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Overview

General

* A “tax” is defined by the Collins English Dictionary as a “compulsory financial contribution imposed by a government to raise revenue….”[1]

* In 2022, U.S. federal, state and local governments collected a combined total of $7.1 trillion in taxes, or more precisely, $7,146,628,750,000. This amounts to:

  • $21,423 for each person living in the U.S.
  • $54,470 for each household in the U.S.
  • 28.1% of the U.S. economy.[2]

* From 1929 to 2022, inflation-adjusted federal, state and local tax collections per person in the U.S. have ranged from $1,333 to $21,423 per year, with a median of $11,458 and an average of $10,697. In 2022, they were $21,423, or 100% above the average:

Inflation-Adjusted Federal, State & Local Taxes Per U.S. Resident

[3] [4]

* From 1929 to 2022, the portion of the U.S. economy collected in federal, state and local taxes has ranged from 10% to 28%, with a median of 25% and an average of 24%. In 2022, it was 28%, or 19% above the average:

Federal, State & Local Taxes as a Portion of the U.S. Economy

[5] [6]

* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resulting debt is “borne by tomorrow’s workers and taxpayers.” This burden can manifest in the form of higher taxes, lower wages, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[7] [8] [9] [10]

* In 2022, federal, state and local governments spent $8.7 trillion for current programs and received $7.6 trillion in revenues, leaving a gap of $1.1 trillion. This amounts to 4.1% of the U.S. economy and an average of $8,006 for every household in the U.S.:

Government Current Revenues and Spending

[11] [12] [13] [14]

* In addition to government debts, explicit and implicit government obligations such as public employee pensions and Social Security/Medicare benefits also constitute a burden on future taxpayers.[15]

* At the close of the federal government’s 2023 fiscal year, the federal government had $144.3 trillion in debts, liabilities, and unfunded obligations. This shortfall equates to $430,252 for every person living in the United States, or $1,098,087 per household.[16]

Federal

* In 2022, the U.S. federal government collected $4.8 trillion in taxes, or more precisely, $4,834,240,000,000. This amounts to:

  • $14,491 for each person living in the U.S.
  • $36,846 for each household in the U.S.
  • 19.0% of the U.S. economy.[17]

* From 1929 to 2022, inflation-adjusted federal tax collections per person in the U.S. have ranged from $275 to $14,491 per year, with a median of $7,604 and an average of $7,113. In 2022, they were $14,491, or 104% above the average:

Inflation-Adjusted Federal Taxes Per U.S. Resident

[18] [19]

* From 1929 to 2022, the portion of the U.S. economy collected in federal taxes has ranged from 3% to 20%, with a median of 17% and an average of 16%. In 2022, it was 19%, or 22% above the average:

Federal Taxes as a Portion of the U.S. Economy

[20] [21]

* In 2022, federal taxes came from following sources:

Type of Tax

Portion of Total

Personal Income Taxes

54%

Social Insurance Taxes

34%

Corporate Income Taxes

7%

Excise Taxes

2%

Custom Duties

2%

Estate and Gift Taxes

1%

[22]

* Since 1929, the components of federal tax collections have varied as follows:

Components of Federal Tax Collections

[23] [24] [25] [26]

State & Local

* In 2022, U.S. state and local governments collected a combined total of $2.3 trillion in taxes, or more precisely, $2,188,200,000,000. This amounts to:

  • $6,932 for each person living in the U.S.
  • $17,625 for each household in the U.S.
  • 9.1% of the U.S. economy.[27]

* From 1929 to 2022, inflation-adjusted state and local tax collections per person in the U.S. have ranged from $924 to $7,047 per year, with a median of $3,826 and an average of $3,584. In 2022, they were $6,932, or 93% above the average:

Inflation-Adjusted State & Local Taxes Per U.S. Resident

[28]

* From 1929 to 2022, the portion of the U.S. economy collected in state and local taxes has ranged from 4% to 11%, with a median of 9% and an average of 8%. In 2022, it was 9%, or 13% above the average:

State & Local Taxes as a Portion of the U.S. Economy

[29] [30]

* In 2022, state and local taxes came from following sources:

Type of Tax

Portion of Total

Sales & Excise Taxes

33%

Property Taxes

29%

Personal Income Taxes

24%

Corporate Income Taxes

5%

Social Insurance Taxes

1%

Other

8%

[31]

* Since 1929, the components of state and local tax collections have varied as follows:

Components of State and Local Taxes

[32]

Distribution of Tax Burdens

Overview

* Tax burdens are shaped by a combination of public laws and market forces. Lawmakers dictate who must remit taxes, but the final burden is determined by how people alter their actions in response to these taxes.[33] [34] [35] Per the textbook Public Finance:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. … Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on … the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.[36]

* Per the director of the Congressional Budget Office (CBO):

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[37]

* To calculate tax burdens, CBO uses the following assumptions/simplifications:

  • “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes.”[38] [39]
  • “[T]he economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol).”[40] [41] [42]
  • “In the judgment of CBO and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”[43] [44] [45] [46] [47] [48]
  • “Far less consensus exists about how to allocate corporate income taxes,” but CBO estimates that 75% is borne by owners/stockholders, and 25% falls on workers.[49] [50] [51]

* Per the latest pre-pandemic data from CBO,[52] the effective federal tax burdens for various income groups were as follows in 2019:

Average Effective Federal Tax Rates by Income of Household

[53] [54] [55]

Average Effective Federal Taxes by Income of Household

[56] [57] [58]

* Data from the charts above:

Average Effective Federal Tax Rates (2019)

Income Group

Household Income

Tax Rate

Taxes Paid

Lowest 20%

$39,100

0.3%

$100

Second 20%

$59,600

7.7%

$4,600

Middle 20%

$85,500

12.4%

$10,600

Fourth 20%

$124,900

16.5%

$20,600

Highest 20%

$333,100

24.3%

$81,100

Highest 1%

$1,998,700

30.0%

$600,300

* Per the latest available data from CBO, the effective federal tax burdens for various income groups were as follows in 2020 amid Covid-19 government lockdowns and intensified social spending:[59] [60] [61]

Average Effective Federal Tax Rates by Income of Household

[62] [63] [64]

Average Effective Federal Taxes by Income of Household

[65] [66] [67]

* Data from the charts above:

Average Effective Federal Tax Rates (2020)

Income Group

Household Income

Tax Rate

Taxes Paid

Lowest 20%

$42,200

–8.8%

–$3,700

Second 20%

$63,600

0.6%

$400

Middle 20%

$90,500

7.0%

$6,300

Fourth 20%

$131,800

12.7%

$16,800

Highest 20%

$360,900

23.6%

$85,200

Highest 1%

$2,291,800

29.9%

$686,300

* Per CBO, the effective federal tax rates for various income groups have varied over time as follows:

Average Effective Federal Tax Rates by Income of Household

[68] [69] [70]

* CBO does not include state and local taxes in its analysis of effective tax rates “because of the complexity” of estimating them for individual households.[71] Just Facts has not found a reliable analysis of the distribution of state and local taxes.[72]

* Using rough approximations and methods that vary from CBO’s,[73] the U.S. Treasury Department and the Tax Policy Center estimated the following effective federal tax burdens for various income groups in 2019, prior to the Covid-19 pandemic[74]:

Average Effective Federal Tax Rates by Income

[75] [76] [77]

* A scientific, nationally representative survey commissioned in 2019 by Just Facts found that 79% of voters believe that middle-income households pay a greater portion of their income in federal taxes than the top 1%.[78] [79]

* Using rough approximations and methods that vary from CBO’s,[80] the U.S. Treasury Department and the Tax Policy Center estimated the following effective federal tax burdens for various income groups in 2023:

Average Effective Federal Tax Rates by Income

[81]

Media

* The overall federal tax burden is progressive, which means that overall tax rates generally rise with income,[82] but this is not the case for all types of federal taxes. Excise taxes, for example, fall more heavily on lower-income households.[83] [84] In 2019, prior to the Covid-19 pandemic,[85] effective federal tax rates varied by income and tax type as follows:

Average Effective Federal Tax Rates (2019)

Type of Tax

Household Income Group

Lowest
20%

Second
20%

Middle
20%

Fourth
20%

Top
20%

Top
1%

Individual Income †

–6.6%

–1.5%

2.3%

5.9%

15.3%

23.3%

Social Insurance

5.6%

7.9%

8.7%

9.1%

6.5%

2.3%

Corporate Income

0.3%

0.5%

0.7%

0.8%

2.2%

4.2%

Excise

1.0%

0.8%

0.8%

0.6%

0.4%

0.2%

Overall

0.3%

7.7%

12.4%

16.5%

24.3%

30.0%

† Negative income tax burdens result from refundable tax credits, which often exceed the income tax liabilities of low-income households.[86] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[87]

[88] [89] [90]

* In a 2005 New York Times article, reporter David Cay Johnston claimed that “the 400 taxpayers with the highest incomes … now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.”[91] That statement fails to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[92]

* In a 2012 Fox News article entitled “Republicans Dispute Obama’s ‘Fair Share’ Claims, Say Top Earners Already Pay Enough,” reporter Jim Angle wrote that “the top 1 percent of earners take home 16.9 percent of the nation’s total income, but pay 36.7 percent of the nation’s income taxes.”[93] That statement fails to account for the burden of social insurance taxes, which fall more heavily on lower-income households.[94]

* In two columns published by the New York Times in 2012, James B. Stewart, a Pulitzer Prize-winning professor of journalism at Columbia University,[95] claimed:

What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system.[96]
[W]hat I’d already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn’t progressive. It’s not even flat. For people like me—and I assume there are millions of us—it’s regressive. For many people, the more you make, the lower the rate you pay.[97]

* Both of the claims above fail to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[98]

* Based upon Mitt Romney’s 2010 federal tax return, the following organizations published articles claiming that Romney pays a lower federal tax rate than most Americans: PolitiFact, FactCheck.org, CBS News, and Agence France-Presse.[99] [100] [101] [102] All of these articles fail to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[103] Both PolitiFact and FactCheck.org also:

  • used the same primary source (a single-page report published by the Tax Policy Center) to determine a middle-class tax burden while ignoring the following data in the report: the top-earning 0.1% of taxpayers paid 10.7% of their income in corporate income taxes versus 0.6% for the middle-class.[104] [105] [106]
  • included the burden of employer payroll taxes in their calculation of a middle-class tax burden, although these taxes (like corporate income taxes) are not remitted by employees but by employers.[107] [108] [109]
  • determined a middle-class tax burden by using adjusted gross income as the denominator for their calculation,[110] [111] [112] even though the source they cited (the Tax Policy Center) stated that adjusted gross income:
is a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. … Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their ETRs [effective tax rates].[113] [114]

* Just Facts and two Certified Public Accountants from Ceterus (a nationwide accounting firm) conducted a comprehensive analyses of Romney’s 2010 federal tax return that accounted for all measurable sources of income and federal taxes. It found:

  • “The complexities of the U.S. tax code make it practically impossible to determine Romney’s exact tax burden.”
  • Based upon simplifying estimates and the Congressional Budget Office’s methodology for allocating the burden of corporate income taxes, Romney’s federal tax burden was 23.3%, which is about twice the rate for middle-income Americans.
  • Based upon simplifying estimates and a wide range of academic opinions about the burden of corporate income taxes, Romney’s tax burden was 18.3% to 26.0%, which is 1.6 to 2.3 times higher than the rate for middle-income Americans.[115] [116]

* An Excel spreadsheet detailing the calculations of Romney’s tax burden is available here.

“Buffett Rule”

* In August 2011, the New York Times published an op-ed by billionaire investor Warren Buffett, who wrote:

Last year my federal tax bill—the income tax I paid, as well as payroll taxes paid by me and on my behalf—was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income—and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
 
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine—most likely by a lot.[117]

* Buffett’s tax rate comparison fails to account for the burden of corporate income taxes, which fall more heavily on upper-income households.[118]

* Buffett’s tax rate comparison uses “taxable income” as the denominator for his tax burden calculations. Per the book Federal Taxation, using “taxable income” to calculate tax burdens is a “bit misleading” and says “little about the true impact of a tax on the taxpayer.”[119] Per a Congressional Research Service report on the Buffett Rule:

Taxable income is a fairly narrow measure of income and does not reflect all the resources available to the taxpayer or gauge the taxpayer’s ability to pay taxes. This is because personal exemptions and itemized deductions have been subtracted. This can artificially increase the effective average tax rate faced by a taxpayer.[120]

* In September 2011 (the month after the Times published Buffett’s op-ed), the Obama administration released a budget plan calling for tax reform that would:

Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.[121]

* In 2011, households in the middle 20% of the U.S. income distribution paid an average effective federal tax rate of 11.7%, as compared to 29.0% for the top 1% of income earners. In 2019, prior to the Covid-19 pandemic,[122] households in the middle 20% paid a tax rate of 12.4%, as compared to 30.0% for the top 1%.[123] [124] [125]

* CBO’s latest data shows that in 2020—amid Covid-19 government lockdowns and intensified social spending,[126] [127] [128] households in the middle 20% paid a tax rate of 7.0%, as compared to 29.9% for the top 1%.[129] [130] [131]

* In 2011, 15,000 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 58% of these cases, the primary reason was because they had earned interest from tax-exempt bonds issued by state and local governments.[132] These bonds are called “municipal bonds” or “munis,” and they are a principal means by which wealthy investors limit their federal income taxes.[133] [134]

* Per CBO:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.[135]

* Per the IRS:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”…. [136] [137]

General Revenues

* “General revenues” are taxes that are collected to fund the general operations of government. These taxes are not legally restricted to funding a specific program.[138] [139] [140]

* The national debt and interest on it are paid with general revenues.[141]

* Overall, general revenue taxes are progressive so that higher-income households pay higher effective tax rates. In 2019, prior to the Covid-19 pandemic,[142] the average federal general revenue taxes paid by various income groups varied as follows:

Average Federal General Revenue Taxes (2019)

Income Group

Household Income

Effective Tax Rate †

Taxes Per Household

Lowest 20%

$39,100

–6.0%

–$2,359

Second 20%

$59,600

–0.7%

–$424

Middle 20%

$85,500

3.9%

$3,300

Fourth 20%

$124,900

7.0%

$8,682

Highest 20%

$333,100

17.6%

$58,658

81st–90th%

$181,300

10.2%

$18,552

91st–95th%

$250,400

13.0%

$32,523

96th–99th%

$417,400

17.6%

$73,428

Top 1%

$1,998,700

27.6%

$551,879

† Negative tax burdens result from refundable tax credits, which often exceed the general revenue taxes of low-income households.[143] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[144]

[145] [146] [147]

* In 2020—amid Covid-19 government lockdowns and intensified social spending,[148] [149] [150] the average federal general revenue taxes paid by various income groups varied as follows:

Average Federal General Revenue Taxes (2020)

Income Group

Household Income

Effective Tax Rate †

Taxes Per Household

Lowest 20%

$42,200

–13.7%

–$5,798

Second 20%

$63,600

–6.7%

–$4,230

Middle 20%

$90,500

–1.4%

–$1,295

Fourth 20%

$131,800

3.6%

$4,739

Highest 20%

$360,900

17.1%

$61,609

81st–90th%

$191,500

8.2%

$15,707

91st–95th%

$265,100

12.0%

$31,775

96th–99th%

$440,000

17.3%

$76,077

Top 1%

$2,291,800

27.6%

$633,629

† Negative tax burdens result from refundable tax credits, which often exceed the general revenue taxes of low-income households.[151] In such cases, individuals receive cash payments from the government through the IRS (for more detail, see Tax Preferences).[152]

[153] [154] [155]

* The general revenues of the U.S. Treasury are comprised of:

  • individual income taxes (80%).
  • corporate income taxes (11%).
  • customs duties (3%).
  • excise taxes (2%).
  • estate and gift taxes (1%).
  • miscellaneous receipts (4%).[156] [157]

Individual Income Taxes

* In 2020, income taxes paid by individuals (as opposed to corporations) comprised 49% of the taxes collected by the federal government and 24% of the taxes collected by state and local governments:

Personal Income Taxes

[158]

* Federal individual income taxes are typically allocated to the general fund of the U.S. Treasury, which means that these taxes are not earmarked for specific programs and can be used for any legitimate purpose of government.[159] [160]

* Federal individual income tax liabilities are calculated in the following manner:

  1. Determine gross income Taxpayers tally their gross income, which by law, includes “income from whatever source derived” with several exceptions, such as interest from tax-free municipal bonds, life insurance death payments, and employer-provided benefits such as health insurance and pension contributions.[161] [162] [163] [164]
  1. Determine adjusted gross income Gross income is then reduced by certain deductions to arrive at an adjusted gross income (AGI). These deductions include items such as interest on student loans, business expenses, and alimony payments.[165] [166]
  1. Determine taxable income Adjusted gross income is then reduced by certain deductions to arrive at a taxable income. These deductions can be standard deductions based upon the number of family members that a taxpayer supports, or they can be itemized deductions such as state and local income taxes, home mortgage interest, and charitable contributions. Many of these deductions phase out for taxpayers with higher incomes and thus don’t benefit these individuals.[167] [168] [169]
  1. Determine preliminary tax liability Taxable income is then multiplied by graduated rates that rise with income to determine a preliminary tax liability. There are four different sets of rates that apply to the following categories of tax filers: single individuals, heads of household, married filing jointly, and married filing separately.[170] For example, in 2020, the tax rates for single individuals were:
  • 10% on their first $9,875 in taxable income
  • plus 12% on the next $30,250 in taxable income
  • plus 22% on the next $45,400
  • plus 24% on the next $77,775
  • plus 32% on the next $44,050
  • plus 35% on the next $311,050
  • plus 37% on all income thereafter[171]
  1. Determine regular tax liability Preliminary tax liability is then reduced by certain tax credits that decrease taxes on a dollar-for-dollar basis to determine a regular tax liability. Some of the most commonly used tax credits are the child tax credit, education tax credit, and earned-income tax credit. Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government. Many of these tax credits phase out for taxpayers with higher incomes and thus don’t benefit these individuals.[172] [173] [174] [175] [176]
  1. Determine alternative minimum tax liability After regular income tax liability is calculated, tax filers must determine if their alternative minimum tax liability exceeds their regular income tax liability, and if it does, pay the higher of the two liabilities (for more detail, see Alternative Minimum Tax).

* Federal individual income taxes also include taxes on capital gains and dividends,[177] which are addressed below.

* When the modern federal individual income tax was instituted in 1913,[178] the bottom tax rate was 1%, and the top rate was 7%. Since then, the bottom rate has been as high as 23% (in 1944–1945), and the top rate has been as high as 94% (in 1944–1945).[179] [180] In 2020, the bottom rate was 10%, and the top rate was 37%.[181]

Federal Income Tax Bottom and Top Rates

[182]

* From 1950 to 2019, the top federal individual income tax rate varied from 92% (in 1952–1953) to 28% (in 1988–1990), and income tax receipts (as a portion of gross domestic product) varied from 5.8% (in 1950) to 9.8% (in 2000). Over this period, these lower and higher income tax rates often do not correspond with lower and higher income tax collections:

Federal Income Tax Receipts and Top Rates

[183]

* As of January 1, 2021, the 50 U.S. states have individual income tax rates that vary from a top rate of 13.3% in California to 0% in seven states that don’t have such a tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).[184]

* In 2019, 4,964 counties, cities, townships, and school districts in 17 states levied individual income taxes.[185]

* In 2018, the portion of state and local tax collections that were comprised of individual income taxes varied from a high of 43% in Oregon, to a median of 24% in South Carolina to a low of 0% in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.[186]

Social Insurance Taxes

General

* Current government “social insurance” programs in the U.S. include Social Security, Medicare hospital insurance, unemployment insurance, and several smaller healthcare and income security programs. “Social insurance taxes,” which are also known as “payroll taxes” or “employment taxes,” are taxes that are levied specifically for these programs.[187] [188] [189] [190]

* In 2020, social insurance taxes comprised 41% of the taxes collected by the federal government and 1% of the taxes collected by state and local governments:

Social Insurance Taxes

[191]

* Employees and employers both pay social insurance taxes, but payroll taxes levied on employers are predominately borne by employees in the form of reduced wages.”[192] [193] [194] [195] [196] (For more detail, see Distribution of the Tax Burden).

* Federal taxpayers in all income groups except for the top 20% pay more in social insurance taxes than individual income taxes.[197]

* In 2020, 99% of federal social insurance taxes were levied for three programs: Social Security, Medicare hospital insurance, and unemployment insurance.[198] [199]

* Government began collecting social insurance taxes for unemployment insurance in 1936, Social Security in 1937, and Medicare hospital insurance in 1966. Combined payroll taxes for these programs have ranged from 0.2% of the nation’s gross domestic product (GDP) in 1936 to 6.5% in 1991 and 1998–2001:

Social Insurance Taxes for Social Security, Medicare, and Unemployment Insurance

[200]

Social Security

* In 2019, Social Security payroll taxes accounted for 74% of federal social insurance taxes.[201]

* For 2021, Social Security’s baseline payroll tax rate (employee and employer combined) is 12.4%.[202]

* Social Security payroll taxes are restricted to a “taxable maximum” or “wage threshold.” Earnings above the threshold are not subject to this tax. For 2021, the threshold is $142,800.[203] Since 1982, the taxable maximum has been annually indexed roughly based upon average worker compensation levels.[204] [205]

* At the outset of the Social Security program, the federal government published an informational pamphlet that stated the following about the program’s taxes:

And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.[206]

* Accounting for inflation, the figures above equate to a maximum tax collection of $1,935 per person in 2020 dollars.[207] In 2020, the maximum payroll tax collection per person was $17,075 or 8.8 times the promised maximum.[208] This figure does not include other taxes that are now levied to fund Social Security, such as the tax on Social Security benefits.

* For comprehensive facts about Social Security’s taxes, benefits, and financial status, visit Just Facts’ research on Social Security.

Medicare

* Medicare hospital insurance, which is also known as Medicare “Part A,” provides coverage for hospital inpatient services, skilled nursing facility care (not custodial care[209]), and hospice care.[210]

* In 2019, Medicare hospital insurance payroll taxes accounted for 22% of federal social insurance taxes.[211]

* Medicare’s baseline payroll tax rate is 2.9% of workers’ wages (employer and employee combined).[212] [213]

* Medicare’s payroll tax was previously limited by a wage threshold that generally increased as the national average wage increased. Earnings above this threshold were not subject to the tax. In 1993, this threshold was $135,000 per year.[214] That year, Congress and Democratic President Bill Clinton passed a law that removed the threshold, thus making all earnings subject to Medicare payroll taxes.[215] The bill passed with 85% of Democrats voting for it and 100% of Republicans voting against it.[216]

* The Affordable Care Act (a.k.a. Obamacare) levies an additional 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples.[217] [218]

* For comprehensive facts about Medicare’s taxes, benefits, and financial status, visit Just Facts’ research on Medicare.

Unemployment Insurance

* In 2019, unemployment insurance payroll taxes accounted for 3% of federal social insurance taxes.[219] [220]

Corporate Income Taxes

* Corporate income taxes are typically levied on “C corporations,” which are business entities that are fully separated by law from their owners’ personal finances. Most major and public corporations are structured in this manner.[221] [222]

* Per the IRS and the Congressional Research Service, U.S. tax law imposes a “double tax” on corporate profits. This is because the “profit of a corporation is taxed to the corporation when earned,” but shareholders cannot receive these profits without also paying dividend or capital gain taxes on them.[223] [224] [225] (For more detail, see Capital Gains, Dividends, and Interest).

* Business entities can be structured in other ways, such as “S corporations,” partnerships, and sole proprietorships. In these cases, tax law combines business incomes with owners’ personal incomes. These types of businesses are called “passthrough entities.” They are subject to personal income taxes instead of corporate income taxes and dividend taxes.[226] [227] [228]

* The combination of taxes on corporate income and dividends is typically higher than personal income taxes. Thus, people who have the option to structure business as pass-through entities often do so. The law does not allow businesses with more than 100 shareholders—like most major public corporations—to be structured as pass-through entities.[229] [230] [231] [232]

* In 2020, corporate income taxes comprised 6% of the taxes collected by the federal government and 4% of the taxes collected by state and local governments:

Corporate Income Taxes

[233]

* The burden of corporate income taxes falls on:

  • business owners in the form of decreased profits.
  • workers in the form of reduced wages.
  • possibly consumers in the form of higher prices.[234] [235]

* The Congressional Budget Office (CBO) estimates that 75% of corporate income taxes are borne by owners/stockholders and 25% are borne by workers.[236] [237] [238] Other creditable sources estimate that owners/stockholders bear anywhere from 33% to 100% of this tax burden.[239] (For more detail, see Distribution of Tax Burdens.)

