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Historical Effective Federal Tax Rates:
1979 to 2002
  March 2005  


The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional year--2002.(1) The tables show effective tax rates for the four largest sources of federal revenues--individual income taxes, corporate income taxes, payroll taxes, and excise taxes--as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.
 

Tax Law Changes in 2002

Compared to those in 2001, effective tax rates in 2002 were affected by two major tax bills. The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) continued to phase in, lowering the effective individual income tax rate. In 2002, EGTRRA reduced the statutory tax rates for the top four brackets below their 2001 levels, increased the income range over which married couples could claim the earned income tax credit, and allowed for higher tax credits to offset child and dependent care expenses. The Job Creation and Worker Assistance Act of 2002 (JCWAA) lowered effective rates for both the individual income and corporate income taxes by increasing depreciation allowances for some property and altering tax rules concerning operating losses.(2)
 

Effective Tax Rates in 2002

The overall effective tax rate fell by 0.7 percentage points, from 21.4 percent in 2001 to 20.7 percent in 2002, largely because of a 0.7 percentage point drop in the effective individual income tax rate. The effective corporate income tax rate fell by 0.3 percentage points, while the effective social insurance tax rate rose by an equivalent amount.

A combination of tax law changes and income changes accounted for the drop in effective individual tax rate. EGTRRA lowered rates and increased credits, while JCWAA increased deductions, all of which lowered the effective income tax rate.(3) At the same time, aggregate income fell from 2001 to 2002. Declines in capital gains income (which fell from $326 billion to $239 billion) and taxable interest income (which fell from $198 billion to $149 billion) were especially pronounced. Wages and salaries, the largest source of income, were essentially unchanged between 2001 and 2002. At the same time, features of the tax code such as the size of tax brackets, personal exemptions, and the standard deduction increased because they are indexed to the rate of inflation. Such increases, coupled with the decline in income, meant that a larger proportion of income was taxed at lower statutory tax rates, lowering the effective tax rate.

The drop in the effective corporate tax rate primarily reflects the changes to depreciation enacted in JCWAA. The increase in the effective social insurance tax rate stems from two factors. In 2002 a larger share of wages fell below the Social Security taxable maximum, increasing payroll taxes relative to wage income. At the same time, wages made up a larger share of income in 2002 than in 2001, further pushing up the effective social insurance tax rate, which is measured as a percentage of total income.
 

Who Pays Taxes?

The analysis assumes that households bear the burden of the taxes that they pay directly (for example, individual income taxes and the employees' share of the payroll tax). Excise taxes are assumed to fall on households according to their consumption of taxed goods (tobacco and alcohol) or--in the case of excise taxes that affect intermediate goods--in proportion to overall consumption. Taxes on businesses were attributed to households. CBO assumes, as do most economists, that employers' shares of payroll taxes fall on employees and, therefore, that the amount of those taxes should be included in employees' income and the taxes counted as part of employees' tax burden. Far less consensus exists regarding how to attribute corporate income taxes. CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from interest, dividends, rents, and capital gains.
 

Measuring Income

This analysis focuses on adjusted pretax comprehensive household income. That measure includes all cash income (both taxable and tax-exempt), taxes paid by businesses (which are imputed to individuals, as noted above), employee contributions to 401(k) retirement plans, and the value of income received in kind from various sources (including employer-paid health insurance premiums, Medicare and Medicaid benefits, and food stamps, among others). The calculations use the Census Bureau's fungible value measure to determine the cash equivalent of in-kind government transfers.

CBO adjusted the resulting measure of comprehensive income for differences in the size of households in order to assign households to income quintiles. It used adjusted income only to rank households in the income distribution; values in Tables 1C, 2C, 3C, and 4CA for average income are based on income unadjusted for household size.
 

Income Quintiles

The tables report values for both the entire population and for parts of the income distribution. Quintiles form the basic groups of interest. The tables also include information about households in the top 10 percent, top 5 percent, and top 1 percent of the annual income distribution. The analysis does not show a comparable subdivision of the lowest quintile because effective tax rates and income are distributed in similar ways for households in different parts of that income group.

Quintiles contain equal numbers of people, but because households vary in size, quintiles generally contain unequal numbers of households.
 

Types of Households

Separate tables show effective tax rates and income for three different types of households: those with members under age 18 (households with children), those headed by a person age 65 or older and with no member under age 18 (elderly childless households), and all others (nonelderly childless households).


Table 1.

Effective Federal Tax Rates, 2001 and 2002
      Average Income (2002 dollars)
 Effective Tax Rate
Income Category Millions of
Households		 Pretax After-Tax All Federal
Taxes		 Individual
Income Tax		 Social
Insurance Taxes		 Corporate
Income Taxes		 Excise
Taxes
2001
                                 
Lowest Quintile 22.2   15,200   14,400   5.2   -5.6   8.3   0.3   2.2  
Second Quintile 21.1   34,700   30,700   11.5   0.3   9.4   0.4   1.4  
Middle Quintile 21.6   52,300   44,400   15.1   3.8   9.5   0.7   1.1  
Fourth Quintile 21.5   76,800   62,000   19.2   7.2   10.4   0.7   0.9  
Highest Quintile 22.5   185,400   135,900   26.7   16.3   7.1   2.8   0.5  
 
All Quintiles 109.4   72,900   57,300   21.4   10.4   8.4   1.8   0.8  
 
Top 10% 11.4   262,800   188,000   28.5   18.7   5.8   3.5   0.5  
Top 5% 5.7   385,400   269,800   30.0   20.8   4.5   4.3   0.4  
Top 1% 1.1   1,064,800   715,000   32.9   24.1   2.3   6.2   0.2  
 
