idea if you do it wrong.
Categories: Tax news

Why Our @*$! Tax Code Is So Confusing

SmartMoney.com - Tax Matters - Wed, 2008-09-10 08:30
I'm a CPA and our stupid tax code even drives me nuts. Politicians, are you listening?
Categories: Tax news

Which Cars Qualify for Alternative Fuel Credit?

SmartMoney.com - Tax Matters - Thu, 2008-09-04 06:34
Here's a list of which vehicles still qualify for the juicy tax credit of up to $3,000.
Categories: Tax news

IRAs Are Better Than Ever as Retirement Tool

SmartMoney.com - Tax Matters - Wed, 2008-08-27 07:03
More folks are eligible -- and the contribution limits are higher. So get on this.
Categories: Tax news

Late Payments of Estimated Taxes Can Be Smart Move

SmartMoney.com - Tax Matters - Wed, 2008-08-20 10:27
If you pay estimated taxes, delaying your payments is remarkably painless.
Categories: Tax news

A Sneaky New Twist on the Wash-Sale Rules

SmartMoney.com - Tax Matters - Thu, 2008-08-07 07:16
The IRS says IRA and other transactions can now trigger the dreaded wash-sale rule.
Categories: Tax news

3 Brand-New Tax Changes You Need to Know About

SmartMoney.com - Tax Matters - Tue, 2008-08-05 11:00
New legislation has changes that will affect many homeowners.
Categories: Tax news
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