* In basic terms, federal corporate income taxes are levied on profits, which are calculated by adding income from business operations and the sale of company stock minus:

  • employee wages and benefits
  • consumable resources used for producing products, delivering services, or marketing
  • interest paid on debts
  • contributions to charities
  • state and local taxes
  • depreciation, which is “an allowance for declines in the value of a firm’s tangible assets, such as machines, equipment, and structures.” Per the Congressional Research Service:
When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business is simply exchanging one asset—for example, cash—for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost. Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years.[240] [241] [242] [243]

* Higher marginal tax rates—which are the rates that taxpayers pay on the next dollar of income they earn—typically weaken incentives to save and invest.[244] [245] [246] [247] For more detail, see Economic Effects.)

* Starting in 2018, the Trump Tax Cuts reduced the top marginal federal corporate income tax to a flat rate of 21%.[248] [249] [250]

* In 2017 (latest IRS data), the marginal federal corporate income tax rate for active corporations averaged 36% before tax credits. After tax credits were applied, the average effective rate was 26%.[251] [252] (For more detail, see Tax Preferences).

* Out of 20 major business sectors, the effective federal corporate income tax rates in 2017 averaged as low as 15% for mining and 19% for utilities to as high as 32% for educational services and retail trade and 33% for healthcare and social assistance.[253] [254]

* In 2018, the portion of state and local tax collections that were comprised of corporate income taxes varied from a high of 11% in New Hampshire to a median of 3% in Iowa to a low of 0% in Nevada, Texas, Washington and Wyoming.[255]

Capital Gains, Dividends, and Interest

* A “capital gain” is an increase in the price of a financial asset between when it is purchased and when it is sold.[256] [257] Financial assets that are subject to capital gain taxes include items such as company stocks, real estate, collectibles, and precious metals.[258]

* A “dividend” is a company profit that is distributed to shareholders.[259] [260]

* “Interest income” is money earned from “certain bank accounts or from lending money to someone else.”[261]

* Per the Encyclopedia of Taxation and Tax Policy (as confirmed by the IRS, Congressional Research Service, and U.S. Joint Committee on Taxation):

Income that is earned by corporations in the United States is currently subject to two levels of tax. Corporate profits are subject to the corporate income tax. When these profits are distributed to the shareholders who own the corporations, these distributions are also included in the shareholders’ taxable income.[262] [263] [264]
[T]he capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income….[265] [266] [267]

* Taxes on dividends and capital gains are classified by the federal government as individual income taxes, but the tax rates are generally lower, which mitigates some of the double taxation. The lower tax rates on capital gains only apply to assets that are owned for a year or longer. Assets that are owned for less than a year are considered “short-term capital gains” and are taxed at ordinary income tax rates.[268] [269] [270] [271]

* In 2020, the tax rates on most dividends and capital gains ranged from 0% to 20%. For couples filing jointly, the typical rates are:

  • 0% for taxable income below $80,000.
  • 15% for taxable income from $80,000 to $496,600.
  • 20% for taxable income above $496,600.[272] [273]

* Interest income, such as that from bank accounts and personal loans, is not considered a capital gain or a dividend, and it is generally subject to regular income tax rates.[274] [275]

* Starting in 2013, the Affordable Care Act (a.k.a. Obamacare) began subjecting income earned from interest, dividends, and capital gains to an additional 3.8% tax for singles with incomes above $200,000 and couples with incomes above $250,000. This tax is called the “net investment income tax.”[276] [277] [278]

* Taxes on interest income, dividends, and capital gains are not offset for inflation, and investors must pay taxes on gains that are due to inflation (a.k.a. “phantom gains”).[279] [280] For example, if a $1,000 investment yields a 4% return over the course of a year while inflation is at 3% and the tax rate is at 25%, the effective tax rate is 100%:

  • $1,000 investment × .04 return = $40 nominal profit (i.e., not adjusted for inflation[281])
  • $40 nominal profit × .25 tax rate = $10 tax bill
  • $1,000 investment × .03 inflation = $30 lost to inflation
  • $40 nominal profit – $10 tax bill – $30 loss due to inflation = $0 real profit[282]

* With capital gains (but not dividends or interest income), some effects of inflation are alleviated because taxes on capital gains don’t need to be paid until an asset is sold. This allows an asset to grow in value without losing some gains to taxes each year.[283] [284] [285]

* In 2019, 11.2% of federal individual income tax receipts came from capital gain taxes.[286]

* For 2020, the Congressional Budget Office estimated that 6.5% of gross income earned by individuals will come from capital gains, and 3.5% from dividends or interest income.[287]

* In 2020, state taxes on capital gains ranged from as low as 0%—in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—to as high as 13% in California and 11% in Hawaii and New Jersey.[288] [289]

Preferences

Definition

* “Tax preferences,” which are also called “tax expenditures,” are defined by federal law as “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”[290] [291]

* Tax preferences fall into five broad categories:

  1. Credits “reduce a taxpayer’s liability dollar for dollar.”
  2. Deductions “reduce the amount of income subject to tax.”
  3. Deferrals “allow taxpayers to postpone the date at which income gets taxed.”
  4. Exclusions and exemptions “allow certain types of income to avoid taxation entirely.”
  5. Preferential rates “tax certain types of income at lower levels.”[292]

* Per Donald B. Marron, director of the Tax Policy Center and former acting director of the Congressional Budget Office:

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark.[293] [294] [295]

* Examples of unambiguous tax preferences/expenditures include:

  • the deduction for home mortgage interest.[296] [297]
  • business credits for renewable energy.[298]
  • credits for paid child care.[299]
  • the exemption for interest earned on state and local government bonds.[300] [301]
  • the deduction for charitable contributions.[302]
  • credits for education expenses.[303]
  • exclusions for employer-provided benefits such as pensions and health insurance.[304] [305]

Purpose & Effects

* Per the U.S. Joint Committee on Taxation, tax preferences/expenditures are commonly:

designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives.”[306] [307]

* Many tax preferences have the same purpose and effects as government spending. For example, if the government were to repeal the child tax credit and instead send checks to certain households with children, the result would be the same.[308] [309] [310] [311] [312]

* With regard to tax preferences:

  • the IRS’ Taxpayer Advocate Service states that the “IRS no longer is just a revenue collection agency but is also a benefits administrator.”[313]
  • the Organization for Economic Cooperation and Development states that governments “make use of the tax system to directly pursue social policy goals.”[314]
  • Donald B. Marron, director of the Tax Policy Center and former acting director of the Congressional Budget Office, states:
A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences—preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.[315] [316]

* Per the federal government’s Energy Information Administration:

  • “Many tax expenditure programs are functionally equivalent to direct expenditure programs.”
  • Tax expenditures “are less visible than direct expenditure programs in the budget process.”
  • Tax expenditures “may be less subject to annual review in the normal budget cycle.”[317]

* The primary beneficiaries of tax preferences are sometimes not the individuals who claim them. For example, the exemption for interest earned on state and local government bonds mainly benefits the governments that issue the bonds instead of the investors who buy them. This is because governments can sell tax-exempt bonds with lower interest rates than comparable taxable bonds, and investors will still buy these bonds as long as their after-tax profits are equivalent or greater. Hence, the tax exemption allows governments to issue bonds at lower interest rates, which lowers their costs of financing.[318] [319] Per the Internal Revenue Service:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”….[320]

* During the U.S. Constitutional Convention, James Madison, who would later become known as the Father of the Constitution for his central role in its formation, stated that all civilized societies are “divided into different sects, factions, and interests,” and “where a majority are united by a common interest or passion, the rights of the minority are in danger.” He then listed some “unjust laws” that were due to majorities taking advantage of minorities, such as those that sanctioned slavery and those that imposed “a disproportion of taxes” on certain types of properties.[321] [322] [323]

* Out of 20 major business sectors, the effective federal corporate income tax rates in 2017 averaged as low as 15% for mining and 19% for utilities to as high as 32% for educational services and retail trade and 33% for healthcare and social assistance.[324]

Refundable

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[325] [326] [327] [328]

* The first major refundable tax credit was implemented by the federal government in 1976. Since then, six others have been enacted, and a total of five such programs are still in effect.[329] [330]

* In 2014, the Affordable Care Act (a.k.a. Obamacare) began providing refundable tax credits for people who purchase health insurance through the program. Under this law:

  • Households with incomes up to 400% of federal poverty guidelines are eligible for these tax credits. This includes households with incomes up to $87,840 for a family of three, $106,000 for a family of four, or $124,160 for a family of five.[331] [332]
  • In 2020, roughly 9.2 million people qualified for an average tax credit of $5,898 per year.[333]

* Due to refundable tax credits, the lowest-income 20% of U.S. households paid an average effective federal income tax rate of –6.6% in 2019 prior to the Covid-19 pandemic.[334] This amounted to an average payment from the federal government of $2,600 per household.[335] [336] [337] [338]

* Due to refundable tax credits, the lowest-income 20% of U.S. households paid an average effective federal income tax rate of –14.2% in 2020—amid Covid-19 government lockdowns and intensified social spending.[339] [340] [341] This amounted to an average payment from the federal government of $6,000 per household.[342] [343] [344] [345]

1986 Reform

* In 1986, the 99th Congress passed and Republican President Ronald Reagan signed a tax reform law that eliminated many tax preferences while reducing the top personal income tax bracket from 50% to 28% and reducing the top corporate income tax bracket from 46% to 34%.[346]

* In the year after the 1986 reform, the average effective federal tax rate for the top 20% of income earners increased by 2.1 percentage points, while the rates for all other income groups dropped by less than one percentage point. In the next five years, the tax rate for the top 20% stayed higher than before the law was enacted, while the rates for all other income groups stayed about the same or lower:

Effective Federal Tax Rates by Income of Household

[347] [348] [349]

* The 1986 reform kept in place some of the more widely used tax preferences, such as the deduction for home-mortgage interest.[350]

* In the 25 years after the 1986 reform was passed, various congresses and presidents enacted at least 150 provisions into law that the Joint Committee on Taxation classifies as tax preferences. Examples of such include:

  • the enhanced oil recovery tax credit,
  • a credit for the cost of providing access for disabled individuals,
  • tax incentives for businesses in empowerment zones, enterprise communities, and rural development investment areas,
  • accelerated depreciation for property on Indian reservations,
  • HOPE and Lifetime Learning credits for tuition for post-secondary education,
  • the welfare-to-work tax credit,
  • a deduction for film and television production costs,
  • a tax credit for expenditures for maintaining railroad tracks,
  • a tax credit for biodiesel blenders, and
  • a charitable deduction for certain expenses incurred in carrying out sanctioned whaling activities.[351]

Alternative Minimum Tax

* The alternative minimum tax (AMT) is a form of federal income tax that is imposed on top of the standard income tax. The AMT disallows certain tax preferences and thereby increases the income taxes that some individuals must pay.[352] [353] [354] [355]

* Per the Congressional Budget Office (CBO):

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts.[356]
Inflation is the most important driver of the long-term growth in receipts from the AMT. Under the regular individual income tax, the tax rate brackets, exemptions, and certain deductions and credits are adjusted automatically to keep pace with inflation. By contrast, the exemption amounts and rate brackets used to calculate the AMT are not indexed.
Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers…. In the years to come, however, many taxpayers with lower income will move onto the AMT because it disallows some widely used features of the regular tax, such as the personal exemption (which all taxpayers use) and the standard deduction (which roughly two-thirds of filers use).[357]

* The AMT has a greater impact on taxpayers with large families, high medical bills, and high state and local taxes.[358]

* Between 2001 and 2011, various Congresses and presidents partially alleviated the inflationary impact of the AMT by enacting temporary changes in the law.[359] [360]

* In 2012, President Obama and Congress passed permanent legislation to adjust the AMT for inflation on an annual basis. This reduced but did not eliminate the impact of bracket creep.[361] [362]

* In 2017, President Trump and Congress passed legislation that temporarily decreases the portion of taxpayers subject to the AMT until 2025. This law:

  • expands the amount of income that is exempt from the AMT.
  • limits certain tax preferences, such as the write-off for state and local taxes.
  • eliminates certain tax preferences, such as write-offs based on the size of a person’s family.[363] [364] [365]

* From 1983 to 1998, the portion of taxpayers liable for the AMT stayed below 1%. By 2017, 4.9% of taxpayers were required to pay the AMT. In 2018 the portion dropped to 0.2%:

Impact of AMT

[366]

* The origins of the AMT can be traced to a January 1969 speech given by Treasury Secretary Joseph Barr, in which he stated that “there is going to be a taxpayer revolt over the income taxes in this country unless we move in this area.” Barr criticized the use of “loopholes and gimmicks” by the wealthy and pointed out that “in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the ‘taxpayers’ paid the U.S. Government not 1 cent of income taxes….”[367] [368]

* Barr’s speech spurred a public uproar, and in August of 1969, Life magazine published a house editorial noting that Congress was considering a “minimum tax” to address “the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all.”[369] [370]

* In December of 1969, Congress passed and the president signed the first minimum tax law. The legislative report echoed Barr’s speech and stated, “It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income.”[371] [372]

* Over the ensuing three decades, various U.S. Congresses and presidents made at least 18 changes to this tax.[373] The legislative report for the changes passed in 1982 echoed Barr’s speech again, stating that the changes have “one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits.”[374]

* The 155 tax returns cited by Barr amounted to 0.0002% of taxable returns in 1967.[375] Adjusted for inflation, $200,000 in 1967 is equivalent to $1.5 million in 2018.[376] In 2018, the AMT levied additional taxes on 0.2% of taxable returns,[377] including:

  • 18,753 returns with adjusted gross incomes below $100,000.
  • 31,382 returns with adjusted gross incomes from $100,000 to $200,000.
  • 91,442 returns with adjusted gross incomes from $200,000 to $500,000.
  • 30,022 returns with adjusted gross incomes from $500,000 to $1 million.
  • 72,409 returns with adjusted gross incomes above $1 million.[378]

* In 2017, 10,988 individuals with incomes over $200,000 paid no federal individual income taxes (this does not include corporate income taxes). In 42% of these cases, their primary tax preference was interest earned from tax-exempt bonds issued by state and local governments.[379] These bonds are called “municipal bonds” or “munis,” and they are a principal means by which wealthy individuals limit their federal income taxes.[380] [381]

* When Congress was considering the first minimum tax in 1969, the editors of Life wrote that the proposed law has “some dubious side effects” because “among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works.”[382]

* Currently, under federal tax law, the definition of “gross income” excludes interest from tax-exempt munis, and hence, income from these bonds is not subject to the alternative minimum tax.[383] [384] [385]

* Per the CBO:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.[386]

* Per the IRS:

The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax”….[387] [388]

Bracket Creep

Overview

* Per the Congressional Budget Office (CBO), “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” Thus, if tax laws remain unchanged, “average federal tax rates would increase in the long run.” This is referred to as “bracket creep.”[389]

* In 2012, before Congress and President Obama passed a law to index the alternative minimum tax for inflation and make most of the Bush tax cuts permanent for everyone but high-income earners,[390] [391] CBO projected that if tax laws remained unchanged, federal revenues would grow to 46% above the average of the previous 40 years by 2051:

Federal Revenues, Actual and Projected Under 2012 Laws

[392] [393]

* From 1962 to 2020, federal revenues averaged 17.3% of the nation’s gross domestic product (GDP). In 2021, CBO projected that if current tax laws remain unchanged, federal revenues will grow to 7% above this long-term average by 2051, mainly due to bracket creep:

Federal Revenues, Actual and Projected Under Current Law

[394] [395]

* With regard to middle-income families, CBO projected:

  • in 2016 that if current laws remained unchanged, “a married couple with two children earning the median total income” will see their income and payroll taxes rise from 17% of their income in 2016 to 19% over the next 30 years. This amounts to a 12% increase.[396]
  • in 2019 that after most of the Trump tax cuts expire, “a married couple (including one worker with average earnings) with two children” will see their federal income taxes rise from 3.3% of their income in 2026 to 8.2% in 2049. This amounts to a 148% increase.[397]

* Examples of tax laws that are not indexed for inflation or wage growth include:

  • the taxes on Social Security benefits, which apply to single beneficiaries with incomes of more than $25,000 per year and couples with incomes of more than $32,000 per year. These taxes currently affect 40% of all Social Security beneficiaries and are projected to affect more than 56% of these beneficiaries by 2050.[398] [399]
  • the deduction for home mortgage interest.[400] [401] [402]
  • some excise taxes. In this case, the lack of indexing generally decreases the burden of these taxes over time.[403] [404]
  • the following provisions of the 2010 Affordable Care Act (a.k.a. Obamacare):
    • a 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples.[405] [406]
    • a 3.8% tax on income from investments imposed on singles with income above $200,000 and couples with income above $250,000.[407] [408] [409]

* Examples of tax laws that are indexed for inflation (but not for wage growth) include:

  • income tax brackets, exemptions, and deductions. In this case, the lack of wage indexing has a greater impact on lower-income taxpayers.[410] [411]
  • the alternative minimum tax. This tax will apply to more taxpayers as inflation-adjusted income rises.[412] [413] [414]
  • the earned-income tax credit eligibility thresholds. As these lose value relative to income over time, the portion of taxpayers who receive the credit is projected to fall from 16% in 2016 to 12% in 2046.[415] [416] [417]
  • the annual gift tax exemption. This is the annual amount that can be given away without potentially incurring taxes.[418] [419] [420]

Politics/Media

* In a 2011 budget analysis published by the Washington Post, Ezra Klein posted a chart of federal spending and revenue projections based on the Congressional Budget Office’s “current law” scenario and wrote that it:

  • shows what happens if we do … nothing. The answer, as you can see, is that the budget comes roughly into balance.
  • contains “a balanced mix of revenues” and “program cuts.”[421] [422]

* Klein called this is a “pretty good plan” without revealing that under it:

  • elements of the tax code that were not indexed for inflation or wage growth would shift taxpayers into progressively higher tax brackets over time.
  • by 2020, federal revenues would “reach higher levels relative to the size of the economy than ever recorded in the nation’s history.”
  • the portion of the U.S. economy consumed by federal revenues would continue climbing through 2084, rising to:
    • 69% higher than the average of the previous 40 years.
    • 47% higher than ever recorded in the history of the United States.[423] [424]
  • the publicly held national debt would increase from 62% of the U.S. economy in 2010 to 113% in 2084 due to interest on the national debt, which his analysis did not account for.[425] [426]

* In a 2012 commentary published by Rolling Stone, Jared Bernstein—a former economic advisor to President Obama and a senior fellow with the Center on Budget and Policy Priorities—wrote that “it is well within our means” to reduce the national debt by following the “broad outlines” of “current law.” He then pushed for this without revealing that under the law at that time, federal taxes would progressively consume a greater share of the U.S. economy, rising to:

  • 21% higher than the average of the previous 40 years by 2025.
  • 40% higher by 2045.
  • 56% higher by 2065.[427] [428] [429]

Compliance

Complexity

* Per the Congressional Budget Office:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. … Complexity also arises from efforts to achieve certain equity goals. Provisions that phase out various tax credits and deductions at higher income levels are designed to target benefits toward people with the greatest need, but they make taxes more difficult to calculate.[430] [431]

* The federal tax code is about 6,000 pages when printed on 8.5×11 inch paper in size 11 font. This includes supplementary materials that do not have the force of law (such as indexes and records of some repealed provisions), but these materials are often needed to understand the law.[432] [433] [434]

* Per the IRS, “Federal tax regulations … pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.”[435] When printed on 8.5×11 inch paper in size 8 font, current federal tax regulations are about 15,000 pages. This does not include obsolete provisions or indexes.[436] [437]

* U.S. taxpayers (including businesses) spend roughly six billion hours per year complying with the requirements of federal tax law. This amounts to 48 hours per household, or the labor equivalent of more than three million full-time workers. Per the IRS’s Taxpayer Advocate, these figures do not include “millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits.”[438] [439]

* The IRS’s Taxpayer Advocate estimates that the cost of complying with federal income tax laws was $195 billion in 2015, or 10% of income tax receipts.[440]

* In 2006, General Electric filed the nation’s longest federal tax return, which was about 24,000 pages long.[441] In 2011, its federal tax return was about 57,000 pages long.[442]

* In 2019, the IRS spent $11.8 billion and employed 78,004 people, including seasonal and part-time workers.[443]

* Per the IRS’s Taxpayer Advocate:

[T]ax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.[444]

Noncompliance

* A 2019 IRS study found that from 2011 to 2013, the difference between what was legally due in federal taxes and what was actually paid amounted to an average annual “tax gap” of $381 billion. This equates to a noncompliance rate of 14.2%.[445] [446]

* Per the IRS’s Taxpayer Advocate, the tax gap represents an effective tax on most taxpayers “to subsidize noncompliance by others.”[447] Adjusted for inflation into 2020 dollars, the 2013 tax gap was an average of $3,519 for every household in the U.S.[448]

* Per the IRS’s Taxpayer Advocate:

IRS data show that when taxpayers have a choice about reporting their income, voluntary tax compliance rates are disturbingly low. Among self-employed workers whose income is not subject to tax withholding, reporting compliance rates are 43 percent for the business income of non-farm sole proprietors and 28 percent for unincorporated farming businesses.[449]

* In instances where income was reported to the IRS and withheld by third parties (such as employers), the noncompliance rate was about 1% from 2011 to 2013. In instances where income was not subject to reporting or withholding, the noncompliance rate was 55%.[450] [451]

* Willfully evading federal taxes is a felony crime punishable by up to five years in prison and fines of up to $250,000 for individuals and $500,000 for corporations.[452] [453] [454]

Refundable Tax Credits

* Some tax credits are refundable, and low-income households with tax credits that exceed their income tax liabilities receive the difference as cash payments from the federal government.[455] [456] [457] Per the Treasury Department’s Inspector General for Tax Administration, “the risk of fraud for these types of claims is significant.”[458] [459]

* Two of the costliest and most frequently claimed refundable tax credits are the earned income tax credit and the child tax credit.[460] [461] [462]

* In 2019, the IRS improperly paid $17.4 billion in earned income tax credits, amounting to an improper payment rate of 25%.[463] [464] These improper payments were greater than the budget of the IRS.[465]

* In 2019, the IRS improperly paid about $7.2 billion in refundable child tax credits, amounting to an improper payment rate of 15%.[466]

* In 2020, the maximum refundable child tax credit is $1,400 per child.[467]

* Federal law generally prohibits illegal immigrants from earning income in the U.S., but the law also requires them to file tax returns if they do earn income. Federal law also prohibits illegal immigrants from receiving most federal benefits, but the IRS has concluded that this restriction does not apply to refundable child tax credits. In 2010, the IRS paid out $4.2 billion in refundable child tax credits to 2.3 million tax filers who were not legally authorized to work in the United States.[468] [469]

* In 2010, 72% of the tax returns filed by illegal immigrants and foreign investors received cash payments from the IRS for child tax credits. Among the U.S. citizens and foreigners legally working the U.S., 14% of tax filers received cash payments from the IRS for child tax credits.[470]

* In April 2012, WTHR, an NBC News affiliate in Indiana, aired a report by investigative journalist Bob Segall about illegal immigrants who were fraudulently obtaining child tax credits by claiming credit for children who live in Mexico. The IRS responded to the report by stating that the agency “has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund.”[471]

* In the wake of the WTHR news report, 11 current and former IRS employees contacted WHTR and made statements such as the following:

  • “I just saw your report and there’s something I need to tell you. I see this stuff every day and there isn’t anything I can do about it.”
  • “Most of these documents are fraudulent and there’s absolutely no system here to catch it.”
  • “We don’t have the resources to follow up on much and we’re not allowed to flag problems.”
  • “We get applications from Mexico, Honduras, China, Japan, Bulgaria, all over the world. … I guarantee 90% of them are phony. We see the same signatures hundreds of times. We see the same docs photocopied and attached to different applications. It’s the same person, same photo, same address. I’ve seen the same birth certificate twelve times now in the past day.”[472]

