Growls

Early last week, the Congressional Budget Office released an update of their “estimates of effective federal tax rates, which include date for calendar year 2006." According to the CBO director’s blog, “(t)he effective tax rates in 2006 differed only slightly from those in 2005.” The director listed the following points from their analysis (emphases added)

• The overall effective federal tax rate (the ratio of federal taxes to household income) was 20.7 percent in 2006. Individual income taxes, the largest component, were 9.1 percent of household income. Payroll taxes were the next largest source, with an effective tax rate of 7.5 percent. Corporate income taxes and excise taxes were smaller, with effective tax rates of 3.4 percent and 0.7 percent.

• The overall federal tax system is progressive—that is, effective tax rates generally rise with income. Households in the bottom fifth of the income distribution paid 4.3 percent of their income in federal taxes, while the middle quintile paid 14.2 percent, and the highest quintile paid 25.8 percent. Average rates continued to rise within the top quintile, with the top 1 percent facing an effective rate of 31.2 percent.

• Higher-income groups pay a disproportionate share of federal taxes because they earn a disproportionate share of pretax income and because effective tax rates rise with income. In 2006, the highest quintile earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 3.9 percent of income and paid 0.8 percent of taxes, while the middle quintile earned 13.2 percent of income and paid 9.1 percent of taxes.

• Effective tax rates in 2006 changed only slightly compared with their levels in 2005. There were no significant changes in the tax law between those years, and changes in the income distribution were not enough to cause large movements in effective rates. The overall effective rate was 0.1 percentage point higher in 2006 than in 2005. And the effective tax rate for each of the four taxes was within 0.1 percentage point of its 2005 level. Similarly, no income quintile saw its total effective tax rate change by more than 0.1 percentage point, though in some cases the rate for specific taxes differed by 0.2 points. On average, the top 1 percent of households saw their effective tax rate decline by 0.4 percentage point (from 31.6 percent to 31.2 percent), primarily because of a drop in the average rate for their individual income taxes.

This CBO webpage provides access to the entire set of data for the CBO’s April 2009 update. Below is a graph from that page:

Could the tax eating, income redistributionists tell tax earners just what they think these effective tax rates should be?