2002
 
Lowest Quintile 22.6   14,400   13,800   4.6   -6.0   8.1   0.3   2.3  
Second Quintile 21.5   33,600   29,900   10.8   -0.2   9.3   0.3   1.4  
Middle Quintile 22.3   51,100   43,700   14.4   3.5   9.3   0.5   1.1  
Fourth Quintile 21.7   75,900   61,700   18.7   6.8   10.5   0.5   0.9  
Highest Quintile 22.8   175,900   130,000   26.1   15.6   7.5   2.5   0.5  
 
All Quintiles 111.4   69,800   55,300   20.7   9.7   8.7   1.5   0.9  
 
Top 10% 11.6   244,500   176,200   27.9   18.0   6.3   3.2   0.5  
Top 5% 5.8   350,700   247,200   29.5   20.1   4.9   4.1   0.4  
Top 1% 1.1   938,100   631,700   32.7   23.8   2.5   6.1   0.3  
Source: Congressional Budget Office.

Notes: A household consists of the people who share a housing unit, regardless of their relationships.

Income categories are defined by ranking all people by their comprehensive household income adjusted for household size--that is, divided by the square root of the household's size. Quintiles, or fifths, contain equal numbers of people.

Comprehensive household income equals pretax cash income plus income from other sources. Pretax cash income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits plus taxes paid by businesses (corporate income taxes and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and employee contributions to 401(k) retirement plans. Other sources of income include all in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Households with negative income are excluded from the lowest income category but are included in totals.

Table 2.

Shares of Federal Tax Liabilities, 2001 and 2002
      Share of Income
 Share of Tax Liabilities
Income Category Percent of
Households		 Pre-Tax After-Tax All Federal
Taxes		 Individual
Income Tax		 Social
Insurance Taxes		 Corporate
Income Taxes		 Excise
Taxes
2001
                                 
Lowest Quintile 20.3   4.2   5.1   1.0   -2.3   4.2   0.8   11.1  
Second Quintile 19.3   9.2   10.3   4.9   0.3   10.3   2.1   14.7  
Middle Quintile 19.8   14.2   15.4   10.0   5.2   16.0   5.4   18.1  
Fourth Quintile 19.6   20.7   21.3   18.5   14.3   25.6   7.7   22.3  
Highest Quintile 20.6   52.4   48.9   65.3   82.5   43.9   82.6   33.5  
 
All Quintiles 100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0  
 
Top 10% 10.4   37.6   34.2   50.0   67.7   26.0   74.8   20.1  
Top 5% 5.2   27.5   24.5   38.5   55.2   14.6   67.8   12.2  
Top 1% 1.0   14.8   12.6   22.7   34.4   4.0   51.8   4.2  
 
2002
 
Lowest Quintile 20.3   4.2   5.1   0.9   -2.6   3.9   0.7   11.2  
Second Quintile 19.3   9.3   10.4   4.8   -0.2   9.9   1.9   15.1  
Middle Quintile 20.0   14.7   15.8   10.2   5.3   15.8   5.2   18.7  
Fourth Quintile 19.5   21.2   21.7   19.1   14.8   25.6   7.4   22.2  
Highest Quintile 20.4   51.5   48.0   64.8   82.8   44.6   82.9   32.3  
 
All Quintiles 100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0  
 
Top 10% 10.4   36.4   33.1   49.0   67.4   26.6   75.8   19.3  
Top 5% 5.2   26.2   23.3   37.3   54.5   14.9   69.4   11.7  
Top 1% 1.0   13.4   11.4   21.1   33.0   3.9   53.5   4.1  
Source: Congressional Budget Office.

Notes: A household consists of the people who share a housing unit, regardless of their relationships.

Income categories are defined by ranking all people by their comprehensive household income adjusted for household size--that is, divided by the square root of the household's size. Quintiles, or fifths, contain equal numbers of people.

Comprehensive household income equals pretax cash income plus income from other sources. Pretax cash income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits plus taxes paid by businesses (corporate income taxes and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes) and employee contributions to 401(k) retirement plans. Other sources of income include all in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Households with negative income are excluded from the lowest income category but are included in totals.


Appendix: Detailed Tables for 1979 to 2002

The following tables are available in a spreadsheet.

All Households

  • Table 1A. Effective Federal Tax Rates
  • Table 1B. Shares of Federal Tax Liabilities
  • Table 1C. Number of Households, Average Income and Income Shares, and Income Category Minimums

Households with Children

  • Table 2A. Effective Federal Tax Rates
  • Table 2B. Shares of Federal Tax Liabilities
  • Table 2C. Number of Households, Average Pretax and After-Tax Income, Shares of Pretax and After-Tax Income, and Income Category Minimums

Elderly Childless Households

  • Table 3A. Effective Federal Tax Rates
  • Table 3B. Shares of Federal Tax Liabilities
  • Table 3C. Number of Households, Average Pretax and After-Tax Income, Shares of Pretax and After-Tax Income, and Income Category Minimums

Nonelderly Childless Households

  • Table 4A. Effective Federal Tax Rates
  • Table 4B. Shares of Federal Tax Liabilities
  • Table 4C. Number of Households, Average Pretax and After-Tax Income, Shares of Pretax and After-Tax Income, and Income Category Minimums

1.  See Congressional Budget Office, Effective Federal Tax Rates, 1997 to 2000 (August 2003). An update extended the series to 2001; see Effective Federal Tax Rates: 1979-2001 (April 2004).
2.  For a more detailed description of legislative changes to the tax law, see Congressional Budget Office, Effective Federal Tax Rates Under Current Law, 2001 to 2014, August 2004.
3.  By increasing depreciation deductions, JCWAA reduced sole proprietorship, S corporation, and partnership income reported on individual income tax returns and the associated taxes. Because CBO's definition of income includes business income as reported on tax returns, JCWAA also lowered measured income.