* Two months later, the Treasury Department’s Inspector General for Tax Administration published an audit of the IRS department that handles tax returns for illegal immigrants and foreign investors. Since these individuals are ineligible to receive Social Security Numbers, the IRS issues them ITINs (Individual Taxpayer Identification Numbers).[473] The audit found that the:

  • IRS had issued 9,909 ITINS to 9,522 people allegedly living at a single address in Tulsa, Oklahoma (more examples in footnote).[474]
  • IRS had mailed 23,994 ITIN refunds totaling $46,378,040 to a single address in Atlanta, Georgia (more examples in footnote).[475]
  • IRS had deposited 2,706 ITIN refunds totaling $7,319,518 into a single bank account (more examples in footnote).[476]
  • IRS had eliminated a process used to detect fraud in ITIN applications in 2010.[477]
  • “environment created by [IRS] management discourages tax examiners from identifying questionable ITIN applications.”[478]
  • “payment of federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts federal law and policy to remove such incentives.”[479]

* With regard to fraudulent tax refunds obtained through identity theft, IRS Inspector General J. Russell George stated: “Once the money is out the door, it is almost impossible to get it back.”[480]

* Various members of Congress have sponsored bills to prevent the IRS from awarding refundable child tax credits to illegal immigrants, none of which have become law. For example:

  • In 2012, Republican Congressman Paul Ryan sponsored a wide-ranging bill with a provision that would restrict illegal immigrants from obtaining refundable child tax credits.[481] [482] The bill passed the House of Representatives with 90% of Republicans voting for it and 96% of Democrats voting against it.[483] The Senate never voted on it.[484]
  • In 2013, Republican Congressman Sam Johnson sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[485] [486] The bill was cosponsored by 67 Republicans and no Democrats. It was never voted upon.[487] [488]
  • In 2015, Republican Congressman Larry Bucshon sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[489] [490] The bill was cosponsored by four Republicans and no Democrats.[491] The House never voted on it.[492]
  • In 2017, Republican Congressman Gus Bilirakis sponsored a bill that would restrict illegal immigrants from obtaining refundable child tax credits.[493] [494] The bill was cosponsored by two Republicans and no Democrats.[495] The House never voted on it.[496]

* In 2017, Congress passed and Republican President Donald Trump signed a law that:

  • forbids parents from receiving refundable child tax credits unless their children are U.S. citizens and have a Social Security number.[497] (Due to birthright citizenship, about 88% of the children of illegal immigrants are U.S. citizens.[498])
  • adds a separate nonrefundable $500 child tax credit for illegal immigrants whose children do not have a Social Security number.[499] [500] [501]
  • continues to allow an education tax credit of up to $2,500 per student for illegal immigrants who do not have a Social Security number.[502]

* President Trump’s 2018, 2019, 2020 and 2021 budget proposals called for restricting illegal immigrants from obtaining refundable child tax credits.[503] [504] [505] [506]

Economic Effects

* Examples of the types of decisions that are affected by taxes include:

  • whether or not to work.[507]
  • how long to hold investments.[508]
  • whether or not to get married.[509]
  • how much to save.[510]
  • whether or not to buy a house.[511]
  • whether to be self-employed or work for somebody else.[512]
  • how to finance a business.[513]

* Among different measures of taxes, marginal tax rates—which are the rates that taxpayers pay on the next dollar of income they earn—typically have the greatest impact on people’s financial decisions. This is because when people are deciding whether or not to take effort or risk to earn more income, they typically consider how much money they will take home after taxes. The marginal tax rate informs such decisions because it determines how much of this added income will be taken in taxes.[514] [515]

* Per the U.S. Joint Committee on Taxation, the negative economic effects of taxes can be minimized while collecting the same amount of tax revenue when there is “a broad base of taxation in order to keep marginal tax rates as low as possible….”[516]

* Marginal tax rates are generally higher than average tax rates because much income is not subject to taxation (due to tax preferences) and because income tax brackets rise with income.[517] [518] For example, households with $85,500 in income during 2019 paid an average of $10,600 in federal taxes, which amounts to an effective tax rate of 12%.[519] [520] [521] However, if the household earned another $10,000, they would have paid a marginal tax rate of about 39% on this added income.[522]

* Marginal tax rates can have differing effects on people depending upon their circumstances and mindsets.[523] Per the Congressional Budget Office (CBO):

Changes in marginal tax rates have two different types of effects on people. On the one hand, the lower those tax rates are, the greater the share of the returns from additional work or saving that people can keep, thus encouraging them to work and save more. On the other hand, because lower marginal tax rates increase after-tax income, they make it easier for people to attain their consumption goals with a given amount of work or saving, thus possibly causing people to work and save less.[524]

* There is disagreement among economists about the quantitative effects of marginal tax rates, but there is broad agreement that:

  • higher marginal tax rates on workers mostly reduce their “incentive to work,” and this effect is stronger on those who are not already working than those who are working but considering working more.[525] [526]
  • the “efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.”[527]
  • higher “marginal tax rates may encourage taxpayers to seek compensation in the form of tax free fringe benefits rather than taxable compensation and to engage in other tax avoidance activities, including deductible expenses or deductible consumption, or even illegal tax evasion. Such distortions in consumption represent an efficiency loss to the economy.”[528]
  • higher marginal tax rates on investors and savers mostly reduce their incentive to invest and save, but there is much dispute over the strength of this effect, and a few studies have concluded that higher marginal tax rates encourage investing and saving.[529] [530]

* With regard to the effects of marginal tax rate on investments and savings, the Congressional Budget Office and Joint Committee on Taxation have stated:

  • “[M]ore saving implies more investment, a larger capital stock, and greater output and income.”[531]
  • “If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.”[532]
  • “A small change in the growth of productivity can, over a long period, have a larger effect on GDP [gross domestic product] than most recessions do” because “the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount.”[533]

* In addition to marginal tax rates, other aspects of tax laws with economic effects include provisions such as the following:

  • Corporate income taxes that are sometimes higher in the U.S. than in other countries can incentivize corporations to relocate overseas.[534]
  • The combination of the following two provisions of U.S. tax law incentivizes corporations to raise money by going into debt: (1) the corporate income tax deduction for interest on debt, and (2) the taxation of money raised through selling corporate shares.[535] [536] [537]

Excise and Sales Taxes

* Excise taxes are imposed on specific goods and services, whereas sales taxes are imposed on wide arrays of goods and services.[538] [539]

* In addition to raising revenue, excise taxes are sometimes imposed to discourage or penalize certain activities.[540] [541] Per the U.S. Joint Committee on Taxation:

Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.[542]

* In 2020, excise taxes comprised 2% of the taxes collected by the federal government and 11% of the taxes collected by state and local governments:

Excise Taxes

[543]

* In 2018, state and local excise taxes ranged from a low of $328 per person in Arizona to a high of $1,134 per person in Vermont. The nationwide average was $613 per person.[544]

* Excise taxes are remitted by businesses that manufacture, import, or sell the goods and services that are taxed.[545] [546]

* The economic burden of excise taxes primarily falls on retail customers in the form of higher prices. Per the Congressional Budget Office:

The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.[547] [548] [549] [550]

* In 2010, the 111th Congress and President Obama passed the Affordable Care Act (a.k.a. Obamacare), which enacted several new types of excise taxes on items such as medical devices, indoor tanning services, and high-cost health plans. Some of these taxes took effect during 2010–2014, and others were delayed by Congress.[551] [552] [553] In 2019, the 116th Congress and President Trump repealed the taxes on medical devices and high-cost health plans.[554]

* Sales taxes are typically remitted by retailers and shown on purchase receipts, but the burden of these taxes falls on both consumers and retailers to varying degrees, depending upon the product or service.[555] [556] [557]

* Most states don’t impose a sales tax on prescription drugs or food.[558]

* In 2020, sales taxes comprised 22% of the taxes collected by state and local governments:

Sales Taxes

[559]

* In 2018, the portion of state and local tax collections that were comprised of sales taxes varied from a high of 42% in Louisiana, to a median of 22% in Michigan, to a low of 0% in Delaware, Montana, New Hampshire and Oregon.[560]

Property Taxes

* Property taxes are annual levies on properties based upon their appraised value. Per The Oxford Companion to American Law, property taxes were levied:

in ancient times but the modern tax has roots in the feudal obligations owed to British and European kings or landlords. In the fourteenth and fifteenth centuries, British tax assessors used ownership of property to estimate ability to pay. In time the tax came to be regarded as a levy on the property … itself. In the United Kingdom the tax developed into a system of “rates” based upon the annual (rental) value of the property.[561]

* Local governments generally do not levy property taxes on colleges, hospitals, and other nonprofit organizations, but these organizations sometimes make “payments in lieu of taxes” or “PILOTs” to local governments. Such payments are generally lower than property taxes.[562]

* In addition to property taxes on real estate, some states levy taxes on personal property such as automobiles, boats, and aircraft.[563]

* In 2020, property taxes comprised 30% of the taxes collected by state and local governments:

Property Taxes

[564]

* In 2018, the portion of state and local tax collections that were comprised of property taxes varied from a high of 64% in New Hampshire, to a median of 30% in Arizona, to a low of 17% in Delaware.[565]

* In 2018, state and local property taxes ranged from a low of $598 per person (not per household) in Alabama to a high of $3,378 per person in New Jersey. The nationwide average was $1,675 per person.[566]

* Economists generally fall into three different camps regarding who bears the burden of property taxes. All three groups agree that property taxes on owner-occupied housing are mostly borne by homeowners, and property taxes on land (but not necessarily housing located on the land) are mostly borne by landowners. There is much disagreement over commercial and industrial properties.[567]

Estate and Gift Taxes

* Per the Congressional Research Service, the federal:

  • estate tax is “imposed when property is transferred at death.”
  • gift tax “operates alongside the estate tax to prevent individuals from avoiding the estate tax by transferring property to heirs before dying.”[568]

* The modern federal estate tax was first enacted in 1916, and per the IRS, it “was to serve the dual purposes of producing revenue and redistributing wealth.”[569]

* In 2020, estate and gift taxes comprised 0.5% of total federal taxes and 0.3% of total state and local taxes:

Estate and Gift Taxes

[570]

Hidden Taxes

* Hidden taxes are those that are not apparent to the individuals who ultimately pay them. Per the director of the Congressional Budget Office (CBO):

[T]he ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government.[571]

* Examples of hidden taxes include:

  • excise taxes on items such as gasoline and wine, which are remitted by businesses but are primarily borne by retail customers in the form of higher prices.[572] [573] [574] For example, retail consumers pay an average of 45 cents in federal and state excise taxes per gallon of gasoline, but these taxes do not appear on their purchase receipts.[575]
  • employer payroll taxes, which are remitted by employers but are primarily borne by employees in the form of lower wages.[576] [577] [578] For example, middle-income households lose about 4.0% of their income to federal payroll taxes remitted by employers, but these taxes did not appear on employees’ paychecks or tax returns.[579] [580] [581]
  • corporate income taxes, which are remitted by corporations but are primarily borne by stockholders and employees in the form of lower profits and wages.[582] [583] [584] For example, the top 1% of income earners lose about 3.6% of their income to federal corporate income taxes, but these taxes did not appear on their paychecks or tax returns.[585] [586] [587]

* In 2020, U.S. households paid an average of $7,000 in hidden federal taxes. For different income groups, the amounts and rates varied as follows:

2020 Average Hidden Federal Taxes Per Household

Income Group

Full Income

Hidden Taxes

Hidden Tax Rate

Lowest 20%

$42,200

$1,400

3.3%

Second 20%

$63,600

$3,000

4.7%

Middle 20%

$90,500

$4,700

5.2%

Fourth 20%

$131,800

$7,350

5.6%

Highest 20%

$360,900

$19,500

5.4%

81–90%

$191,500

$11,300

5.9%

91–95%

$265,100

$15,700

5.9%

96–99%

$440,000

$22,900

5.2%

Highest 1%

$2,291,800

$111,300

4.9%

[588] [589] [590]

* Governments also enact laws and regulations that do not collect tax revenue but impose the costs of government policies on the private sector. These are functional hidden taxes, and examples of such include:

  • a federal law that requires most hospitals with emergency departments to provide an “examination” and “stabilizing treatment” for anyone who comes to such a facility and requests care for an emergency medical condition or childbirth, regardless of their ability to pay and immigration status.[591]
  • state and federal mandates that require health insurers to enroll all applicants regardless of preexisting conditions, thus increasing the cost of health insurance and forcing existing health insurance customers to subsidize the healthcare of those who do not purchase insurance until after contracting serious illnesses.[592]
  • state mandates that require electric utility companies to obtain certain amounts of their electricity from alternative energy sources that are more expensive than traditional sources, thus increasing the cost of electricity.[593]

Politics

Overview

* The U.S. Constitution vests Congress with the powers to tax, spend, and pay the debts of the federal government. Legislation to carry out these functions must be enacted in one of the following ways:

  • passed by majorities in both houses of Congress and approved by the President.
  • passed by majorities in both houses of Congress, vetoed by the President, and then passed by two-thirds of both houses of Congress.
  • passed by majorities in both houses of Congress and left unaddressed by the President for ten days.[594]

Bush Tax Cuts

* Per the Congressional Budget Office (CBO), “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” Thus, if tax laws remain unchanged, “average federal tax rates would increase in the long run” (for more detail, see Bracket Creep).[595]

* In 2000, the federal government collected revenues equal to 20.4% of the nation’s gross domestic product (GDP). This was the highest level in the history of the United States.[596]

* In 2000, the stock market “dotcom” bubble burst,[597] [598] [599] the NASDAQ lost 39% of its value,[600] and profits for nonfinancial corporations fell by 18%.[601] In the first quarter of 2001, the nation’s GDP contracted and a recession began.[602] [603]

* Republican President George W. Bush entered office in January of 2001 and signed his first major economic bill in June of that year.[604] [605] Among other provisions, this law enacted various tax reforms that Congress and Bush accelerated and expanded upon in 2002 and 2003. Collectively, these statues:

  • decreased tax rates on incomes, estates, capital gains and dividends.
  • increased the child tax credit (which is also a form of spending).
  • raised the exemption amount for the alternative minimum tax.
  • increased certain corporate income tax deductions.[606] [607]

* Collectively, the tax provisions in these laws are known as the “Bush tax cuts.” Congress passed these bills with Democratic and Republican support varying as follows:

Congressional Bush Tax Cut Votes

Bill Year

Democrats

Republicans

For

Against

For

Against

2001

15%

71%

95%

1%

2002

90%

4%

98%

0%

2003

4%

96%

97%

1%

[608] [609] [610]

* In order to avert Democratic filibusters in the Senate, Republicans used a procedural rule that required them to sunset many of the tax cuts at the end of 2010.[611] [612] [613] [614] [615]

* In addition to the Bush tax cuts, federal revenues during 2000–2010 were impacted by factors such as:

  • the burst of the dotcom bubble in 2000 and ensuing recession.[616] [617]
  • average economic growth of 3.4% above the rate of inflation during 2003–2006.[618] [619]
  • the burst of the housing bubble in 2007 and ensuing Great Recession.[620] [621]
  • the rise of unemployment from 5.0% in January 2008 to 9.9% in December 2009.[622]
  • the economic “stimulus” bill of February 2008.[623]

* From 2000 to 2010, federal revenues (as a portion of GDP) varied as follows:

Federal Receipts as a Portion of Gross Domestic Product Bush

[624] [625] [626] [627] [628]

* For facts related to the economic implications of the Bush tax cuts, see the sections of this research on economic effects and government debt.

Obama Tax Cuts

* In 2007, the housing bubble burst, and “banks began reporting large losses resulting from declines in the market value of mortgages and other assets.”[629] The nation entered a recession in the last quarter of 2007,[630] and unemployment increased from 5.0% at the outset of 2008 to 9.9% at the end of 2009.[631]

* Democratic President Barack Obama entered office in January of 2009 and signed his first major economic bill one month later in February.[632] [633] Among other provisions, this law:

  • created or expanded four temporary tax credits.
  • created a temporary tax exclusion for unemployment benefits.
  • created a temporary sales tax deduction for new car purchases.
  • instituted four business tax benefits and a business tax increase.[634]

* Congress passed this bill with 97% of Democrats voting for it and 98% of Republicans voting against it.[635]

* In December of 2010, Congress passed and Obama signed a bill that extended most of the Bush tax cuts and some of the tax cuts from Obama’s 2009 law through 2012. This law also decreased the Social Security payroll tax by two percentage points until the end of 2011.[636] [637] In 2011 and 2012, Congress and Obama extended the Social Security tax cut through the end of 2012.[638] [639]

* In January of 2013, Congress passed and Obama signed a bill to make the most of the previous tax cuts permanent for everyone but high-income earners (except for adjustments to the estate, gift, and alternative minimum taxes). Also, the law did not renew the Social Security payroll tax cut.[640] [641]

* In addition to the Obama tax cuts, federal revenues during 2007–2017 were impacted by factors such as:

  • the Great Recession.[642] [643]
  • an unconventional Federal Reserve policy called “quantitative easing,” which involved creating trillions of dollars of new money to purchase government debt and private financial assets that had become bad investments.[644] [645] [646] [647] [648]
  • average inflation-adjusted economic growth of 2.3% during 2010–2017.[649]

* From 2007 to 2017, federal revenues (as a portion of GDP) varied as follows:

Federal Receipts as a Portion of Gross Domestic Product Obama

[650] [651] [652] [653] [654] [655]

* For facts related to the economic implications of the Obama tax cuts, see the sections of this research on economic effects and government debt.

Obama Tax Increases

* In a campaign speech during September of 2008, Barack Obama stated:

I can make a firm pledge: under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.[656]

* About two weeks after taking office, Obama signed a law that more than doubled federal excise taxes on cigarettes, cigars, and other tobacco products.[657] [658] [659] The bill passed with 98% of Democrats voting for it and 75% of Republicans voting against it.[660] Per the Congressional Budget Office, “The effect of excise taxes, relative to income, is greatest for lower-income households, which tend to spend a greater proportion of their income on such goods as gasoline, alcohol, and tobacco, which are subject to excise taxes.”[661]

* In 2010, the 111th Congress and President Obama passed two laws that are collectively known as the Affordable Care Act or “Obamacare.” These bills passed with 88% to 89% of Democrats voting for them and 99% of Republicans voting against them.[662] [663] These laws impose or increase 10 types of taxes, fees, and penalties (in addition to fines for not having health insurance).[664] The largest of these are:

  • a 3.8% tax on income from investments (such as interest, dividends, and rent) imposed on singles with income above $200,000 and couples with income above $250,000. This began in 2013.[665] [666]
  • an added 0.9% Medicare payroll tax on earnings above $200,000 for singles and $250,000 for couples. This began in 2013.[667] [668]
  • a 40% excise tax imposed on high-cost health insurance plans. This was initially due to begin in 2018, but a 2016 law delayed it to 2020,[669] and a 2019 law repealed it.[670]
  • an annual fee imposed on health insurance providers. This began in 2014,[671] and a 2019 law repealed it.[672]
  • an annual fee imposed on manufacturers and importers of pharmaceuticals. This began in 2011.[673]
  • a 2.3% excise tax imposed on manufacturers and importers of certain medical devices. This began in 2013,[674] and a 2019 law repealed it.[675]

* Regarding tax preferences (which are also a form of spending), the Affordable Care Act provided refundable tax credits for individuals who purchase health insurance with incomes up to 400% of federal poverty guidelines (for example, $106,000 for a family of four).[676] [677] [678] The law also eliminated or reduced six other preferences while adding three others.[679] [680]

* The Affordable Care Act also imposed fines on large employers that don’t provide full time-employees with health insurance that meets certain requirements,[681] and the law requires most Americans to carry some form of health insurance starting in 2014 or pay a fine.[682] [683] [684] [685] (In 2017, Congress passed and President Trump signed a law that repealed this fine starting in 2019.[686] [687] [688])

* During a September 2009 interview on ABC News, Obama was asked if such a fine constitutes a tax increase, and he replied, “I absolutely reject that notion.”[689] In March of 2012, an Obama administration lawyer argued before the Supreme Court that the Affordable Care Act’s fine for not buying health insurance is constitutional because:

  • it is “justifiable under [Congress’s] tax power.”
  • it is “fair to read this as an exercise of the tax power.”
  • the “Court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis.”[690]

* The Supreme Court ruled (5 to 4) that Obamacare’s fine is constitutional on the grounds that it is a tax.[691]

* Obama’s budget proposal for 2017 contained 45 pages of tax-related provisions.[692] Some of his proposals were to:

  • impose a one-time 14% tax on the untaxed foreign earnings that U.S. corporations hold overseas.[693]
  • increase the tax rate on capital gains and dividends from 20% to 24.2% for upper income individuals (for a total tax rate of 28% when combined with the 3.8% net investment tax).[694]
  • enact the “Buffett rule.”[695]
  • enact, expand, or extend at least 22 different tax credits.[696]

* Per the Joint Committee on Taxation and Congressional Budget Office:

  • “The complexity of the tax system partly results from tax expenditures [a.k.a. preferences] that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions.”[697]
  • “Complexity also arises from efforts to achieve certain equity goals.”[698] [699]
  • “Policymakers are not concerned only with efficiency issues in designing a tax system, but are also concerned with establishing an ‘equitable’ tax code with respect to the distribution of the tax burden. Whether a tax system is viewed as equitable is in the eye of the beholder, and economic analysis cannot define an equitable tax.”[700]
  • “Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases.”[701]
  • “A less efficient allocation of labor and capital resources leaves society with a lower level of output of goods and services than it would otherwise enjoy in the absence of tax-system induced economic distortions.”[702]
  • “[M]any of the same aspects of the tax system that reduce economic efficiency also increase complexity.”[703]
  • “In general, the goals of equity and efficiency are in conflict. In order to keep rates low for efficiency reasons, the progressivity of the rate schedule should be minimized, but this conflicts with the desire to have more progressive rates for equity reasons.”[704]

* For more facts related to the economic implications of the Obama tax increases, see the sections of this research on economic effects and government debt.

Trump Tax Cuts

* Republican President Donald Trump entered office in January of 2017 and signed his first major economic bill in December of that year.[705] [706] Among other provisions, this law permanently lowered the corporate tax rate beginning in 2018 and temporarily (during 2018–2025):

  • lowered the income tax rates in five of the seven income brackets.
  • increased the basic standard tax deduction for people who do not itemize their deductions.
  • increased the child tax credit (which is a form of spending).
  • increased the amount of charitable contributions that people can deduct from their federal income taxes.
  • limited the maximum amount of state and local taxes that people can deduct from their federal income taxes.
  • reduced the maximum amount of mortgage interest that people can deduct from their federal income taxes.[707]

* The bill passed Congress with 95% of Republicans voting for it and 98% of Democrats voting against it.[708]

* In order to avert a Democratic filibuster in the Senate, Republicans used a procedural rule that required them to sunset many of the tax reforms at the end of 2025.[709] [710] [711]

* In April of 2018, the Congressional Budget Office (CBO) projected that federal revenues will vary as follows under current law:

Federal Revenues After Trump Tax Cuts as Projected by CBO Under Current Law

[712] [713]

* Per the Congressional Budget Office, the corporate income tax “reduces capital investment in the United States,” and hence:

it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. … That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.[714]

* By August 2020, businesses had enacted at least 1,200 general pay raises, bonuses, benefit increases, consumer price reductions, charitable donations, and business expansions that they credited to the Trump tax cuts.[715]

* For more facts related to the economic implications of the Trump tax cuts, see the sections of this research on economic effects and government debt.

Media

* When President Bush proposed tax cuts at the outset of his presidency, Newsweek published a cover story that showed pictures of objects that people with various incomes could buy with money from the tax cuts. On the low end, Newsweek showed a bowl of pasta to signify “three weeks’ worth of groceries” or $168 that a family of four with a gross income of $20,000 would save on an annual basis. On the high end, Newsweek showed a Lexus GS 430 to signify $47,114 that a married couple with an income of $1,000,000 would save on an annual basis.[716]

* Newsweek did not reveal what these families were currently paying in federal taxes or what they were receiving in cash and other benefits from the federal government. The family with a gross income of $20,000 was paying about $1,600 per year in taxes while receiving $16,000 from the government. In comparison, the family with an income of $1,000,000 was paying $325,000 in taxes and receiving $7,000 from the government.[717] [718]

Debt

* Per the U.S. Government Accountability Office, when government spends more than it collects in revenues, the resultant debt is “borne by tomorrow’s workers and taxpayers.” This burden can manifest in the form of higher taxes, reduced government benefits, decreased economic growth, inflation, or combinations of such results.[719] [720] [721] [722]

* Other factors impacting the debt/GDP ratio include but aren’t limited to high inflation (which lowers the ratio in the short term and raises it in the long term),[723] [724] [725] legislation passed by previous Congresses and presidents,[726] economic cycles, terrorist attacks, pandemics, government-mandated lockdowns, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[727] [728] [729]

Congress

* During the first session of the 113th Congress (January–December 2013), U.S. Representatives and Senators introduced 168 bills that would have reduced spending and 828 bills that would have raised spending.[730]

* The table below quantifies the costs and savings of these bills by political party. This data is provided by the National Taxpayers Union Foundation:

Costs/Savings of Bills Sponsored or Cosponsored in 2013 by Typical Congressman (in Billions)

Legislative Body & Party

Proposed Increases

Proposed Decreases

Net Agendas

Change in 2013 Budget Outlays (%)

House Democrats

$407

$10

$397

11.5

Senate Democrats

$22

$3

$18

0.5

House Republicans

$9

$91

–$83

–2.4

Senate Republicans

$6

$165

–$159

–4.6

[731] [732]

* The table below quantifies the net agendas of the political parties in previous Congresses:

Costs/Savings of Bills Sponsored or Cosponsored in the First Sessions of Congress by Typical Congressman (in Billions)

2011

2009

2007

2005

2003

2001

1999

House Democrats

$497

$500

$547

$547

$402

$262

$34

Senate Democrats

$24

$134

$59

$52

$174

$88

$15

House Republicans

–130

–$45

$7

$12

$31

$20

–$5

Senate Republicans

–$239

$51

$7

$11

$26

$19

–$324

NOTE: Data not adjusted for inflation.

[733]

George W. Bush

* In February 2001, Republican President George W. Bush stated:

Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt, repaid more quickly than has ever been repaid by any nation at any time in history.[734]

* From the time that Congress enacted Bush’s first major economic proposal (June 7, 2001[735]) until the time that he left office (January 20, 2009), the national debt rose from 54% of GDP to 74%, or an average of 2.7 percentage points per year.[736]

* During eight years in office, President Bush vetoed 12 bills, four of which were overridden by Congress and thus enacted without his approval.[737] These bills were projected by the Congressional Budget Office to increase the deficit by $26 billion during 2008–2022.[738]

Barack Obama

* In February 2009, Democratic President Barack Obama stated:

I refuse to leave our children with a debt that they cannot repay—and that means taking responsibility right now, in this administration, for getting our spending under control.[739]

* From the time that Congress enacted Obama’s first major economic proposal (February 17, 2009[740]) until the time that he left office (January 20, 2017), the national debt rose from 75% of GDP to 104%, or an average of 3.6 percentage points per year.[741]

* During eight years in office, President Obama vetoed twelve bills, one of which was overridden by Congress and thus enacted without his approval.[742] The Congressional Budget Office estimated that this bill “would have no significant effect on the federal budget.”[743]

Donald Trump

* In March 2016, Republican presidential candidate Donald Trump had the following exchange in an interview with Bob Woodward of the Washington Post:

Trump: “We’ve got to get rid of the $19 trillion in debt.”
 
Woodward: “How long would that take?”
 
Trump: “I think I could do it fairly quickly, because of the fact the numbers…”
 
Woodward: “What’s fairly quickly?”
 
Trump: “Well, I would say over a period of eight years.”[744]

* From the time that Congress enacted Trump’s first major economic proposal (December 20, 2017[745]) until the outset of the Covid-19 pandemic (March 11, 2020[746]), the national debt rose from 102.9% of GDP to 108.9%, or an average of 2.7 percentage points per year.[747]

* Before the Covid-19 pandemic, President Trump vetoed six bills, none of which were overridden by Congress.[748]

* From the outset of the Covid-19 pandemic (March 11, 2020[749]) until the end of 2020, the national debt rose from 108.9% of GDP to 129.1%, or at a rate of 24.9 percentage points per year.[750]

* During the Covid-19 pandemic, President Trump vetoed four bills, one of which was overridden by Congress and thus enacted without his approval.[751] The Congressional Budget Office estimated that this bill would increase the deficit by $21 million during 2021–2030.[752]

Joseph Biden

* In May 2022, President Biden claimed:

My Treasury Department is planning to pay down the national debt this quarter, which never happened under my predecessor. Not once. Not once.[753]

* From the time that Congress enacted Biden’s first major economic proposal (March 10, 2021[754]) until June 28, 2024, the national debt:

  • rose from $27.93 trillion to $34.83 trillion, or by $6.91 trillion.[755]
  • rose by 24.7%,[756] while inflation rose by 18.6%.[757]
  • fell from 124% of GDP to 122%, or an average of –0.6 percentage points per year.[758]

* From the beginning of his presidency until December 31, 2022, Biden vetoed one bill, and it was not overridden by Congress.[759]

* The lifting of Covid-19 lockdowns allowed GDP to recover in the first year of Biden’s term, thereby decreasing the debt/GDP ratio.[760] [761] [762] [763]

* As documented in an article published by the Federal Reserve Bank of St. Louis, inflation:

directly reduces the real value of government debt, as well as the ratio of debt to GDP, because—holding other things constant—higher prices increase nominal GDP. Thus, surprise inflation transfers wealth from holders of U.S. government debt—who include both Americans and non-Americans—to U.S. taxpayers.3
 
This transfer is not an unalloyed good even for U.S. taxpayers, however, because unexpected inflation will tend to raise the cost of servicing future U.S. debt … by increasing the expected rate of inflation and the risk premium associated with inflation.[764] [765] [766]

Context

* Without mentioning the role of Congress in taxes, spending, or the national debt,[767] [768] PolitiFact reported in 2009 that the national debt increased by $5 trillion “under” George W. Bush, while “there were several years of budget surpluses” at “the end of the Clinton administration.”[769]

* Measured in consistent terms, the average annual changes in national debt varied as follows during the tenures of recent presidents and congressional majorities:

Political Power

Dates

Annual Change in National Debt

Raw Debt (Trillions)

Percentage Points of GDP

Bill Clinton with Democratic House and Senate

1/20/93 –  1/4/95

$0.3

0.8

Bill Clinton with Republican House and Senate

1/4/95 –  1/19/01

$0.2

-1.5

George W. Bush with Republican House and Senate

1/20/01 –  6/6/01, 11/12/02 –  1/4/07

$0.5

0.7

George W. Bush with Republican House and Democratic Senate

6/6/01 –  11/12/02

$0.4

2.2

George W. Bush with Democratic House and Senate

1/4/07 –  1/20/09

$1.0

6.2

Barack Obama with Democratic House and Senate

1/20/09 –  1/5/11

$1.7

9.0

Barack Obama with Republican House and Democratic Senate

1/5/11 –  1/6/15

$1.0

2.2

Barack Obama with Republican House and Senate

1/6/15 –  1/20/17

$0.9

1.6

Donald Trump with Republican House and Senate

1/20/17 – 1/3/19

$1.0

0.2

Donald Trump with Democratic House and Republican Senate

1/3/19 – 1/20/21

$2.8

9.2

Joseph Biden with Democratic House and Democratic Senate

1/20/21 – 1/3/23

$1.8

-3.0

[770]

* Other factors impacting the debt/GDP ratio include but aren’t limited to high inflation (which lowers the ratio in the short term and raises it in the long term),[771] [772] [773] legislation passed by previous Congresses and presidents,[774] economic cycles, terrorist attacks, pandemics, government-mandated lockdowns, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[775] [776] [777]

Footnotes

[1] Entry: “tax.” Collins English Dictionary—Complete & Unabridged. HarperCollins, 1991, 1994, 1998, 2000, 2003. <www.thefreedictionary.com>

“1. (Government, Politics & Diplomacy) a compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organizations, on the production costs or sales prices of goods and services, etc.”

[2] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

e) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

f) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

h) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[3] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

d) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

e) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023 <apps.bea.gov>

f) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

g) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[4] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[5] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

e) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

f) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[6] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[7] Report: “United States Federal Debt: Answers To Frequently Asked Questions, An Update.” U.S. Government Accountability Office, August 12, 2004. <www.gao.gov>

Page 39:

Over the long term, the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers. Higher saving and investment in the nation’s capital stock—factories, equipment, and technology—increase the nation’s capacity to produce goods and services and generate higher income in the future. Increased economic capacity and rising incomes would allow future generations to more easily bear the burden of the federal government’s debt. Persistent deficits and rising levels of debt, however, reduce funds available for private investment in the United States and abroad. Over time, lower productivity and GDP [gross domestic product] growth ultimately may reduce or slow the growth of the living standards of future generations.

Page 41:

GAO’s [Government Accountability Office’s] long-term simulations show that absent policy actions aimed at deficit reduction, debt burdens of such magnitudes imply a substantial decline in national saving available to finance private investment in the nation’s capital stock. The fiscal paths simulated are ultimately unsustainable and would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result in rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.

[8] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “[I]f the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output.”

[9] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 175: “[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt.”

[10] The consequences of unchecked government debt are addressed in greater detail in Just Facts’ research on the national debt.

[11] Calculated with data from:

a) Dataset: “Table 3.1. Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

c) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

NOTES:

  • This data shows government “current” revenues and spending. To measure all government revenues and spending, “total” instead of “current” figures are preferable, but such data only extends back to 1960.
  • For an explanation of the differences between “total” and “current” expenditures, see <www.bea.gov>
  • An Excel file containing the data and calculations is available upon request.

[12] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[13] “WHO Director-General’s Opening Remarks at the Media Briefing on Covid-19.” World Health Organization, March 11, 2020. <www.who.int>

[Dr. Tedros Adhanom Ghebreyesus:] …

WHO [World Health Organization] has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction.

We have therefore made the assessment that COVID-19 can be characterized as a pandemic.

[14] Press release: “COVID-19 and Other Global Health Issues.” World Health Organization, May 5, 2023. <www.justfacts.com>

[Dr. Tedros Adhanom Ghebreyesus:] …

Yesterday, the Emergency Committee met for the 15th time and recommended to me that I declare an end to the public health emergency of international concern. I have accepted that advice. It’s therefore with great hope that I declare COVID-19 over as a global health emergency.

[15] Report: “United States Federal Debt: Answers to Frequently Asked Questions, An Update.” U.S. Government Accountability Office, August 12, 2004. <www.gao.gov>

Pages 35–36: “Assuming no changes to currently projected benefits and revenues, Social Security and Medicare ultimately will pose an unsustainable burden on future taxpayers and would significantly reduce the nation’s economic growth.”

Page 65:

Debt held by the public is the largest explicit liability of the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending. These “fiscal exposures”2 vary widely as to source, extent of the government’s legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrum extending from explicit liabilities to the implicit promises embedded in current policy or public expectations. (See table 2.) For example, the current liability figures for the U.S. government do not include the difference between scheduled and funded benefits in connection with the Social Security and Medicare programs.

Pages 66–67:

Fiscal exposures represent significant commitments that ultimately have to be addressed. The burden of paying for these exposures may encumber future budgets and constrain fiscal flexibility. Not capturing the long-term costs of current decisions limits policymakers’ ability to control the government’s fiscal exposures at the time decisions are made. In addition, the lack of recognition of long-term fiscal exposures may make it difficult for policymakers and the public to adequately understand the government’s overall performance and true financial condition.

[16] A detailed accounting of these debts, liabilities, and obligations is published in Just Facts’ research on the national debt.

[17] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

d) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

e) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[18] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

e) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[19] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[20] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[21] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[22] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[23] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[24] Article: “Great Depression.” By Richard H. Pells and Christina D. Romer. Encyclopedia Britannica, 1998. <www.britannica.com>

“Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.”

[25] Article: “Federal Reserve’s Role During WWII.” By Gary Richardson. Federal Reserve Bank of Richmond, Federal Reserve History, November 22, 2013. <www.federalreservehistory.org>

In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. In December 1941, Japan attacked Pearl Harbor. Germany and Italy declared war on the United States. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. The Allied counteroffensive began in 1942. The Axis surrendered in 1945.

[26] Webpage: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research. Last updated March 14, 2023. <www.nber.org>

“Contractions (recessions) start at the peak of a business cycle and end at the trough. … Peak Month (Peak Quarter) [=] December 2007 (2007Q4) … Trough Month (Trough Quarter) [=] June 2009 (2009Q2)”

[27] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

d) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2022. <www.census.gov>

e) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]
    • excludes taxes from the rest of the world. [Report: “Concepts and Methods of the U.S. National Income and Product Accounts.” U.S. Bureau of Economic Analysis, December 2022. <www.bea.gov>. Page 2-6: “BEA includes most transactions between the U.S. government and economic agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and services), government transactions with these areas are treated as transactions with the rest of the world.”]

[28] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11 Capital Transfers Paid and Received, by Sector and by Type [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised September 30, 2022. <apps.bea.gov>

c) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

d) Dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed January 27, 2023 at <www.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

e) Dataset: “Table 7.1. Selected Per Capita Product and Income Series in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 18: “Population (Midperiod, Thousands)”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]

[29] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

c) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 26, 2023. <apps.bea.gov>

Line 1: “Gross Domestic Product”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Just Facts consulted with the U.S. Bureau of Economic Analysis (BEA) to determine how to calculate taxes from BEA’s extensive data. This methodology:
    • includes social insurance taxes, which BEA classifies as a social insurance contributions. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Taxes for social insurance programs, such as social security taxes and Medicare taxes, are not classified as personal current taxes; these types of taxes are classified as contributions for government social insurance….”]
    • includes estate and gift taxes, which BEA classifies as capital transfer receipts. [Webpage: “Frequently Asked Questions: What Is Included in Personal Current Taxes?’ U.S. Bureau of Economic Analysis, May 27, 2010. <www.bea.gov>. “Estate and gift taxes, which are classified as capital transfers, are shown in NIPA (National Income and Product Account) table 5.11 and 5.11U.”]

[30] Article: “Great Depression.” By Richard H. Pells and Christina D. Romer. Encyclopedia Britannica, 1998. <www.britannica.com>

“Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.”

[31] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[32] Calculated with data from:

a) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

b) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 30, 2023. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[33] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 398:

Economic incidence is concerned with how the burden of the tax is distributed among economic agents (producers, consumers, employees, and shareholders) as determined by market forces, not by the law. It is one thing to specify in law that the sales tax be collected and paid by Wal-Mart, for example, but it is quite another to determine how Wal-Mart then passes some portion of the tax burden along to its customers, workers, and owner-shareholders, depending on the economic forces at work in each of these market contexts. Economic incidence is the pattern of tax burden as it is distributed by supply and demand forces in each of these markets.

[34] Textbook: Macroeconomics: Private and Public Choice. By James D. Gwartney and others. South-Western Cengage Learning, 2005.

Pages 95–98:

Economic analysis indicates that the actual burden of a tax—or more precisely, the split of the burden between buyers and sellers—does not depend on whether the tax is statutorily placed on the buyer or the seller. …

If the actual incidence of a tax is independent of its statutory assignment, what does determine the incidence? The answer: The incidence of a tax depends on the responsiveness of buyers and of sellers to a change in price. When buyers respond to even a small increase in price by leaving the market and buying other things, they will not be willing to accept a price that is much higher than it was prior to the tax. Similarly, if sellers respond to a small reduction in what they receive by shifting their goods and resources to other markets, or by going out of business, they will not be willing to accept a much smaller payment, net of tax. The burden of a tax—its incidence—tends to fall more heavily on whichever side of the market has the least attractive options elsewhere—the side of the market that is less sensitive to price changes, in other words.

[35] Textbook: Microeconomics. By N. Gregory Mankiw and Mark P. Taylor. Thompson Learning, 2006.

Page 122: “Politicians can decide whether a tax comes from a buyer’s pocket or from the seller’s, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand.”

[36] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. Statutory incidence refers to tax incidence required by legal statutes. Of course, it is not possible to specify true economic incidence in law, but that does not stop lawmakers from trying. Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor.

NOTE: See also the next three footnotes.

[37] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. <www.cbo.gov>

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.

[38] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes. But households also bear the burden of the taxes paid by businesses.”

[39] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 31:

CBO [Congressional Budget Office] allocated individual income taxes and the employee’s share of payroll taxes to the households paying those taxes directly.2 The agency also allocated the employer’s share of payroll taxes to employees because employers appear to pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay.3 Therefore, CBO also added the employer’s share of payroll taxes to households’ earnings in calculating before-tax income.

[40] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 23–24:

CBO [Congressional Budget Office] also assumed that the economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the Bureau of Labor Statistics’ Consumer Expenditure Survey.

Page 9: “The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes.”

[41] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 43–44:

Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service. Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.

[42] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. Because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity.

[43] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In the judgment of CBO [Congressional Budget Office] and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”

[44] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 48:

Transparent tax systems include the following elements: …

• Taxpayers know their own tax burden and the tax burden of others: Irrespective of who actually writes a check to the government, taxpayers can identify who actually bears the burden of a tax. For example, the payroll tax is not transparent to the extent that taxpayers in general are unaware of the incidence of the tax. Even though payroll taxes are divided equally between employees and employers, economists generally agree that employees bear the entire burden of payroll taxes in the form of reduced wages.

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

Page 69: “Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.”

[45] Book: The Economics of Tax Policy. Edited by Alan J. Auerbach and Kent Smetters. Oxford University Press, 2017.

Chapter 5: “Economic and Distributional Effects of Tax Expenditure Limits.” By Len Burman and others. Pages 109–144.

Page 143: “In our distribution tables, we assume that the worker bears the burden of both the employer and employee portions of payroll taxes. This premise is widely accepted among economists. CBO [Congressional Budget Office], JCT [Congress’ Joint Committee on Taxation], and Treasury all make the same assumption for their distributional analyses.”

[46] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 23: “CBO [Congressional Budget Office] further assumed—as do most economists—that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share of payroll taxes in households’ before-tax income and in households’ taxes.”

[47] “2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply and demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[48] Webpage: “Current Law Distribution of Taxes.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). October 26, 2013. <www.taxpolicycenter.org>

“A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers.”

[49] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[50] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear.”

[51] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, March 28, 2012. <www.fas.org>

Page 4: “The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital.”

b) Working paper: “International Burdens of the Corporate Income Tax.” By William C. Randolph. Congressional Budget Office, August, 2006. <www.cbo.gov>

Pages 51–52: “In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears –71 percent, and the excess burden equals about 4 percent of the revenue.”

[52] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[53] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[54] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[55] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[56] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[57] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[58] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[59] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[60] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[61] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[62] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[63] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[64] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[65] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[66] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[67] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[68] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[69] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[70] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[71] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 17:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020.

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines. Because of the complexity of estimating state and local taxes for individual households, this report considers federal taxes only.

[72] Just Facts has found very few quantitative analyses of the distribution of state and local taxes, and all of them suffer from one or more major inadequacies. For example, the Institute on Taxation and Economic Policy (ITEP) conducted such an analysis for 2007 that excludes large portions of income for lower- and middle-class families, thus artificially inflating their tax burdens.

The report in question, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” does not define “income” and refers readers to the organization’s website for more details about methodology.† This methodology document also does not define “income.”‡ However, the report cites figures for family incomes in the lowest quintile of income distribution that are far below the figures provided by CBO [Congressional Budget Office]. For example, the report states that the lowest quintile of families in California had an average income of $13,200 in 2007, whereas CBO states that the lowest quintile of households nationwide had an average income of $23,900 that year.§ (Note that ITEP’s income figures for the lowest quintiles in most of the other states are significantly lower than in California). The CBO report adjusts for inflation and was published in 2012, while the ITEP report does not state it adjusts for inflation. Hence, in the most extreme scenario, this effectively lowers the CBO’s figure for the income of the lowest quintile from $23,900 to $21,630, which is still 64% higher than ITEP’s figure.#

Just Facts contacted ITEP via email on 8/27/2012 and asked what measure of income was used in its analysis. Just Facts then followed up with a phone call later that day. ITEP failed to respond to both inquiries. Just Facts’ research on tax distribution for the “Media” and “Buffett Rule” reveals how various organizations and individuals use narrow measures of income as the denominator to calculate effective tax burdens, which has the effect of artificially increasing tax rates, especially for lower- and middle-income households. For an article from Just Facts about the media’s uncritical use of ITEP’s defective tax analysis, click here.

NOTES:

  • † Report: “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 3rd edition.” By Carl Davis and others. Institute on Taxation & Economic Policy, November 2009. <itep.org>
  • ‡ Webpage: “ITEP Tax Model Methodology.” Institute on Taxation & Economic Policy. Accessed August 26, 2012 at <itep.org>
  • § Dataset: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>. Tab 3: “Household Income”
  • # “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed August 26, 2012 at <www.bls.gov>. “$23,900 in 2012 has the same buying power as $21,629.80 in 2007”

[73] The differing methodologies of Congressional Budget Office, the U.S. Treasury, and the Tax Policy Center are detailed in these documents:

  • Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>
  • Report: “Treasury’s Distribution Methodology and Results.” U.S. Department of the Treasury, Office of Tax Analysis, July 14, 2021. <home.treasury.gov>
  • Webpage: “Brief Description of the Tax Model.” Tax Policy Center. Updated March 9, 2022. <www.taxpolicycenter.org>

[74] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[75] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

b) Dataset: “Distribution of Tax Burden, Current Law.” U.S. Department of the Treasury, Office of Tax Analysis, April 18, 2018. <home.treasury.gov>

“Distribution Table: 2019 001”

c) Dataset: “Table T22-0068, Average Effective Federal Tax Rates, All Tax Units, By Expanded Cash Income Percentile, 2019.” Tax Policy Center, October 14, 2022. <www.taxpolicycenter.org>

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Negative tax burdens result from refundable tax credits, which sometimes exceed the taxes paid by low-income households. For more detail, see tax preferences.
  • The next two footnotes contain important context for these calculations.

[76] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[77] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[78] Article: “Scientific Survey Shows Voters Widely Accept Misinformation Spread by the Media.” By James D. Agresti. Just Facts, January 2, 2020. <www.justfacts.com>

The survey was conducted by Triton Polling & Research, an academic research firm used by scholars, corporations, and political campaigns. The responses were obtained through live telephone surveys of 700 likely voters across the U.S. during December 2–11, 2019. This sample size is large enough to accurately represent the U.S. population. Likely voters are people who say they vote “every time there is an opportunity” or in “most” elections.

The margin of sampling error for the total pool of respondents is ±4% with at least 95% confidence. The margins of error for the subsets are 6% for Democrat voters, 6% for Trump voters, 5% for males, 5% for females, 12% for 18 to 34 year olds, 5% for 35 to 64 year olds, and 6% for 65+ year olds. The survey results presented in this article are slightly weighted to match the ages and genders of likely voters. The political parties and geographic locations of the survey respondents almost precisely match the population of likely voters. Thus, there is no need for weighting based upon these variables.

NOTE: For facts about what constitutes a scientific survey and the factors that impact their accuracy, visit Just Facts’ research on Deconstructing Polls & Surveys.

[79] Dataset: “Just Facts’ 2019 Survey of Voter Knowledge on Public Policy Issues.” Just Facts, December 2019. <www.justfacts.com>9_voter_knowledge_weighted_crosstabs.pdf

Page 2:

Q7. On average, who would you say pays a greater portion of their income in federal taxes: The middle class or the upper 1% of income earners?

Middle class [=] 78.9%

Upper 1% [=] 18.3%

Unsure [=] 2.8%

[80] The differing methodologies of Congressional Budget Office, the U.S. Treasury, and the Tax Policy Center are detailed in these documents:

  • Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>
  • Report: “Treasury’s Distribution Methodology and Results.” U.S. Department of the Treasury, Office of Tax Analysis, July 14, 2021. <home.treasury.gov>
  • Webpage: “Brief Description of the Tax Model.” Tax Policy Center. Updated March 9, 2022. <www.taxpolicycenter.org>

[81] Calculated with data from:

a) Dataset: “Distribution of Tax Burden, Current Law.” U.S. Department of the Treasury, Office of Tax Analysis, March 14, 2019. <home.treasury.gov>

“Distribution Table: 2020 001”

b) Dataset: “Table T21-0132, Average Effective Federal Tax Rates, All Tax Units, By Expanded Cash Income Percentile, 2020, Baseline: Current Law.” Tax Policy Center, August 5, 2021. <www.taxpolicycenter.org>

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Negative tax burdens result from refundable tax credits, which sometimes exceed the taxes paid by low-income households. For more detail, see tax preferences.

[82] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2 (of PDF): “Income tax rates in the United States are generally progressive, such that higher levels of income are typically taxed at higher rates.”

[83] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 12: “The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.”

[84] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. And because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity.

[85] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[86] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[87] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[88] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[89] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[90] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[91] Article: “Class Matters: Richest Are Leaving Even the Rich Far Behind.” By David Cay Johnston. New York Times, June 5, 2005. <www.nytimes.com>

“Under the Bush tax cuts, the 400 taxpayers with the highest incomes—a minimum of $87 million in 2000, the last year for which the government will release such data—now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.”

NOTE: The author fails to account for corporate income taxes throughout the article.

[92] See the table “Effective Federal Tax Burdens.”

[93] Article: “Republicans Dispute Obama’s ‘Fair Share’ Claims, Say Top Earners Already Pay Enough.” By Jim Angle. Fox News, July 12, 2012. <www.foxnews.com>

NOTE: The author fails to account for any federal taxes beyond income taxes throughout the article.

[94] See the table “Effective Federal Tax Burdens.”

[95] Webpage: “James B. Stewart.” New York Times. Accessed August 30, 2018 at <www.nytimes.com>

James B. Stewart is a columnist at The New York Times, a staff writer at The New Yorker and the author of nine books.

He won a Pulitzer Prize for explanatory journalism in 1988 for his coverage of the stock market crash of 1987 and the Ivan Boesky insider trading scandal. …

Stewart is also the Bloomberg professor of business journalism at Columbia University. …

Before becoming a journalist, Stewart practiced law at the firm of Cravath, Swaine & Moore, in New York.

Stewart is a graduate of DePauw University and Harvard Law School.

[96] Commentary: “In Superrich, Clues to What Might Be in Romney’s Returns.” By James B. Stewart. New York Times, August 10, 2012. <www.nytimes.com>

“What’s abundantly clear, both from Mr. Romney’s 2010 returns and from the returns of the top 400, is that at the very pinnacle of taxpayers, the United States has a regressive tax system. The top 400 earn more than 1 percent of all income in the United States, more than double their share in 1992. These 400 earned a total of $81 billion in 2009—but paid an average tax rate of just 19.9 percent.”

NOTE: The author fails to account for corporate income taxes throughout the piece.

[97] Commentary: “In One Man’s Return, the Tax Code’s Unfairness.” By James B. Stewart. New York Times, April 20, 2012. <www.nytimes.com>

“This perverse outcome proves that what I’d already discovered about the ultrarich also holds true for people who are far from the million-dollar bracket: our tax code isn’t progressive. It’s not even flat. For people like me—and I assume there are millions of us—it’s regressive. For many people, the more you make, the lower the rate you pay.”

NOTE: The author fails to account for corporate income taxes throughout the piece.

[98] See the table “Effective Federal Tax Burdens.”

[99] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

A new ad from President Barack Obama’s campaign continues the drumbeat that Mitt Romney is a privileged rich guy who isn’t paying his fair share of taxes.

“You work hard, stretch every penny,” a narrator says. “But chances are, you pay a higher tax rate than him: Mitt Romney made $20 million in 2010, but paid only 14 percent in taxes—probably less than you.”

We wondered whether it’s accurate to say that Romney “paid only 14 percent in taxes—probably less than you.” …

So what happens when you add payroll taxes to income taxes? Obama’s ad is accurate.

NOTE: PolitiFact fails to account for corporate income taxes throughout the article.

[100] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“A new ad from the Obama campaign claims that Mitt Romney ‘paid only 14 percent in taxes—probably less than you.’ That depends. Romney paid a federal income tax rate that is higher than the income tax rate paid by 97 percent of tax filers. But if you include a combination of income taxes and payroll taxes—which make up the bulk of federal taxes for most taxpayers—the ad is accurate.”

NOTE: The author fails to account for corporate income taxes throughout the article.

[101] Article: “Romney Admits He Pays Lower Tax Rate Than Most Americans.” By Sarah B. Boxer. CBS News, January 17, 2012. <www.cbsnews.com>

“Republican presidential front-runner Mitt Romney acknowledged Tuesday that he pays an income tax rate close to 15 percent, the same rate that billionaire investor Warren Buffett has decried as lower than that paid by most middle-class Americans.”

NOTE: The author fails to account for corporate income taxes throughout the article. Also, Romney did not say he paid a lower tax rate than most Americans.

[102] Article: “Obama Team Signals Nasty White House Race.” By Stephen Collinson. Agence France-Presse, April 10, 2012. <news.yahoo.com>

“Romney, a former venture capitalist, paid a tax rate of just 13.9 percent in 2010, a far lower rate than the average American paid, as his fortune is mainly based on investment and not salaried income.”

NOTE: The author fails to account for corporate income taxes throughout the article. Also, the article does not cite the tax rate paid by average Americans.

[103] See the table “Effective Federal Tax Burdens.”

[104] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“Here are the average effective tax rates for Americans in different slices of the income spectrum, according to a study by the Urban Institute-Brookings Institution Tax Policy Center.”

NOTE: In the sentence above, the word “study” is linked to the following URL: <www.taxpolicycenter.org>

[105] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

NOTE: In the sentence above, the phrase “an analysis” is linked to the following URL: <www.taxpolicycenter.org>

[106] Report: “T12-0018: Average Effective Federal Tax Rates by Cash Income Percentiles, 2011; Baseline: Current Law.” Tax Policy Center, February 08, 2012. <www.taxpolicycenter.org>

“As a Percentage of Cash Income … Corporate Income Tax … Middle Quintile [=] 0.6 … Top 0.1 Percent [=] 10.7”

[107] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“Here’s the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer)”

[108] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

[109] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397: “The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee.”

[110] Report: “T12-0018: Average Effective Federal Tax Rates by Cash Income Percentiles, 2011; Baseline: Current Law.” Tax Policy Center, February 08, 2012. <www.taxpolicycenter.org>

“As a Percentage of Adjusted Gross Income … Middle Quintile … Individual Income Tax [=] 4.1 … Payroll Tax … Employee [=] 5.1 … Employer [=] 6.3”

NOTE: These figures add up to 15.5%. The next two footnotes show that this is the figure used by PolitiFact and FactCheck.

[111] Article: “Barack Obama Says Most Americans Pay a Higher Tax Rate Than Mitt Romney.” By Louis Jacobson. PolitiFact. Accessed August 27, 2012 at <www.politifact.com>

“So what happens when you add payroll taxes to income taxes? Obama’s ad is accurate. Here’s the breakdown when you include income taxes and both sides of the payroll tax (the parts paid for by employee and employer): … Middle fifth: 15.5 percent”

[112] Article: “Does Romney Pay a Lower Rate in Taxes Than You?” By Robert Farley. FactCheck.org, August 3, 2012. <factcheck.org>

“In February, the nonpartisan Tax Policy Center released an analysis that found that when you include income tax and payroll taxes paid both by the employee and employer, people in the middle 20 percent paid an effective rate of 15.5 percent.”

[113] Article: “Income Measure Used for Distributional Analysis by the Tax Policy Center.” Tax Policy Center, July 12, 2012. <www.taxpolicycenter.org>

The purpose of an income qualifier is to reflect taxpayers’ ability to pay tax. In the initial versions of the tax model, the Tax Policy Center (TPC) used adjusted gross income (AGI) as the income qualifier because resource limitations prevented us from developing a more comprehensive measure of income. AGI, however, is a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest.

The measurement of income also matters importantly for the calculation and interpretation of effective tax rates (ETRs), the amount of taxes paid measured as a percentage of income. Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their ETRs. If omitted sources of income vary across households, ETRs do not accurately measure the distribution of tax burdens as a share of income, either within or across income groups.

[114] Paper: “Integration of Micro and Macro Data on Consumer Income and Expenditures.” By Clinton P. McCully. U.S. Bureau of Economic Analysis, October 23, 2012. <www.justfacts.com>

Page 27: “The NIPA [Bureau of Economic Analysis’ National Income and Product Accounts] estimates include both cash and in-kind social benefits, while [Census Bureau] money income only includes cash benefits, and AGI [adjusted gross income] excludes the great majority of social benefits.”

[115] Article: “FactCheck Abets False Obama Claim About Romney’s Taxes.” By James D. Agresti and Anna Harrington. Just Facts Daily, August 7, 2012. <www.justfactsdaily.com>

As detailed in the earlier analysis by Just Facts and Ceterus, corporate income tax burdens depend upon several variables that are subject to uncertainty, and the key one is how much of this tax falls upon stockholders. Up until this latest report, CBO [Congressional Budget Office] assumed that stockholders bore 100% of this burden. However, “CBO has reevaluated the research on that topic” and now “allocates 75 percent of the federal corporate income tax to” stockholders.

Just Facts and Ceterus accounted for the uncertainty of this key variable by using values ranging from 33% to 100%, which were determined by researching a wide array of academic literature. CBO’s new figure of 75% falls roughly in the middle of this range.

Again, using CBO’s 75% figure to calculate Romney’s 2010 tax burden yields a rate of 23.3%, which is about twice CBO’s 2009 tax rate for middle-income households. Using the full range of values determined by Just Facts yields tax rates for Romney that extend from 18.3% to 26.0%, which are 1.6 to 2.3 times higher than the 2009 middle-income tax rate. Hence, regardless of what the exact figure may be, Romney pays a much higher tax rate than most Americans.

[116] Article: “Reporters Wrong: Romney Pays a Far Higher Federal Tax Rate Than Most Americans.” By James D. Agresti, Levi Morehouse, and Anna Harrington. Just Facts Daily, May 24, 2012. https://<www.justfactsdaily.com>

The complexities of the U.S. tax code make it practically impossible to determine Romney’s exact tax burden. Even CBO’s [Congressional Budget Office’s] estimates are based on suppositions that leave room for uncertainty. Nonetheless, a comprehensive estimate based upon known facts is presented below.

First, Romney’s excise tax rate is probably close to zero. Per the CBO, “The effect of excise taxes, relative to income, is greatest for lower-income households, which tend to spend a greater proportion of their income on such goods as gasoline, alcohol, and tobacco, which are subject to excise taxes.” Given that the upper 1% of income earners made an average of $1.9 million in 2007 while paying a 0.1% excise tax rate, the rate on Romney’s earnings of $21.6 million should be vanishingly small.

Calculating Romney’s corporate income tax burden is more complicated because:

• certain capital gains and dividends (such as those from municipal bonds) are not subject to corporate income taxes.

• although the basic corporate income tax rate is 35%, tax preferences (such as those for manufacturers and those for green energy companies) make the effective rate 27% while spreading this tax burden unevenly.

• uncertainty exists about how the burden of corporate income taxes is distributed among stockholders, employees, and customers. As the CBO has explained, “households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital [stockholders], as workers, or as consumers is not clear.”

Thus, each investor’s corporate income tax burden is dependent upon the nature of his or her portfolio and the portion of corporate income tax borne by stockholders. Estimates for this last variable range from nearly 100% down to 33%. For a 1998 survey published in the Journal of Economic Literature, researchers asked economists at leading U.S. universities to estimate the “percentage of the current corporate income tax in the United States that is ultimately borne by capital.” The median response was 40%.

Based upon the facts above and the details of Romney’s personal tax return, Just Facts and Ceterus calculate that Romney paid somewhere between 18.4% and 26.0% of his 2010 income in federal taxes (Excel file). This amounts to a 29% to 83% higher rate than CBO’s equivalent figure for middle-class Americans.

[117] Commentary: “Stop Coddling the Super-Rich.” By Warren E. Buffett. New York Times, August 14, 2011. <www.nytimes.com>

Last year my federal tax bill—the income tax I paid, as well as payroll taxes paid by me and on my behalf—was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income—and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine—most likely by a lot.

[118] See the table “Effective Federal Tax Burdens.”

[119] Book: Federal Taxation (2012 edition). By James W. Pratt and William N. Kulsrud. Cengage Learning, 2012.

Pages 1–8:

Average Tax Rates The average rate is computed by dividing the taxpayer’s tax liability by the tax base. For the income tax, the average tax rate is simply the tax divided by the taxable income (tax / taxable income). …

Average tax rates are a bit misleading in that they seem to suggest that all units of the tax base (e.g., all dollars of income) are treated equally. … While providing some insight about the overall rate structure, average rates say little about the true impact of a tax on the taxpayer. For this information, effective tax rates are the preferred statistic.

Effective Tax Rates The effective tax rate is computed by dividing the tax by some broader measure other than the tax base, often some quantity reflecting taxpayer’s ability to pay. For example, for the income tax, the effective rate tax rate is normally determined by dividing the tax by total economic income (tax / total economic income).

[120] Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. <www.fas.org>

Page 3: “Taxable income is a fairly narrow measure of income and does not reflect all the resources available to the taxpayer or gage [sic] the taxpayer’s ability to pay taxes. This is because personal exemptions and itemized deductions have been subtracted. This can artificially increase the effective average tax rate faced by a taxpayer.”

NOTE: Instead of using taxable income for the denominator in its calculation of tax rates, this report uses adjusted gross income,† which still undercounts income, though not as egregiously as taxable income. Per the Tax Policy Center, adjusted gross income is “a very narrow measure of income. It excludes such items as untaxed social security and pension benefits, tax-exempt employee benefits, income earned within retirement accounts, and tax-exempt interest. … Narrow measures of income understate taxpayers’ ability to pay taxes and overstate their” effective tax rates. In 2012, the Tax Policy Center began using a “broadened measure of income” that “is similar to the measures currently employed by Treasury, the Joint Committee of Taxation, and the Congressional Budget Office….”‡

† Page 3: “Adjusted gross income (AGI) is a broader income measure that does not exclude personal exemptions and itemized deductions for charitable contributions, state taxes, and mortgage interest.11 AGI is used for the analysis in calculating tax rates and determining income categories.”

‡ Article: “Income Measure Used for Distributional Analysis by the Tax Policy Center.” Tax Policy Center, July 12, 2012. <www.taxpolicycenter.org>

[121] Report: “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.” White House Office of Management and Budget, September 2011. <obamawhitehouse.archives.gov>

Page 46:

Principles for Tax Reform …

5. Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.

[122] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[123] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[124] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[125] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[126] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[127] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[128] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[129] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[130] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[131] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[132] Report: “High-Income Tax Returns for 2011.” By Justin Bryan. IRS, Statistics of Income Bulletin, Spring 2014. <www.irs.gov>

Page 51:

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI), and the “expanded income” concept.2 The expanded income concept uses items reported on tax returns to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax (AMT) purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.3, 4, 5

There are also two tax concepts in this article used to classify returns as taxable or nontaxable: “U.S. income tax” and “worldwide income tax.” The first concept, U.S. income tax, is total Federal income tax liability, which includes the AMT, less all credits against income tax and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits (including refundable credits). A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits). Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. income tax concept even though income taxes had been paid to a foreign government. The second tax concept, worldwide income tax, addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S. income tax.6, 7 The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

For 2011, the number of expanded-income returns over $200,000 increased 9.4 percent to almost 4.8 million returns. Of these, 15,000 returns had no worldwide income tax liability. … Tax-exempt interest was the primary reason for nontaxability on more than half (58.2 percent) of these returns.

Page 59: “On returns without any worldwide tax and expanded income of $200,000 or more, the most important item in eliminating tax, on 58.2 percent of returns, was the exclusion for State and local Government interest (‘tax-exempt interest’) (Table 8).”

Pages 63–64:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[133] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 15, 2012. <www.sec.gov>

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[134] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Pages 3–4: “Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is ownership of dividend paying stocks.5”

[135] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[136] Report: “High-Income Tax Returns for 2012.” By Justin Bryan. IRS, Statistics of Income Bulletin, Summer 2015. <www.irs.gov>

Pages 13–14:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pre-tax, basis.

[137] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Page 4:

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[138] “Internal Revenue Manual.” Internal Revenue Service. Accessed February 1, 2018 at <www.irs.gov>

Part 1, Chapter 34, Section 1.2, Definition 57a (<www.irs.gov>):“The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[139] Report: “Analytical Perspectives: Budget of the United States Government, Fiscal Year 2005.” White House Office of Management and Budget, February 2004. <fraser.stlouisfed.org>

Page 339: “The main financing component of the Federal funds group is the general fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program. It consists of all collections not earmarked by law to finance other funds, including virtually all income taxes and many excise taxes….”

[140] “2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 142: “The Social Security Act does not permit expenditures from the OASI [Old-Age & Survivors Insurance] and DI [Disability Insurance] Trust Funds for any purpose not related to the payment of benefits or administrative costs for the OASDI [Social Security] program.”

[141] “Internal Revenue Manual.” Internal Revenue Service. Accessed February 1, 2018 at <www.irs.gov>

Part 1, Chapter 34, Section 1.2, Definition 57a (<www.irs.gov>):“The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[142] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[143] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[144] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[145] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

b) Dataset: “Table 2.4 – Composition of Social Insurance and Retirement Receipts and of Excise Taxes: 1940–2027.” Executive Office of the President of the United States, Office of Management and Budget, March 28, 2022. <www.govinfo.gov>

c) Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

d) Report: “Present Law and Background Information on Federal Excise Taxes.” United States Congress, Joint Committee on Taxation, January 2011. <www.jct.gov>

Page 1: “Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the Highway Trust Fund) for designated expenditure programs, and revenues from other excise taxes (e.g., alcoholic beverages) go to the General Fund for general purpose expenditures.”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[146] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[147] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[148] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[149] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[150] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[151] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 9–10: “An income quintile has a negative average income tax rate if refundable tax credits in that quintile exceed other income tax liabilities.”

[152] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[153] Calculated with data from:

a) Dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

b) Dataset: “Table 2.4 – Composition of Social Insurance and Retirement Receipts and of Excise Taxes: 1940–2028.” Executive Office of the President of the United States, Office of Management and Budget, March 13, 2023. <www.govinfo.gov>

c) Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

d) Report: “Present Law and Background Information on Federal Excise Taxes.” United States Congress, Joint Committee on Taxation, January 2011. <www.jct.gov>

Page 1: “Revenues from certain Federal excise taxes are dedicated to trust funds (e.g., the Highway Trust Fund) for designated expenditure programs, and revenues from other excise taxes (e.g., alcoholic beverages) go to the General Fund for general purpose expenditures.”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[154] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[155] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[156] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

[157] Calculated with data from:

a) Dataset: “Historical Budget Data.” Congressional Budget Office, January 2020. <www.cbo.gov>

Tab: “3. Revenues Since 1962, by Major Source, in Billions of Dollars.”

b) Report: “A Budget for America’s Future: Analytical Perspectives, Fiscal Year 2021.” Executive Office of the President of the United States, Office of Management and Budget, March 2020. <www.govinfo.gov>

Page 133: “Table 11–4. Receipts by Source—Continued (In millions of dollars) … 2019 Actual … Source … Excise taxes … Total, Federal [general] funds [=] 34,927 … Total, Excise taxes [=] 99,452”

NOTE: An Excel file containing the data and calculations is available upon request.

[158] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[159] The Encyclopedia of Taxation & Tax Policy. Edited by Joseph J. Cordes and others. Urban Institute Press, 2005.

Page 469: “Spending from the general fund is financed by general revenues, which include the individual and corporation income taxes, some excise taxes, estate and gift taxes, tariffs, and miscellaneous receipts.”

[160] “Internal Revenue Manual.” Internal Revenue Service. Accessed January 11, 2011 at <www.irs.gov>

Part 1, Chapter 34, Section 1 (<www.irs.gov>): “The main financing component of the Federal funds group is referred to as the General Fund, which is used to carry out the general purposes of Government rather than being restricted by law to a specific program and consists of all collections not earmarked by law to finance other funds.”

[161] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 3–4:

A. Individual Income Tax

In General

A United States citizen or resident alien generally is subject to the U.S. individual income tax on his or her worldwide taxable income.8 Taxable income equals the taxpayer’s total gross income less certain exclusions, exemptions, and deductions. Graduated tax rates are then applied to a taxpayer’s taxable income to determine his or her individual income tax liability. A taxpayer may face additional liability if the alternative minimum tax applies. A taxpayer may reduce his or her income tax liability by any applicable tax credits.

Gross Income

Under the Code, gross income means “income from whatever source derived” except for certain items specifically exempt or excluded by statute.9 Sources of income include compensation for services, interest, dividends, capital gains, rents, royalties, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts (other than certain death benefits), pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations, partnerships,10 estates or trusts.11 Statutory exclusions from gross income include death benefits payable under a life insurance contract, interest on certain State and local bonds, the receipt of property by gift or inheritance, as well as employer-provided health insurance, pension contributions, and certain other benefits.

8 Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A nonresident alien generally is subject to the U.S. individual income tax only on income with a sufficient nexus to the United States. A U.S. citizen or resident who satisfies certain requirements for presence in a foreign country also is allowed a limited exclusion ($103,900 in 2018, Joint Committee staff calculation) for foreign earned income and a limited exclusion of employer-provided housing costs. Sec. 911.

9 Sec. 61.

10 In general, partnerships and S corporations (i.e., corporations subject to the provisions of subchapter S of the Code) are treated as pass-through entities for Federal income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of such entities is passed through and taxed to the owners at the individual level. A business entity organized as a limited liability company (“LLC”) under applicable State law generally is treated as a partnership for Federal income tax purposes if it has two or more members; a single-member LLC generally is disregarded as an entity separate from its owner for Federal income tax purposes.

11 In general, estates and most trusts pay tax on income at the entity level, unless the income is distributed or required to be distributed under governing law or under the terms of the governing instrument. Such entities determine their tax liability using a special tax rate schedule and are subject to the alternative minimum tax. Certain trusts, however, do not pay Federal income tax at the trust level. For example, certain trusts that distribute all income currently to beneficiaries are treated as pass-through or conduit entities (similar to a partnership). Other trusts are treated as being owned by grantors in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust.

[162] Form 9452: “Filing Assistance Program.” Internal Revenue Service, 2018. Accessed January 12, 2021 at <www.irs.gov>

“Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)”

[163] Report: “The Federal Revenue Effects Of Tax-Exempt And Direct-Pay Tax Credit Bond Provisions.” Joint Committee On Taxation, July 16, 2012. <www.jct.gov>

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other requirements are met.

[164] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 3–4:

Sources of gross income for individual taxpayers in 2011 include: wages and salaries (70.8 percent); Social Security and pensions and individual retirement arrangements (“IRAs”) (10.6 percent); business, farm and schedule E income (e.g., rents) (7.7 percent); capital gains (4.7 percent); dividend income (2.4 percent); interest income (2.3 percent); and other income (1.4 percent). … Different maximum marginal tax rates apply to different sources of income.

[165] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 6: “Adjusted gross income is used to determine income tax liability. It is total income from taxable sources minus certain exempted amounts, such as contributions to deductible individual retirement accounts and interest on student loans.”

[166] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 4:

An individual’s adjusted gross income (“AGI”) is determined by subtracting certain “above-the-line” deductions from gross income. These deductions13 include trade or business expenses, capital losses, contributions to a qualified retirement plan by a self-employed individual, contributions to certain individual retirement accounts (“IRAs”), certain moving expenses for members of the Armed Forces, certain education-related expenses, and certain charitable contributions.14 …

13 Sec. 62 Alimony and separate maintenance payments generally are deductible by the payor spouse for divorce and separation instruments executed before January 1, 2019.

[167] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 4–5:

Taxable Income

In General

To determine taxable income, an individual reduces AGI [adjusted gross income] by the applicable standard deduction or his or her itemized deductions,15 and by the deduction for qualified business income.16

A taxpayer may reduce AGI by the amount of the applicable standard deduction to arrive at taxable income. The basic standard deduction varies depending on a taxpayer’s filing status. For 2020, the amount of the standard deduction is $12,400 for a single individual and for a married individual filing separately, $18,650 for a head of household, and $24,800 for a married individual filing jointly and for a surviving spouse. An additional standard deduction is allowed with respect to any individual who is elderly (i.e., above age 64) or blind.17 The amounts of the basic standard deduction and the additional standard deductions are indexed annually for inflation.

In lieu of taking the applicable standard deductions, an individual may elect to itemize deductions. The deductions that may be itemized include State and local taxes (up to $10,000 annually ($5,000 for married taxpayers filing separately), in aggregate of income or sales taxes, real property taxes, and certain personal property taxes), home mortgage interest, charitable contributions, certain investment interest, medical expenses (in excess of 7.5 percent of AGI), and casualty and theft losses attributable to Federally declared disasters (in excess of 10 percent of AGI and in excess of $100 per loss).

[168] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2: “Tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer’s tax liability depends on their filing status….”

[169] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, November 2005. <www.cbo.gov>

Page 8:

Similarly, with tax credits, taxpayers often gradually lose the ability to claim a credit as their income nears the upper limit of the specified range for the credit. In that case, an additional dollar of earnings still faces the statutory rate, but in addition, the credit that can be subtracted from tax liability is reduced at the rate of the credit phaseout. Those taxpayers face an effective marginal rate equal to the sum of their statutory rate and the credit phaseout rate.

A few tax benefits disappear immediately once a taxpayer reaches a certain income level rather than gradually phasing out over a range of income. Those “cliffs” can create very high effective marginal rates. For example, single taxpayers with income between $60,000 and $80,000 can deduct up to $2,000 of tuition from their income, but those with income above $80,000 cannot claim the deduction at all. Someone who earned an additional $1,000 that pushed income over that threshold would lose $2,000 in deductions, causing taxable income to rise by $3,000. The taxpayer would face an effective marginal rate three times his or her statutory rate: for instance, a taxpayer in the 25 percent bracket would face an effective marginal rate of 75 percent.

[170] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 2: “Tax liability depends on the filing status of the taxpayer. There are four main filing categories: married filing jointly, married filing separately, head of household, and single individual. The computation of a taxpayer’s tax liability depends on their filing status….”

[171] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 6–8:

To determine regular tax liability, a taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, with the marginal tax rate increasing as a taxpayer’s income increases.25 Separate rate schedules apply based on an individual’s filing status. For 2020, the regular individual income tax rate schedules are as follows:

Table 1.–Federal Individual Income Tax Rates for 2020 …

NOTE: The following information is derived from Table 1:

Single Individuals

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$9,875

10%

–

$9,875

$40,125

12%

$30,250

$40,125

$85,525

22%

$45,400

$85,525

$163,300

24%

$77,775

$163,300

$207,350

32%

$44,050

$207,350

$518,400

35%

$311,050

$518,400

infinity

37%

infinity

Heads of Households

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$14,100

10%

–

$14,100

$53,700

12%

$39,600

$53,700

$85,500

22%

$31,800

$85,500

$163,300

24%

$77,800

$163,300

$207,350

32%

$44,050

$207,350

$518,400

35%

$311,050

$518,400

infinity

37%

infinity

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$19,750

10%

–

$19,750

$80,250

12%

$60,500

$80,250

$171,050

22%

$90,800

$171,050

$326,600

24%

$155,500

$326,600

$414,700

32%

$88,100

$414,700

$622,050

35%

$207,350

$622,050

infinity

37%

Infinity

Married Individuals Filing Separate Returns

Taxable Income

Rate

Differential From Previous Upper Threshold

Lower Threshold

Upper Threshold

$0

$9,875

10%

–

$9,875

$40,125

12%

$30,250

$40,125

$85,525

22%

$45,400

$85,525

$163,300

24%

$77,775

$163,300

$207,350

32%

$44,050

$207,350

$311,025

35%

$103,675

$311,025

infinity

37%

infinity

[172] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 2: “A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit.”

[173] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

Credits Against Tax

An individual may reduce his or her tax liability by any available tax credits. For example, tax credits are allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain energy conservation expenditures, certain education expenditures, certain child care expenditures, certain health care costs, and for certain elderly or disabled individuals.

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. Three large refundable credits in terms of cost are the child tax credit, the earned income tax credit, and the recovery rebate credit.34 An individual may claim a tax credit for each qualifying child under age 17. The amount of the credit per child is $2,000.35

The aggregate amount of child credits that may be claimed is phased out for individuals with incomes over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000, or fraction thereof, of modified AGI [adjusted gross income] over $400,000 for married individuals filing jointly and $200,000 for all other individuals. To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of $2,500,36 not to exceed $1,400 per child in 2020. The maximum amount of the refundable portion of the credit is indexed for inflation.

For taxpayers with dependents other than qualifying children, such as a 17-year-old child living at home, a full-time college student, or other adult member of the household for whom the taxpayer provides financial support, taxpayers are able to claim a $500 nonrefundable credit. A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37

The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children. For 2020, the maximum EITC for taxpayers is $6,660 with more than two qualifying children, $5,920 with two qualifying children, $3,584 with one qualifying child, and $538 with no qualifying children. The credit amount begins to phase out at an income level of $25,220 for joint-filers with qualifying children, $19,330 for other taxpayers with qualifying children, $14,680 for joint-filers with no qualifying children, and $8,790 for other taxpayers with no qualifying children. The phaseout percentages, or the rates at which the credit amount phases out, are 21.06 percent for taxpayers with two or more qualifying children, 15.98 percent for taxpayers with one qualifying child, and 7.65 percent for taxpayers with no qualifying children. For 2020, a refundable and advanceable recovery rebate credit is available to taxpayers.38 Taxpayers may claim a credit of $1,200 ($2,400 for married individuals filing jointly) plus $500 for each qualifying child.39 This aggregate amount is phased out for individuals with incomes over certain threshold amounts. Specifically, the otherwise allowable amount is reduced by five percent of the amount by which the taxpayer’s AGI exceeds $150,000 for married individuals filing jointly, $112,500 for heads of households, and $75,000 for all other individuals.

36 Families with three or more children may determine the additional child tax credit by taking the greater of (1) the earned income formula, or (2) the alternative formula, i.e. the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income tax credit.

[174] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 1: “For taxpayers with high levels of AGI [adjusted gross income], the personal and dependent exemptions are phased out.”

Page 5: “Itemized deductions are also phased out as income exceeds a certain threshold.”

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government. … Many [tax] credits are phased out as income rises and thus do not benefit higher income individuals.”

Page 8: “The basic exemptions [for alternative minimum tax] are phased out for taxpayers with high levels of AMT income.”

[175] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 135: “Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer.”

[176] “Individual Income Tax Returns Complete Report, 2018.” Internal Revenue Service, September 2020. <www.irs.gov>

Page 24: “In total, taxpayers claimed $109.4 billion in refundable tax credits. … The refundable amount of the additional child tax credit ($34.2 billion), along with the EIC [earned income credit] ($56.2 billion), made up nearly all (95.5 percent) of this refundable portion.”

Page 25:

Item

2018

Amount (millions)

Total refundable credits3,4

$109,439

Earned income credit, total

$64,924

American opportunity credit, total

$6,394

Additional child tax credit, total

$36,235

[3] Includes net premium tax credit, regulated investment company credit, health coverage tax credit, and prior-year returns claiming the refundable prior-year minimum tax credit.

[177] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 6: “Tax liability … Lower rates apply for long-term capital gain and certain dividends; those rates apply for both the regular tax and the alternative minimum tax.”

[178] Report: “Statistics of Income Bulletin.” Internal Revenue Service, Fall 1984. <www.irs.gov>

Page 3: “Today’s estate tax was instituted by the Revenue Act of 1916, 3 years after the inception of the modern income tax in 1913. No 1onger necessary strictly for wartime revenue, the estate tax was to serve the dual purposes of producing revenue and redistributing wealth.”

[179] Report: “Federal Individual Income Tax Rates History: Nominal Dollars, Income Years 1913–2013.” Tax Foundation. Accessed October 30, 2018. <files.taxfoundation.org>

[180] Report: “Federal Individual Income Tax Rates History: Inflation Adjusted (Real 2012 Dollars) Using Average Annual CPI During Tax Year, Income Years 1913–2013.” Tax Foundation. Accessed October 30, 2018. <files.taxfoundation.org>

[181] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 7–8: “Table 1.–Federal Individual Income Tax Rates for 2020”

[182] Constructed with the dataset: “U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Tax Bracket Tax Rates and Tax Base for Regular Tax, Tax Years 1913–2019.” Tax Policy Center, August 2, 2019. <www.taxpolicycenter.org>

[183] Calculated with data from:

a) Dataset: “U.S. Individual Income Tax: Personal Exemptions and Lowest and Highest Tax Bracket Tax Rates and Tax Base for Regular Tax, Tax Years 1913–2019.” Tax Policy Center, August 2, 2019. <www.taxpolicycenter.org>

b) Dataset: “Table 3.4. Personal Current Tax Receipts.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised July 31, 2020. <apps.bea.gov>

c) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 30, 2020. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[184] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 20–23 (of PDF): “Table 12. State Individual Income Tax Rates, as of January 1, 2021.”

[185] Report: “Local Income Taxes in 2019.” By Jared Walczak. Tax Foundation, July 2019. <files.taxfoundation.org>

Page 2:

Although the majority of U.S. cities and counties do not impose a local income tax, they are imposed by 4,964 jurisdictions in 17 states. Ranging from de minimis wage taxes in some states to a statewide average of nearly 2.3 percent of adjusted gross income in Maryland (see Table 1), these taxes are a long-standing and significant source of revenue for many cities in Rust Belt states in the northeastern United States.

All counties in Indiana and Maryland impose a local income tax. In Ohio, 649 municipalities and 199 school districts have income taxes, while 2,506 municipalities and 472 school districts in Pennsylvania impose local income or wage taxes. (Three-quarters of all local income tax jurisdictions, though not three-quarters of the taxed population, are in those two states.) Many cities, counties, and school districts in Iowa, Kentucky, and Michigan also have these taxes, which are more sporadically levied in other states.

[186] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[187] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 29: “Social Insurance taxes comprise old-age and survivors insurance, disability insurance, hospital insurance, railroad retirement, railroad social security equivalent account, employment insurance, employee share of Federal employees retirement, and certain non-Federal employees retirement.”

[188] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy & Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

[189] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 2: “The principal social insurance (employment) taxes are the Federal Insurance Contributions Act (FICA) and Self-Employment Contributions Act (SECA) taxes that fund the Social Security and Medicare systems.”

[190] “Financial Report of the United States Government: Fiscal Year 2014.” U.S. Department of the Treasury, February 26, 2015. <www.fiscal.treasury.gov>

Page 165: “Social Insurance The social insurance programs consisting of Social Security, Medicare, Railroad Retirement, and Black Lung were developed to provide income security and health care coverage to citizens under specific circumstances as a responsibility of the Government.”

[191] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[192] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

Page 69: “Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.”

[193] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 23: “CBO [Congressional Budget Office] further assumed—as do most economists—that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share of payroll taxes in households’ before-tax income and in households’ taxes.”

[194] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 397:

The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. Hence, the statutory incidence of the tax is that half the tax falls on the employer and half falls on the employee. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax. Of course, the extent to which the employer can pass the tax on to the employee depends on the labor supply elasticity of the employee; that is, the willingness of the employee to accept a lower wage and supply the same, or nearly the same, quantity of labor. Recent evidence in Gruber (1997), based on the Chilean payroll tax, for example, suggests that workers bear most of the burden of any increase in the tax rate.

[195] “2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 33:

[U]nder these new laws, a combination of federal subsidies for individual insurance through the health benefit exchanges, penalties for being uninsured or not offering coverage, an excise tax on employer sponsored group health insurance cost, and anticipated competitive premiums from health benefit exchanges are expected to slow the rate of growth in the total cost of employer-sponsored group health insurance. Most of this cost reduction is assumed to result in an increase in the share of employee compensation that will be provided in wages that will be subject to the Social Security payroll tax.

NOTE: To summarize the above, because the cost of health insurance is part of employers’ cost of compensating employees, if the cost of health insurance is decreased, “most” of the cost savings will be redirected to other forms of employee compensation such as salary. This is because employee compensation is generally driven by laws of supply of demand (with the notable exception of minimum wage laws). Likewise, because employer payroll taxes are a direct outcome of employers paying employees, most of this cost is redirected from other forms of employee compensation.

[196] Webpage: “Current Law Distribution of Taxes.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). October 26, 2013. <www.taxpolicycenter.org>

“A key insight from economics is that taxes are not always borne by the individual or business that writes the check to the IRS. Sometimes taxes are shifted. For example, most economists believe that the employer portion of payroll taxes translate into lower wages and are thus ultimately borne by workers.”

[197] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 134:

Much of the progressivity of the federal tax system derives from the largest source of revenues, the individual income tax, for which average tax rates rise with income. The next largest source of revenues, social insurance taxes, has average tax rates that vary little across most income groups—although the average rate is lower for higher-income households, because earnings above a certain threshold are not subject to the Social Security payroll tax and because earnings are a smaller portion of total income for that group. The average social insurance tax rate is higher than the average individual income tax rate for all income quintiles except the highest one (see Figure 4-4). The impact of corporate taxes on households also rises with household income—with the largest effect by far on the top quintile (under the assumption that the corporate tax reduces after-tax returns on capital). By contrast, the average excise tax rate falls as income rises.

NOTE: For later data and more detail, see the table “Effective Federal Tax Burdens.”

[198] Calculated with data from the report: “The Budget and Economic Outlook: 2021 to 2031.” Congressional Budget Office, February 11, 2021. <www.cbo.gov>

Tab: “4. Payroll Tax Revenues Projected in CBO’s [Congressional Budget Office’s] February 2021 Baseline, by Source, Billions of Dollars” <www.cbo.gov>

“2020 … Social Security [=] 965 … Medicare [=] 292 … Unemployment Insurance [=] 43 … Railroad Retirement [=] 4 … Other Retirementa [=] 5 … Total [=] 1,310 … a Consists primarily of federal employees’ contributions to the Federal Employees Retirement System and the Civil Service Retirement System.”

CALCULATION: ($965 + $292 + $43) / $1,310 = 99.2%

[199] Report: “The Budget and Economic Outlook: 2019 to 2029.” Congressional Budget Office, January 2019. <www.cbo.gov>

Page 93:

The two largest sources of payroll taxes are those that are dedicated to Social Security and Medicare Part A [the Hospital Insurance program]. Much smaller amounts come from unemployment insurance taxes (most of which are imposed by states but produce amounts that are classified as federal revenues); employers’ and employees’ contributions to the Railroad Retirement system; and other contributions to federal retirement programs, mainly those made by federal employees (see Table 4-2). The premiums that Medicare enrollees pay for Part B (the Medical Insurance program) and Part D (prescription drug benefits) are voluntary payments and thus are not counted as tax revenues; rather, they are considered offsets to spending and appear on the spending side of the budget as offsetting receipts.

[200] Calculated with data from:

a) Dataset: “Table 3.6. Contributions for Government Social Insurance.” U. S. Department of Commerce, Bureau of Economic Analysis. Last revised July 31, 2020. <apps.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 30, 2020. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[201] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Social Security … 2019 [=] 914”

CALCULATION: $914 / $1,243 = 73.5%

[202] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

“The OASDI [Old-Age, Survivors, and Disability Insurance] tax rate for wages paid in 2021 is set by statute at 6.2 percent for employees and employers, each.”

[203] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. This amount is also commonly referred to as the taxable maximum. For earnings in 2021, this base is $142,800.

[204] Report: “Summary of Major Changes in the Social Security Cash Benefits Program: 1935–1996.” By Geoffrey Kollmann. Congressional Research Service. Updated December 20, 1996. <www.ssa.gov>

Pages 13–14: “1977 Amendments … After 1981, the base would be adjusted automatically to keep up with average wages as under the prior law.”

[205] Actuarial Note: “Average Wages for Indexing Under the Social Security Act and the Automatic Determinations for 1979–81.” By Eli N. Donkar. United States Social Security Administration, Office of the Chief Actuary, May 1981. <www.ssa.gov>

“The amended Act requires the use of an average wage for indexing described in various sections of the law as ‘the average of the total wages (as defined in regulations of the Secretary…).’ Such general language leaves a wide range of possibilities for a definition of such a wage series.”

[206] “The 1936 Government Pamphlet on Social Security.” United States Social Security Administration. <www.ssa.gov>

The taxes called for in this law will be paid both by your employer and by you. For the next 3 years you will pay maybe 15 cents a week, maybe 25 cents a week, maybe 30 cents or more, according to what you earn. That is to say, during the next 3 years, beginning January 1, 1937, you will pay 1 cent for every dollar you earn, and at the same time your employer will pay 1 cent for every dollar you earn, up to $3,000 a year. Twenty-six million other workers and their employers will be paying at the same time.

After the first 3 year—that is to say, beginning in 1940—you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

[207] Calculated with data from the footnote above and the webpage: “CPI Inflation Calculator.” United States Department of Labor, Bureau of Labor Statistics. Accessed November 2, 2020 at <www.bls.gov>

“3,000 in January 1949 has the same buying power as $32,246.38 in January 2020 …

The CPI inflation calculator uses the Consumer Price Index for All Urban Consumers (CPI-U) U.S. city average series for all items, not seasonally adjusted. This data represents changes in the prices of all goods and services purchased for consumption by urban households.

CALCULATION: 6% combined employer and employee payroll tax rate × $32,246 inflation-adjusted taxable maximum = $1,935

[208] Calculated with data from the footnote above and:

a) Webpage: “Social Security & Medicare Tax Rates.” United States Social Security Administration, Office of the Chief Actuary. Accessed November 2, 2020 at <www.ssa.gov>

“Tax rates as a percent of taxable earnings … 1990 and later … Rates for employees and employers, each … OASDI [Social Security] [=] 6.2%”

b) Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed November 2, 2020 at <www.ssa.gov>

“ Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. … Year [=] 2020 … Amount [=] $137,700”

CALCULATIONS:

  • $137,700 × 12.4% = $17,075
  • $17,075 / $1,935 = 8.8

[209] Booklet: “Medicare Coverage of Skilled Nursing Facility Care.” Centers for Medicare and Medicaid Services, January 2015. <www.medicare.gov>

Page 8:

Skilled care is health care given when you need skilled nursing or therapy staff to treat, manage, observe, and evaluate your care. Examples of SNF [Skilled Nursing Facility] care include intravenous injections and physical therapy. Care that can be given by non-professional staff isn’t considered skilled care. People don’t usually stay in a SNF until they’re completely recovered because Medicare only covers certain SNF care services that are needed daily on a short‑term basis (up to 100 days).

Page 29: “… Medicare doesn’t cover custodial care if it’s the only kind of care you need.”

Page 47: “Custodial care—Nonskilled personal care, like help with activities of daily living like bathing, dressing, eating, getting in or out of a bed or chair, moving around, and using the bathroom. It may also include the kind of health-related care that most people do themselves, like using eye drops. In most cases, Medicare doesn’t pay for custodial care.”

[210] Report: “Medicare Primer.” By Patricia A. Davis and others. Congressional Research Service. Updated May 21, 2020. <fas.org>

Page 1:

Medicare consists of four distinct parts:

• Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. The HI trust fund is mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers. Since 2013, workers with income of more than $200,000 per year for single tax filers (or more than $250,000 for joint tax filers) pay an additional 0.9% on income over those amounts.

• Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services. The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%).

• Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Parts A and B services, except hospice. Individuals choosing to enroll in Part C must also enroll in Part B. Part C is funded through the HI and SMI trust funds.

• Part D covers outpatient prescription drug benefits. Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments.

[211] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Medicare … 2019 [=] 278”

CALCULATION: $278 / $1,243 = 22.4%

[212] “2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2020. <www.cms.gov>

Pages 10–11:

For HI [Hospital Insurance, a.k.a. Medicare Part A], the primary source of financing is the payroll tax on covered earnings. Employers and employees each pay 1.45 percent of a worker’s wages, while self-employed workers pay 2.9 percent of their net earnings. Starting in 2013, high-income workers pay an additional 0.9-percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples). Other HI revenue sources include a portion of the Federal income taxes that Social Security recipients with incomes above certain unindexed thresholds pay on their benefits, as well as interest paid from the general fund on the U.S. Treasury securities held in the HI trust fund.

[213] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “Households generally bear the economic cost, or burden, of the taxes that they pay themselves, such as individual income taxes and employees’ share of payroll taxes. But households also bear the burden of the taxes paid by businesses. In the judgment of CBO [Congressional Budget Office] and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”

[214] Webpage: “Contribution and Benefit Base.” United States Social Security Administration, Office of the Chief Actuary. Accessed January 18, 2021 at <www.ssa.gov>

Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year. … This limit changes each year with changes in the national average wage index. …

For Medicare’s Hospital Insurance (HI) program, the taxable maximum was the same as that for the OASDI [Social Security] program for 1966–1990. Separate HI taxable maximums of $125,000, $130,200, and $135,000 were applicable in 1991–93, respectively. After 1993, there has been no limitation on HI-taxable earnings.

[215] Webpage: “History of SSA-Related [U.S. Social Security Administration] Legislation: 103rd Congress.” United States Social Security Administration. Accessed April 13, 2015 at <www.socialsecurity.gov>

“PL 103-66 The Omnibus Budget Reconciliation Act of 1993 (enacted 8/10/93). Section 13207 repeals the limitation on the amount of earnings subject to the HI [Medicare Hospital Insurance] tax beginning in 1994.”

[216] Calculated with data from:

a) Vote 406: “Omnibus Budget Reconciliation Act of 1993.” U.S. House of Representatives, August 5, 1993. <clerk.house.gov>

b) Vote 247: “Omnibus Budget Reconciliation Act of 1993.” U.S. Senate, August 6, 1993. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote†

Number

Portion

Number

Portion

Number

Portion

Republican

0

0%

219

100%

0

0%

Democrat

267

85%

47

15%

0

0%

Independent

1

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[217] “2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2020. <www.cms.gov>

Page 10: “Starting in 2013, high-income workers pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples).”

[218] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 24:

Additional Hospital Insurance Tax on Certain High-Income Individuals

The employee portion of the HI [hospital insurance] tax is increased by an additional tax of 0.9 percent on wages received in excess of a specific threshold amount.82 However, unlike the general 1.45 percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of married filing jointly, $125,000 in the case of married filing separately, and $200,000 in any other case (unmarried individual, head of household or surviving spouse).83 …

The same additional HI tax applies to the HI portion of SECA [Self-Employment Contributions Act] tax on self-employment income in excess of the threshold amount. Thus, an additional tax of 0.9 percent is imposed on every self-employed individual on self-employment income in excess of the applicable threshold amount.84

82 Sec. 3101(b), as amended by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.

83 These threshold amounts are not indexed for inflation.

84 Sec. 1402(b).

[219] Calculated with data from the report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 7: “Table 1-1. CBO’s Baseline Budget Projections, by Category … Actual, 2019 … In Billions of Dollars … Revenues … Payroll taxes [=] 1,243”

“Tab 4. Payroll Tax Revenues.” <www.cbo.gov>: “Billions of Dollars … Unemployment Insurance … 2019 [=] 41”

CALCULATION: $41 / $1,243 = 3.4%

[220] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 23:

In addition to FICA taxes [Federal Insurance Contribution Act, a.k.a. Social Security and Medicare payroll taxes], the Federal Unemployment Tax Act (“FUTA”) imposes tax on employers equal to six percent of the total wages of each employee (up to $7,000) on covered employment. Generally, employers are eligible for a Federal credit equal to 5.4 percent for State unemployment taxes paid by the employer, yielding a 0.6 percent effective tax rate. FUTA taxes are used to fund programs maintained by the States for the benefit of unemployed workers.

[221] Entry: “C Corporation.” Farlex Financial Dictionary, 2012. <financial-dictionary.thefreedictionary.com>

A business that is legally completely separate from its owners. Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits. The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation.

[222] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 23–24:

Forms of Business Organization

The Internal Revenue Code recognizes several different forms of business organization and their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.49

Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders’ liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as “C corporations.” As explained more fully above, in the report’s section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax. In contrast, corporations that qualify as “S corporations” are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax. …

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners’ contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships (“master limited partnerships”) are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax.

[223] Webpage: “Forming a Corporation.” Internal Revenue Service. Last updated December 23, 2020. <www.irs.gov>

“The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.”

[224] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 10:

Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view, it is misleading to compare the tax burden of a corporation with that of an individual.

[225] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “Corporate profits are taxed twice, once by the corporate income tax and once by the personal income tax. The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[226] Entry: “C Corporation.” Farlex Financial Dictionary, 2012. <financial-dictionary.thefreedictionary.com>

A business that is legally completely separate from its owners. Most publicly-traded companies (and all major ones) fall under this classification. For United States tax purposes, C corporations are required to pay income taxes on their profits. The advantage to a C corporate structure is the fact that, unlike S corporations, there is no limit to the number of shareholders. A disadvantage is the fact that, because a C corporation is taxed itself and its individual shareholders are taxed on dividends, it is subject to double taxation.

[227] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 23–24:

Forms of Business Organization

The Internal Revenue Code recognizes several different forms of business organization and their tax treatment varies. The principal forms are C corporations, S corporations, partnerships, and sole proprietorships.49

Apart from taxes, corporations are a legally defined form of business organization, with ownership stakes represented by shares that may or may not be publicly traded. Shareholders’ liabilities are limited to their stake in the corporation. The Internal Revenue Code normally subjects corporate profits to the corporate income tax under its subchapter C; corporations subject to income tax are thus often referred to as “C corporations.” As explained more fully above, in the report’s section on the corporate income tax, the part of C corporation income generated by equity investment is subject to two layers of tax: the corporate income tax and the individual income tax. In contrast, corporations that qualify as “S corporations” are not subject to the corporate income tax. Instead, their net profits are passed on a pro rata basis through to the individual shareholders who are taxed on the profits under the individual income tax. …

Taxes aside, partnerships are like corporations in that they have multiple owners. In contrast to corporations, some partnerships convey a liability for debts that is not limited to partners’ contributions to the enterprise. Partnerships are also less likely than corporations to be publicly traded, although some forms of partnerships (“master limited partnerships”) are. Like S corporations, partnerships are not subject to the corporate income tax; partners are subject to their share of partnership earnings under the individual income tax.

Limited liability companies (LLCs) have some of the characteristics of both partnerships and corporations. Under IRS “check the box” regulations, LLCs can elect to be taxed either as corporations or as partnerships. Other specially defined business entities include real estate investment trusts (REITs), which are required to engage primarily in passive investment in real estate and securities. Qualifying REITs are permitted to deduct dividends they pay to shareholders, which effectively exempts REITs from the corporate income tax. Regulated investment companies (RICs), who invest primarily in securities and distribute most income, are also permitted to deduct dividends. The simplest forms of business organization are sole proprietorships. Sole proprietorships have only one owner; there is no legal distinction between the business and the business’s owner. For tax purposes, business profits earned by a sole proprietor are taxed to the owner under the individual income tax. The corporate income tax does not apply.

49 For more information see CRS Report R40748, Business Organizational Choices: Taxation and Responses to Legislative Changes.

[228] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

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The preceding figures have showed the importance of the individual income tax and corporate income tax to the Federal tax system. However, it is important to recognize that not all businesses are organized as corporations and, consequently, the taxation of active business income occurs both for taxpayers that file Form 1120 (the corporate income tax return) and for taxpayer who file Form 1040 (the primary individual income tax return).

Businesses may be organized under a number of different legal forms. Owners of a business sometimes conduct their activities as sole proprietorships, which do not involve a legal entity separate from the owner. However, for a variety of business or other reasons, a business often is conducted through a separate legal entity. Common reasons to use a separate legal entity include the ability to pool the capital and other resources of multiple owners, the protection of limited liability accorded by State law to the owners of qualifying entities (but generally not to sole proprietors), and an improved ability to access capital markets for investment capital.

The tax consequences of using a separate entity depend on the type of entity through which the business is conducted. Partnerships, certain closely held corporations that elect to be taxed under subchapter S of the Code (referred to as “S corporations”),6 and limited liability companies that are treated as partnerships are treated for Federal income tax purposes as passthrough entities whose owners take into account the income (whether or not distributed) or loss of the entity on their own tax returns.

In contrast, the income of a C corporation7 is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation’s after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.8

6 To be eligible to make an election under subchapter S a corporation must generally (1) be an eligible domestic corporation; (2) not have more than 100 shareholders (taking into account applicable attribution rules); (3) have as shareholders only individuals (other than nonresident aliens), estates, certain trusts and certain tax-exempt organizations; and (4) have only one class of stock.

7 A C corporation is a corporation that is subject to subchapter C of the Code, which provides rules for corporate and shareholder treatment of corporate distributions and adjustments. C corporations generally are subject to the corporate-level tax rate structure set forth in section 11 of the Code.

8 Business entities also include specialized corporations which are not subject to entity level tax, or which are allowed a deduction for distributions to shareholders, under the Federal income tax rules. Federal tax rules applicable to these entities generally require that they distribute substantially all their income and require that they meet other specified limitations on activities, assets, and types of income, for example. These types of entities include regulated investment companies (RICs) (mutual funds in common parlance), real estate investment trusts (REITs), real estate mortgage investment conduits (REMICs), and cooperatives. In addition, some business activities are conducted through tax-exempt entities, whether as activities subject to unrelated business income tax (UBIT), or as permitted under the Federal tax rules relating to tax-exempt organizations.

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B. Overview of Business Entities Other Than Corporations

Significant business activity is conducted through entities other than corporations. Such business entities include passthrough entities such as partnerships (including limited liability companies (“LLCs”)) and S corporations. For Federal income tax purposes, these passthrough entities generally are not subject to tax at the entity level. Rather, the owners—that is, partners or S corporation shareholders—are subject to tax on their shares of the entity’s income, gain, loss, deduction, and credit, whether or not distributed.47 The tax treatment of passthrough entities differs from the generally applicable entity level tax on income of C corporations. In addition, noncorporate business income is generated by sole proprietorships and farms.48

Allowable deductions for businesses conducted in passthrough entity form are generally the same as allowable deductions for businesses conducted in corporate form. However, the calculation of these deductions is affected by the fact that they are taken into account for tax purposes by the partners or S corporation shareholders rather than by the partnership or S corporation at the entity level.

There are no limitations on the identity of a partner in a partnership under present law. Thus, a partner in a business conducted through a partnership (including an LLC taxable as a partnership) can generally be an individual, a corporation, or another partnership, for example. Permissible shareholders of S corporations are restricted to individuals (other than nonresident aliens), estates, certain trusts, and certain tax-exempt organizations, and may not exceed 100 in number (taking into account applicable attribution rules).

47 Partners and S corporation shareholders who are individuals generally report this income on Schedule E.

48 This income is generally reported by individuals on Schedules C and F.

[229] Report: “Corporate Tax Integration: In Brief.” By Jane G. Gravelle. Congressional Research Service, October 31, 2016. <fas.org>

Pages 1–2:

The United States has a “classical” corporate tax system, modified by lower taxes on dividends and capital gains. Corporate taxable profits are subject to a 35% rate for large corporations. Firms distribute after-tax profits as dividends or retain earnings for investment; the latter increases the firm’s value, creating capital gains.

If all profits were taxed at the statutory rate, distributed as a dividend, and then taxed at ordinary rates to a shareholder in the 35% bracket, the total tax on a corporate investment would be 58% (a 35% corporate tax and an additional 35% on the remaining 65% of profit) compared with a tax rate of 35% on noncorporate investment, for a 23 percentage point difference. Those effects, however, are smaller because of favorable treatment of dividends and capital gains (the top rate is 23.8%); options to invest stock through tax-exempt accounts, such as retirement plans, that pay no shareholder-level tax; and tax preferences that lower the effective corporate tax rate more than the effective noncorporate rate.

[230] Webpage: “Briefing Book: Key Elements of the U.S. Tax System.” Tax Policy Center (a joint project of the Urban Institute and Brookings Institution). Accessed January 18, 2020 at <www.taxpolicycenter.org>

Income earned by C-corporations (named after the relevant subchapter of the Internal Revenue Code) is subject to the corporate income tax at a 21 percent rate. This income may also be subject to a second layer of taxation at the individual shareholder level, whether on dividends or on capital gains from the sale of shares.

Suppose a corporation earns $1 million in profits this year and pays $210,000 in federal taxes. If the corporation distributes the remaining $790,000 to its shareholders as dividends, the distribution would be taxable to shareholders. Qualifying dividends are taxed at a top rate of 20 percent, plus a 3.8 percent tax on net investment income. As a result, if the shares were held by high-income individuals only $601,980 would be left, and the combined tax rate on the income would be 39.8 percent = 0.21 + (1–0.21) * 0.238. …

Choice of Organizational Form: Double taxation can encourage businesses to organize as pass-through businesses (S-corporations, partnerships, limited liability companies, or sole proprietorships) instead of C-corporations. Pass-through profits are taxed only once at a top rate of 37 percent (or 29.6 percent if eligible for the 20 percent Section 199A deduction). By no coincidence, the share of business activity represented by pass-through entities has been rising (figure 1). However, businesses that wish to list their shares for public trading generally need to organize as C-corporations.

[231] Report: “A Proposal to Reform the Taxation of Corporate Income .” By Eric Toder and Alan D. Viard. Tax Policy Center (a joint project of the Urban Institute and Brookings Institution), June 17, 2016. <www.taxpolicycenter.org>

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Many businesses do not pay corporate income tax. Instead, their income is allocated to owners and subject only to individual income tax (and, in some circumstances, self-employment tax). Owners of these “flow-through” businesses, which include partnerships and limited liability companies, subchapter S corporations, and many businesses organized as sole proprietorships, pay individual income tax on their business profits at rates of up to 39.6 percent. Although there are two separate flow-through tax regimes, one for partnerships (including limited liability companies taxed as partnerships) and another for S corporations, both regimes follow the same general principle of flowing the business’s income through to the owners.

In 2012, 95 percent of US business taxpayers were organized as flow-through businesses not subject to corporate income tax. Most were small businesses, but many were large and medium-sized businesses. In all, flow-through firms accounted for 39 percent of gross business receipts and 64 percent of net business income.

[232] Report: “Testimony Of The Staff Of The Joint Committee On Taxation Before The Joint Select Committee On Deficit Reduction.” U.S. Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

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To be eligible to make an election under subchapter S a corporation must generally (1) be an eligible domestic corporation; (2) not have more than 100 shareholders (taking into account applicable attribution rules); (3) have as shareholders only individuals (other than nonresident aliens), estates, certain trusts and certain tax-exempt organizations; and (4) have only one class of stock.

[233] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[234] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. <www.cbo.gov>

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.

[235] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear.”

[236] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Page 11:

CBO [Congressional Budget Office] allocates 75 percent of the corporate income tax to households in proportion to their share of capital income and 25 percent to households in proportion to their share of labor income. For more discussion of the incidence of the corporate income tax, see Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012)….

[237] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[238] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 23:

Researchers disagree about how to allocate corporate income taxes (and taxes on capital income generally). CBO’s approach is to allocate 75 percent of corporate income taxes to owners of capital in proportion to their income from interest, dividends, rents, and adjusted capital gains. That measure excludes some forms of capital income that are more difficult to measure, such as investment earnings in tax-preferred retirement accounts and unrealized capital gains.16 For the purposes of that allocation, CBO adjusts capital gains by scaling them to their long-term historical level given the size of the economy and the applicable tax rate; that method reduces the effects of large annual variations in the total amount of gains realized. CBO allocates the remaining 25 percent of corporate income taxes to workers in proportion to their income from labor.17

17 For a more detailed discussion about how CBO allocates corporate taxes, see Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (July 2012), <www.cbo.gov>.

[239] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. <www.fas.org>

Page 4: “The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital.”

b) Working paper: “International Burdens of the Corporate Income Tax.” By William C. Randolph. Congressional Budget Office, August, 2006. <www.cbo.gov>

Pages 51–52: “In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears –71 percent, and the excess burden equals about 4 percent of the revenue.”

[240] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 9–10:

The base of the corporate income tax is net income, or profits, as defined by the tax code. In general this is gross revenue less the cost of doing business. Deductible costs include materials, interest, and wage payments. Another important deductible cost is depreciation—an allowance for declines in the value of a firm’s tangible assets, such as machines, equipment, and structures.

In broad economic terms, the base of the corporate income tax is the return to equity capital. Wages are tax deductible, so labor’s contribution to corporate revenue is excluded from the corporate tax base. Income produced by corporate capital investment includes that produced by corporate investment of borrowed funds, and that produced by investment of equity, or funds provided by stockholders. Profits from debt-financed investment are paid out as interest, which is deductible. Thus, the return to debt capital is excluded from the corporate tax base. Equity investments are financed by retained earnings and the sale of stock. The income equity investment generates is paid out as dividends and the capital gains that accrue as stock increases in value. Neither form of income is generally deductible. Thus, the base of the corporate income tax is the return to equity capital.

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When a business purchases a tangible asset such as a machine or structure, it is not incurring a cost. Rather, the business is simply exchanging one asset—for example, cash—for another. The full purchase price of an asset is therefore usually not tax deductible in the year the asset is bought. Assets do, however, decline in value as they age or become outmoded. This decline in value (depreciation) is a cost. Because assets gradually depreciate until they are worthless, the tax code permits firms gradually to deduct the full acquisition cost of an asset over a number of years.

The tax code contains a set of rules that govern the rate at which depreciation deductions can be claimed. The rules determine the tax depreciation rate by specifying a recovery period and a depreciation method for different types of assets. An asset’s recovery period is the number of years over which deductions for the asset’s full cost must be spread. The applicable depreciation method determines how depreciation deductions are distributed among the different years of the recovery period. The slowest method is straight-line, in which equal deductions are taken each year. Declining balance methods, in which a fixed fraction of the cost less prior depreciation is deducted, cause larger shares to be taken in earlier years.

Because of the time value of money, a tax deduction of a given dollar amount is worth more to a business the sooner it can be claimed. Further, the sooner a tax deduction can be claimed, the sooner the tax savings it generates can be invested and earn a return. It follows that the tax rules governing when depreciation deductions can be claimed are quite important to businesses. If depreciation deductions can be claimed faster than an asset actually declines in value, a tax benefit exists; depreciation is said to be accelerated. If, on the other hand, depreciation deductions can be claimed more slowly than the corresponding asset actually depreciates, a tax penalty occurs. Only if depreciation deductions are claimed at the rate an asset actually depreciates do taxes confer neither a tax benefit nor a tax penalty.

[241] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 26–28:

III. OVERVIEW OF THE CORPORATE INCOME TAX

A. Structure of the Corporate Income Tax …

In General

Corporations organized under the laws of any of the 50 States (and the District of Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable income.29

The taxable income of a corporation generally is comprised of gross income less allowable deductions. Gross income generally is income derived from any source, including gross profit from the sale of goods and services to customers, rents, royalties, interest (other than interest from certain indebtedness issued by State and local governments), dividends, gains from the sale of business and investment assets, and other income.

Allowable deductions include ordinary and necessary business expenses, such as salaries, wages, contributions to profit-sharing and pension plans and other employee benefit programs, repairs, bad debts, taxes (other than Federal income taxes), contributions to charitable organizations (subject to an income limitation), advertising, interest expense, certain losses, selling expenses, and other expenses. Expenditures that produce benefits in future taxable years to a taxpayer’s business or income-producing activities (such as the purchase of plant and equipment) generally are capitalized and recovered over time through depreciation, amortization or depletion allowances. A net operating loss incurred in one taxable year typically may be carried back two years or carried forward 20 years and allowed as a deduction in another taxable year. Deductions are also allowed for certain amounts despite the lack of a direct expenditure by the taxpayer. For example, a deduction is allowed for all or a portion of the amount of dividends received by a corporation from another corporation (provided certain ownership requirements are satisfied). Moreover, a deduction is allowed for a portion of the amount of income attributable to certain manufacturing activities.

The Code also specifies certain expenses that typically may not be deducted, such as expenses associated with earning tax-exempt income,30 certain entertainment expenses, certain executive compensation in excess of $1,000,000 per year, a portion of the interest on certain high-yield debt obligations that resemble equity, and fines, penalties, bribes, kickbacks and illegal payments.

In contrast to the treatment of capital gains in the individual income tax, no separate rate structure exists for corporate capital gains. Thus, the maximum rate of tax on the net capital gains of a corporation is 35 percent. A corporation may not deduct the amount of capital losses in excess of capital gains for any taxable year. Disallowed capital losses may be carried back three years or carried forward five years. …

Alternative Minimum Tax

A corporation is subject to an alternative minimum tax which is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation’s regular income tax liability. The tax is imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of a $40,000 exemption amount.31 Credits that are allowed to offset a corporation’s regular tax liability generally are not allowed to offset its minimum tax liability. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax in future years.

Alternative minimum taxable income is the corporation’s taxable income increased by the corporation’s tax preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Among the preferences and adjustments applicable to the corporate alternative minimum tax are accelerated depreciation on certain property, certain expenses and allowances related to oil and gas and mining exploration and development, certain amortization expenses related to pollution control facilities, net operating losses and certain tax-exempt interest income. In addition, corporate alternative minimum taxable income is increased by 75 percent of the amount by which the corporation’s “adjusted current earnings” exceeds its alternative minimum taxable income (determined without regard to this adjustment). Adjusted current earnings generally are determined with reference to the rules that apply in determining a corporation’s earnings and profits.

A corporation with average annual gross receipts of not more than $7.5 million is exempt from the alternative minimum tax.

29 Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A foreign corporation generally is subject to the U.S. corporate income tax only on income with a sufficient nexus to the United States.

30 For example, the carrying costs of tax-exempt State and local obligations and the premiums on certain life insurance policies are not deductible.

31 The exemption amount is phased out for corporations with income above certain thresholds, and is completely phased out for corporations with alternative minimum taxable income of $310,000 or more.

[242] Report: “Overview of the Federal Tax System in 2020.” Congressional Research Service. Updated November 10, 2020. <fas.org>

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The corporate income tax is designed as a tax on corporate profits (also known as net income). Broadly defined, corporate profit is total income minus the cost associated with generating that income.52 Business expenses that may be deducted from income include employee compensation; the decline in value of machines, equipment, and structures (i.e., depreciation); general supplies and materials; advertising; and interest payments (subject to certain limitations).53 Businesses may also be allowed 100% first-year depreciation or to expense the costs of certain property.54 The corporate income tax also allows for a number of other special deductions, credits, and tax preferences that reduce taxes paid by corporations. Oftentimes, these provisions are intended to promote particular policy goals (promoting charitable giving or encouraging investment in renewable energy, for example). A corporation’s tax liability can be calculated as follows:

Taxes = [(Total Income – Deductible Expenses) × Tax Rate] – Tax Credits.

[243] Webpage: “Topic No. 704 Depreciation.” U.S. Internal Revenue Service. Updated January 25, 2021. <www.irs.gov>

You generally can’t deduct in one year the entire cost of property you acquired, produced, or improved and placed in service for use either in your trade or business or income-producing activity if the property is a capital expenditure. Instead, you generally must depreciate such property. Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost. …

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. … You may depreciate property that meets all the following requirements:

1. It must be property you own.

2. It must be used in a business or income-producing activity.

3. It must have a determinable useful life.

4. It must be expected to last more than one year.

5. It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

[244] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 29: “Marginal tax rates are the rates that taxpayers pay on the next dollar of income that is earned. Marginal tax rates can be presented as both marginal statutory rates and marginal effective rates.”

[245] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, 2005. <www.cbo.gov>

Page 1: “In general, the type of tax rate that most directly affects decisions about whether to engage in more of an activity is the effective marginal tax rate—the percentage of an additional dollar of income that will have to be paid in taxes.”

Page 2:

The effective marginal tax rate depends on features of tax law besides statutory rates. Most taxpayers’ effective marginal rate is the same as their statutory marginal rate. But in some cases, the two rates differ because of the phasing in or out of particular tax provisions. …

A person’s effective marginal tax rate influences many different decisions about working: whether to take on an overtime shift, bargain for wages or fringe benefits, get a second job, or enter the labor force at all.

[246] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Pages 73–74:

Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people’s incentive to save. However, because that higher marginal tax rate also decreases people’s return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO’s analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.

[247] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation, September 12, 2011. <www.jct.gov>

Pages 26–27:

The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers’ decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return.29 Other studies have argued that large behavioral responses to changes in the net return need not occur.30 Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results.31 Some find personal saving responds strongly to increases in the net return to saving,32 while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives,34 while others find little or no increase as retirement plan savings substitute for other saving.35 With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.

[248] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary. For businesses, pass-through entities experience a reduction in effective tax rates via a new deduction, which is also temporary. The statutory corporate tax rate is permanently reduced. Many deductions, credits, and other provisions for businesses are also modified. The act also substantively changes the international tax system, generally moving the U.S. tax system towards a territorial system.

Page 19: “P.L. 115-97 … Corporate taxable income is taxed at a flat rate of 21%. Special rules are provided for certain taxpayers, such as public utilities. (Section 13001 of P.L. 115-97)”

[249] Report: “Overview of the Federal Tax System in 2020.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 12: “The corporate income tax rate is a flat 21%.”

[250] Report: “2019 Instructions for Form 1120. U.S. Corporation Income Tax Return.” U.S. Department of the Treasury, Internal Revenue Service, January 31, 2020. <www.irs.gov>

Page 18: “Multiply taxable income (page 1, line 30) by 21%.”

[251] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[252] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[253] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[254] Paper: “Federal Regulation and Aggregate Economic Growth.” By John W. Dawson and John J. Seater. Journal of Economic Growth, January 2013. Pages 137–177. <link.springer.com>

Page 150: “The marginal corporate income tax is notoriously difficult to measure because almost-whimsical tax provisions that come and go over time, such as safe harbor leasing in the 1980s, have huge effects on the effective tax rate.”

[255] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[256] Entry: “capital gain.” Merriam-Webster’s Collegiate Dictionary, Encyclopædia Britannica Ultimate Reference Suite 2004.

“the increase in value of an asset (as stock or real estate) between the time it is bought and the time it is sold”

[257] Entry: “capital gain.” Collins English Dictionary. HarperCollins, 2003. <www.thefreedictionary.com>

“the amount by which the selling price of a financial asset exceeds its cost”

[258] Publication: “544: Sales and Other Dispositions of Assets, for Use in Preparing 2019 Returns.” Internal Revenue Service, March 4, 2020. <www.irs.gov>

Pages 20–21:

Capital gain or loss. Generally, you will have a capital gain or loss if you sell or exchange a capital asset. You also may have a capital gain if your section 1231 transactions result in a net gain. …

Capital Assets

Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. For exceptions, see Noncapital Assets, later.

The following items are examples of capital assets.

• Stocks and bonds.

• A home owned and occupied by you and your family.

• Household furnishings.

• A car used for pleasure or commuting.

• Coin or stamp collections.

• Gems and jewelry.

• Gold, silver, and other metals.

• Timber grown on your home property or investment property, even if you make casual sales of the timber.

Personal-use property. Generally, property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.

Investment property. Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. This treatment does not apply to property used for the production of income. See Business assets, later, under Noncapital Assets.

Release of restriction on land. Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset.

Noncapital Assets

A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets.

1. Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Inventories are discussed in Pub. 538, Accounting Periods and Methods. But, see the Tip below.

2. Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above.

3. Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Sales of this type of property are discussed in chapter 3.

4. Real property used in your trade or business or as rental property, even if the property is fully depreciated.

5. A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs):

a. Created by your personal efforts,

b. Prepared or produced for you (in the case of a letter, memorandum, or similar property), or

c. Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. …

6. U.S. Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price.

7. Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements.

a. It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer.

b. The instrument is clearly identified in the dealer’s records as meeting (a) by the end of the day on which it was acquired, originated, or entered into.

8. Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into.

9. Supplies of a type you regularly use or consume in the ordinary course of your trade or business.

[259] Entry: “dividend.” World Book Encyclopedia Dictionary, 2007 Deluxe Edition.

“money earned as profit by a company and divided among the owners or stockholders of the company”

[260] Entry: “dividend.” Collins English Dictionary. HarperCollins, 2003. <www.thefreedictionary.com>

“1. a. a distribution from the net profits of a company to its shareholders”

[261] Glossary: “Understanding Taxes Teacher Site.” Internal Revenue Service, 2015. <apps.irs.gov>

“interest income The income a person receives from certain bank accounts or from lending money to someone else.”

[262] Article: “Dividends, Double Taxation of.” By Joseph J. Cordes. Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Taxation that comes about in the U.S. tax system because corporate profits are taxed once by the corporate income tax and then again when these profits are distributed to shareholders.

Income that is earned by corporations in the United States is currently subject to two levels of tax. Corporate profits are subject to the corporate income tax. When these profits are distributed to the shareholders who own the corporations, these distributions are also included in the shareholders’ taxable income.

[263] Webpage: “Forming a Corporation.” Internal Revenue Service. Last updated December 23, 2020. <www.irs.gov>

“The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.”

[264] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 28:

A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation’s current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation. Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.

[265] Article: “Capital Gains Taxation.” By Gerald E. Auten (U.S. Treasury Department). Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

“In addition, the capital gains tax on corporate stock can be viewed as an aspect of the double taxation of corporate income that can raise both equity and efficiency concerns.”

[266] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 10:

Corporate equity profits are taxed twice, once at the corporate level and once under the individual income tax when they are received by stockholders as dividends or capital gains. … Further, corporations are not persons who can bear the burden of taxes, but merely legal entities through which individuals earn income. From this point of view, it is misleading to compare the tax burden of a corporation with that of an individual.

[267] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 8:

[T]he income of a C corporation7 is taxed directly at the corporate level. Shareholders are taxed on dividend distributions of the corporation’s after-tax income. Shareholders are also taxed on any gain (including gain attributable to undistributed corporate income) on the disposition of their shares of stock of the corporation. Thus, the income of a C corporation may be subject to tax at both the corporate and shareholder levels.

[268] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 3–6: “A. Individual Income Tax … Lower rates apply for long-term capital gains and certain dividends; those rates apply for both the regular tax and the alternative minimum tax.”

Pages 8–9:

Preferential Rates on Capital Gain and Dividends

In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income. Any net capital gain of an individual is taxed at maximum rates lower than the rates applicable to ordinary income. Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated as long-term if the asset is held for more than one year. Qualified dividend income is generally taxed at the same rate as net capital gain.

[269] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 10: “Any net capital gain of an individual generally is taxed at rates lower than rates applicable to ordinary income.”

[270] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 3: “Long-term capital gains—that is, gain on the sale of assets held more than 12 months—and qualified dividend income are taxed at lower tax rates. Net investment income is also subject to an additional tax for taxpayers above certain income thresholds.”

Page 5:

Tax Rates

As was noted above, income earned from long-term capital gains and dividends is taxed at lower rates. The maximum rate on long-term capital gains and dividends is 20%. This 20% rate applies to taxpayers in the 39.6% bracket (single filers with taxable income above $406,750; married filers with taxable income above $432,200). Taxpayers in the 25%, 28%, 33%, and 35% tax brackets face a 15% tax rate on long-term capital gains and dividends. The tax rate on capital gains and dividends is 0% for taxpayers in the 10% and 15% tax brackets.

Page 19:

Capital Gains

Under current income tax law, a capital gain or loss can result from the sale or exchange of a capital asset. If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Under current law, capital assets held for more than 12 months are considered long-term assets, while assets held 12 months or less are considered short-term assets. … Capital gains on short-term assets are taxed at regular income tax rates.

[271] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 28:

Treatment of Corporate Distributions

The taxation of a corporation generally is separate and distinct from the taxation of its shareholders. A distribution by a corporation to one of its shareholders generally is taxable as a dividend to the shareholder to the extent of the corporation’s current or accumulated earnings and profits, and such a distribution is not a deductible expense of the corporation.32 Thus, the amount of a corporate dividend generally is taxed twice: once when the income is earned by the corporation and again when the dividend is distributed to the shareholder.33 Although subject to a second tax when distributed, shareholders in a corporation may benefit from deferral of this tax on undistributed corporate income (e.g., corporate income reinvested in the business). …

32 A distribution in excess of the earnings and profits of a corporation generally is a tax-free return of capital to the shareholder to the extent of the shareholder’s adjusted basis (generally, cost) in the stock of the corporation; such distribution is a capital gain if in excess of basis. A distribution of property other than cash generally is treated as a taxable sale of such property by the corporation and is taken into account by the shareholder at the property’s fair market value. A distribution of common stock of the corporation generally is not a taxable event to either the corporation or the shareholder.

33 This double taxation is mitigated by a reduced maximum tax rate of 15 percent generally applicable to dividend income of individuals (prior to 2013). Note that amounts paid as interest to the debtholders of a corporation generally are subject to only one level of tax (at the recipient level) because the corporation generally is allowed a deduction for the amount of interest expense paid or accrued.

[272] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 8–10:

Preferential Rates on Capital Gains and Dividends …

The maximum rate of tax on the adjusted net capital gain of an individual depends on the individual’s taxable income and filing status. Theses maximum rates apply for purposes of both the regular tax and the alternative minimum tax. For 2020, the adjusted net capital gains rate schedules are as follows:

Table 2.─Adjusted Net Capital Gain Maximum Rates for 2020

Filing Status and Rate Start Amount (Taxable Income)

Rate

Married Individuals Filing Joint Returns and Surviving Spouses

Heads of Households

Single Individuals

Married Individuals Filing Separate Returns

Estates and Trust

$0

$0

$0

$0

$0

0%

$80,000

$53,600

$40,000

$40,000

$2,650

15%

$496,600

$469,050

$441,450

$248,300

$13,150

20%

Net Investment Income

An additional tax is imposed on net investment income in the case of an individual, estate, or trust.29 In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income30 over the threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.31 Thus, for taxpayers with modified adjusted gross income in excess of those thresholds, the rate on certain capital gains and dividends is 23.8 percent while the maximum rate on other investment income, including interest, annuities, royalties, and rents, is 40.8 percent.

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property (with certain exclusions33), over (2) deductions properly allocable to such gross income or net gain.

29 Sec. 1411.

30 Modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under section 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income).

31 These thresholds are not indexed for inflation.

Pages 7–8: “Table 1.–Federal Individual Income Tax Rates for 2020”

NOTE: The following information is derived from Table 1:

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Taxable Income

Lower Threshold

Taxable Income

Lower Threshold

Lower Threshold

Lower Threshold

$0

$0

$0

$0

$19,750

$19,750

$19,750

$19,750

$80,250

$80,250

$80,250

$80,250

$171,050

$171,050

$171,050

$171,050

$326,600

$326,600

$326,600

$326,600

$414,700

$414,700

$414,700

$414,700

$622,050

$622,050

$622,050

$622,050

[273] Publication: “550: Investment Income and Expenses (Including Capital Gains and Losses), for Use in Preparing 2019 Returns.” Internal Revenue Service, April 3, 2020. <www.irs.gov>

Pages 67–68:

Table 4-4. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from …

THEN your maximum capital gain rate is …

collectibles gain

28%

eligible gain on qualified small business stock minus the section 1202 exclusion

28%

unrecaptured section 1250 gain

25%

other gain1 and the regular tax rate that would apply is 37%

20%

other gain1 and the regular tax rate that would apply is 22%, 24%, 32%, or 35%

15%

other gain1 and the regular tax rate that would apply is 10% or 12%

0%

1 “Other gain” means any gain that is not collectibles gain, gain on small business stock, or unrecaptured section 1250 gain.

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

For 2019, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. See Table 4-4 for details. …

 28% rate gain. This gain includes gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock minus the section 1202 exclusion.

Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.

Collectibles gain includes gain from the sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles.

Gain on qualified small business stock. If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. The eligible gain minus your section 1202 exclusion is a 28% rate gain. …

Unrecaptured section 1250 gain. Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544.

[274] Publication: “550: Investment Income and Expenses (Including Capital Gains and Losses), For Use in Preparing 2019 Returns.” Internal Revenue Service, April 3, 2020. <www.irs.gov>

Page 5:

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest. Certain distributions commonly called dividends are actually interest. You must report as interest so-called “dividends” on deposits or on share accounts in:

• Cooperative banks,

• Credit unions,

• Domestic building and loan associations,

• Domestic savings and loan associations,

• Federal savings and loan associations, and

• Mutual savings banks.

The “dividends” will be shown as interest income on Form 1099-INT.

Money market funds. Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.

Certificates of deposit and other deferred interest accounts. If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Interest subject to penalty for early withdrawal. If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings, later, for more information on how to report the interest and deduct the penalty.

Money borrowed to invest in certificate of deposit. The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3.

[275] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 3: “Taxable interest income is added to a taxpayer’s AGI [adjusted gross income] and taxed according to the taxpayer’s marginal tax rate. Interest that is earned on tax-exempt securities, such as those issued by state and local governments, is not subject to taxation.”

[276] Webpage: “Find Out if Net Investment Income Tax Applies to You.” Internal Revenue Service. Last updated June 11, 2020. <www.irs.gov>

If an individual has income from investments, the individual may be subject to net investment income tax. Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status. 

The statutory threshold amounts are:

• Married filing jointly—$250,000,

• Married filing separately—$125,000,

• Single or head of household—$200,000, or

• Qualifying widow(er) with a child—$250,000.

[277] “2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2019. <www.cms.gov>

Page 21: “The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 pay an additional Medicare contribution of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds.”

[278] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 9–10:

Net Investment Income

An additional tax is imposed on net investment income in the case of an individual, estate, or trust.29 In the case of an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income30 over the threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.31 Thus, for taxpayers with modified adjusted gross income in excess of those thresholds, the rate on certain capital gains and dividends is 23.8 percent while the maximum rate on other investment income, including interest, annuities, royalties, and rents, is 40.8 percent

Net investment income is the excess of (1) the sum of (a) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business that is not a passive activity with respect to the taxpayer or a trade or business of trading in financial instruments or commodities, and (b) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property (with certain exclusions33), over (2) deductions properly allocable to such gross income or net gain.

29 Sec. 1411.

30 Modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under section 911(a)(1) (net of the deductions and exclusions disallowed with respect to the foreign earned income).

26 These thresholds are not indexed for inflation.

[279] Article: “Capital Gains Taxation.” By Gerald E. Auten (U.S. Treasury Department). NTA Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Economic Issues in Capital Gains Taxation

Inflation

Taxing nominal gains raises the effective tax rate on real capital gains and can impose a tax in cases of real economic losses. Several studies have shown that a large percentage of reported capital gains reflect the effects of inflation, and that capital gains of lower- and middle-income taxpayers commonly represent not only nominal gains but real economic losses. Indexing the cost or basis of assets for changes in the price level has frequently been proposed to correct for inflation.

[280] Statement of U.S. Senator Connie Mack (Republican, Florida). Congressional Record, May 6, 1999. <www.gpo.gov>

Page S4830: “Indexing capital gains for inflation will end the Government’s unfair practice of taxing people on phantom gains due to inflation.”

[281] Book: Quantitative Investing for the Global Markets: Strategies, Tactics, and Advanced Analytical Techniques. Edited by Peter Carman. Fitzroy Dearborn Publishers, 1997.

Pages 25–26: “World stock and bond markets can be expected to continue to grow, although not at the explosive pace of the past few decades. Some of the past growth has been due to rises in nominal asset prices that merely compensate for inflation; such rises are likely to be at lower rates in the future. But we should be concerned not with nominal quantities but with real ones.”

[282] Report: “Effects of Federal Tax Policy on Agriculture.” By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. <www.ers.usda.gov>

Pages 37–38:

Land Prices and Ownership of Capital Assets

Farmland is a key asset because the supply of land available is relatively more limited than other farm assets. Low land prices facilitate entry into farming while high land prices make entry difficult. If a prospective farmer is unable to buy land or to arrange a rental agreement with a landlord, there is no way to enter land-based farming. Farmland historically has been a good tax investment during inflationary periods and has, therefore, been attractive to both farm and nonfarm investors. Its value as an inflationary hedge comes both from the deductibility of nominal interest payments on loans and the appreciation of land values on a tax-deferred basis.

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. If the real rate of return is low relative to inflation, then most of the nominal capital gain is due to inflation and the effective tax rate on the real return could exceed 100 percent.8 …

8 For example, after a 1-year period with 3-percent inflation and a 4-percent nominal capital gain, a 25-percent capital gains tax yields a 100-percent effective tax on the real return.

[283] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 8: “In general, gain or loss reflected in the value of an asset is not recognized for income tax purposes until a taxpayer disposes of the asset. On the sale or exchange of a capital asset, any gain generally is included in income.”

[284] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 21–22:

One perplexing problem associated with taxing income involves the issue of tax deferral. Ideally, a tax levied on income should be assessed when the income accrues to the taxpayer. However, as a result of many factors, taxes are often deferred into the future. This can happen when income is taxed when it is realized, rather than when it accrues or when there is a mismatch between when income is earned and the expenses associated with earning that income. Since money has a time value (a dollar today is more valuable than a dollar in the future), tax deferral effectively lowers the tax rate on the income in question.

Income from capital gains can be used to illustrate the benefits of tax deferral. For capital gains, the tax is assessed when the gain is realized rather than as it accrues. If a capital asset is acquired for $100 and appreciates at a rate of 10% per annum, by the end of the first year it has appreciated in value to $110 and by the end of the second year it is worth $121. Assuming a marginal tax rate of 15%, if the gain were realized at the end of the second year, then a tax of $3.15 ($21 times 15%) would be levied on the realized appreciation. The after-tax return would be $17.85.

In contrast is the case of a $100 investment in an interest-bearing account earning a 10% rate of return with no deferral. At the end of the first year, the account would yield $10 in interest. Tax on the interest, assuming a 15% marginal income tax rate, would be $1.50, leaving $108.50 in the account. By the end of the second year, the account would yield $10.85 in interest. Tax on the second year’s interest would be $1.63, leaving $117.72 in the account, for an after-tax return over the two-year period of $17.72.

It is apparent from the examples above that the investment in the asset yielding capital gains income earns a higher after-tax return than the comparable investment in an interest-bearing account. In essence, the reason for this result is simply that, for the asset producing a capital gain, the tax on the appreciation in the first year was deferred, with the deferred tax remaining in the account and earning interest.

[285] Report: “Effects of Federal Tax Policy on Agriculture.” By Ron Durst and James Monke. U.S. Department of Agriculture, Economic Research Service, Food and Rural Economics Division. April 2001. <www.ers.usda.gov>

Page 38:

Capital gains taxes are levied on nominal returns. Taxing both real and inflationary gains makes the effective tax rate on the real return (the capital gains tax divided by the real capital gain) nearly always greater than the marginal tax rate. … Longer holding periods help reduce the effective tax rate by compounding the real rate of return, but effective tax rates often remain high relative to the marginal tax rate. Although inflation also increases effective tax rates on interest and dividends, the effect on capital gains is often perceived to be greater because of the magnitude of capital sales and the proportion of the sale price that gains represent after long holding periods.

Effective tax rates always exceed the taxpayer’s marginal bracket in an inflationary environment unless part of the nominal gain is excluded from taxation. If part of the gain is excluded, then the effective rate may drop below the taxpayer’s marginal rate under certain combinations of holding periods and real rates of return. Since lowering capital gains tax rates below ordinary tax rates is effectively similar to providing an exclusion, current law helps to reduce the effect of taxing inflationary gains. For example, using a hypothetical 30-year holding period with 2-percent annual real capital appreciation, 4-percent inflation, and tax law from 1996, an individual in the 28-percent ordinary tax bracket faced effective capital gains tax rates on real returns of 52 percent. Under current law with the 20- percent capital gains tax rate (an effective exclusion of 29 percent), the effective tax rate in the scenario drops to 37 percent. Under pre-1986 tax law with the 60-percent exclusion, the scenario would result in a 21-percent effective tax rate on the real return.

Tax timing issues also benefit the investor who borrows. Deductible interest expenses reduce tax liability during the current year, while capital gains taxes are deferred until the asset is sold. Deferring capital gains taxes slightly increases the implicit after-tax rate of return. This increases with longer holding periods and can be especially important for those who intend to hold assets indefinitely.

Before the current policy of a maximum tax rate on capital gains, deferring capital gains until an asset was sold could create problems at the time of sale because unusually large gains may have pushed the taxpayer into a higher marginal tax bracket. In such cases, the potential for higher taxes may have been reduced somewhat by making land sales on the installment method or by selling the land in smaller parcels over time.

[286] Report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office (CBO), January 28, 2020. <www.cbo.gov>

Supplementary dataset: “Revenue Projections, by Category—January 2020.” <www.cbo.gov>

Tab: “6. Actual and Projected Capital Gains Realizations and Tax Receipts in CBO’s [Congressional Budget Office’s] January 2020 Baseline … Capital Gains Tax Receiptsb … Percentage of individual income tax receipts … 2019 [=] 11.2 … b Fiscal year basis. This measure is CBO’s estimate of when tax liabilities resulting from capital gains realizations are paid to the Treasury.”

[287] Calculated with data from the report: “An Update to the Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, September 2, 2020. <www.cbo.gov>

Supplementary dataset: “Revenue Projections, by Category—September 2020” <www.cbo.gov>

Tab “3. Detailed Individual Income Tax Projections in CBO’s [Congressional Budget Office’s] September 2020 Baseline … Billions of Dollars … Calculation of Adjusted Gross Income … 2020 … Taxable interest and ordinary dividends (excludes qualified dividends) [=] 205 … Qualified dividends [=] 235 … Capital gain or lossa [=] 819 … Total income [=] 12,567”

CALCULATIONS:

  • $819 capital gains / $12,567 total = 6.5%
  • ($235 qualified dividends + $205 interest and ordinary dividends) / $12,567 total = 3.5%

[288] Report: “Fiscal Fact No. 693: State Individual Income Tax Rates and Brackets for 2020.” By Katherine Loughead. Tax Foundation, February 2020. <files.taxfoundation.org>

Page 5: “Top State Marginal Individual Income Tax Rates, 2020 … CA 13.30% … HI 11.00% … NJ 10.75% … NJ** 5.00% … TN** 1.00% … WA 0% … NV 0% … WY 0% … SD 0% … TX 0% … FL 0% … Local income taxes are not included. … ** State only taxes interest and dividends income.”

[289] Tax Policy Center Briefing Book. Urban-Brookings Tax Policy Center. Updated May 2020. <www.taxpolicycenter.org>

Pages 618–619 (of PDF):

Five states and the District of Columbia treat capital gains and losses the same as under federal law. They tax all realized capital gains, allow a deduction of up to $3,000 for net capital losses, and permit taxpayers to carry over unused capital losses to subsequent years.

Other states provide exemptions and deductions that go beyond the federal rules. New Hampshire fully exempts capital gains, and Tennessee taxes only capital gains from the sale of mutual fund shares. Arizona exempts 25 percent of long-term capital gains, and New Mexico exempts 50 percent. Massachusetts has its own system for taxing capital gains, while Hawaii has an alternative capital gains tax. Pennsylvania and Alabama only allow losses to be deducted in the year that they are incurred, while New Jersey does not allow losses to be deducted from ordinary income.

The remaining states that tax income generally follow the federal treatment of capital gains, except for various state-specific exclusions and deductions.

Most states tax capital gains at the same rate as ordinary income, while the federal government provides a preferential rate.

[290] Report: “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 2:

Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the “Budget Act”) as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”4 Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. …

4 Congressional Budget and Impoundment Control Act of 1974 (Pub. L. No. 93-344), sec. 3(3). The Budget Act requires CBO [Congressional Budget Office] and the Treasury to publish detailed lists of tax expenditures annually. The Joint Committee staff issued reports prior to the statutory obligation placed on the CBO and continued to do so thereafter. In light of this precedent and a subsequent statutory requirement that the CBO rely exclusively on Joint Committee staff estimates when considering the revenue effects of proposed legislation, the CBO has always relied on the Joint Committee staff for the production of its annual tax expenditure publication. See Pub. L. No. 99-177, sec. 273, codified at 2 USC 601(f).

[291] Report: “Analytical Perspectives, Budget of the United States Government, Fiscal Year 2015.” White House Office of Management and Budget, 2014. <www.govinfo.gov>

Page 162: “Reduce the value of certain tax expenditures.—The Administration proposes to limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent.”

[292] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

The best place to begin is the list of tax preferences that the Treasury Department compiles each year for the president’s budget. This year, that list identifies more than 170 distinct preferences in the individual and corporate income taxes. These preferences fall into five categories.

First, credits reduce a taxpayer’s liability dollar for dollar. If a taxpayer’s total liability is low enough, and a credit is refundable, it can even result in a direct payment from the government to the taxpayer. …

Second, deductions reduce the amount of income subject to tax. …

Third, deferrals allow taxpayers to postpone the date at which income gets taxed. …

Fourth, exclusions and exemptions allow certain types of income to avoid taxation entirely. …

Finally, preferential rates tax certain types of income at lower levels. …

The estimated revenue losses from these five kinds of preferences total more than $1 trillion annually, almost as much as we collect from individual and corporate income taxes combined, and almost as much as we spend on discretionary programs.

[293] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark. The Treasury, for instance, uses a comprehensive, progressive income tax as its benchmark, with a few adjustments to reflect the practical realities of administering the tax system. Other analysts believe a broad-based consumption tax would be a better benchmark. …

Although this disagreement reflects a fundamental debate about tax policy, it does not undermine the basic fact that tax preferences are enormous. Indeed, most provisions that are preferences relative to an income-tax-based system are also preferences relative to a system built around a consumption tax.

[294] Report: “Estimates of Federal Tax Expenditures.” Joint Committee on Taxation, March 14, 1978. <www.jct.gov>

Page 2: “Estimates of tax expenditures are difficult to determine and are subject to important limitations.”

[295] “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 6: “One of the most difficult issues in defining tax expenditures for business income relates to the tax treatment of capital costs. Under present law, capital costs may be recovered under a variety of alternative methods, depending upon the nature of the costs and the status of the taxpayer.”

Page 13: “The Joint Committee staff and Treasury lists of tax expenditures differ in at least six respects.”

[296] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Pages 7–8:

Unfortunately, it is not always straightforward to decide which provisions should be classified as spending substitutes and which are fundamental tax policy choices. We provide a few clear examples, while noting that it is sometimes hard to distinguish the two categories.

Clear Spending Substitutes. Clear spending substitutes are those tax expenditures that encourage selected activities or aid specific groups of taxpayers and could be replaced by similar programs delivered as direct outlays. Examples are renewable energy credits, the home mortgage interest deduction, the exclusion from tax of employer-provided health insurance and health benefits, and tuition tax credits. All these provisions subsidize identifiable activities (renewable energy, housing investment, health insurance, and college tuition), try to promote definable social goals (reduced greenhouse gas emissions, increased homeownership, broader health insurance coverage, and increased college attendance), and could be designed as outlays administered by program agencies (e.g., the Departments of Energy, Housing and Urban Development, Health and Human Services, and Education).

[297] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 37:

As noted above, one of the largest individual tax expenditure provisions is the deductibility of home mortgage interest expense by individuals. What does it mean to eliminate this tax expenditure? As of what date would mortgage interest no longer be deductible? Would the repeal apply to all existing mortgages or only to mortgages undertaken after the effective date? Either choice could be said to substantially eliminate the tax expenditure. These decisions will affect taxpayer’s behavior regarding owning versus renting, the size of a home that they may choose to purchase, as well as the amount of debt they undertake and the choice of assets that they may retain in their portfolios. These decisions will affect the magnitude of revenues that redound to the Federal Treasury from the elimination of the tax expenditure and, as discussed below, these revenues will generally be less than the value of the estimated tax expenditure.

[298] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 59–60:

The general business credit is the sum of various business credits determined under the [tax] Code. The component credits of the general business credit are listed below.

Table A-16.−Components of the General Business Credit for 2011* …

Energy credit (sec. 48) Credit for investing in certain solar, geothermal, fuel cell, and other energy property …

Advanced energy project credit (sec. 48C) Credit for investing in facilities that manufacture certain renewable power or other advanced energy equipment or products …

Renewable electricity production credit (sec. 45) Credit for producing power from wind, biomass, and other renewable resources …

Biodiesel fuels credit (sec. 40A) Credit for producing biodiesel …

Alternative fuel refueling property credit (sec. 30C) Credit for installing certain biofuel, electric, and alternative fuel refueling property …

* Excludes expired and phased-out credits.

[299] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7:

Dependent Care Credit14

This credit is provided for the costs of paid care for dependents, mostly children. The maximum credit rate is 35% of costs. The value of the credit is capped at $3,000 for one dependent and $6,000 for two or more dependents. The credit rate is reduced when the taxpayer’s adjusted gross income (AGI) exceeds $15,000, but is no less than 20% for higher-income taxpayers.

14 For more, see Congressional Research Service Report RS21466, Dependent Care: Current Tax Benefits and Legislative Issues.

[300] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 1, 2012. Modified 6/15/12. <www.sec.gov>

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[301] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (assistant director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[302] Report: “Overview of the Federal Tax System as in Effect for 2015.” U.S. Congress, Joint Committee on Taxation, March 30, 2015. <www.jct.gov>

Page 3: “The deductions that may be itemized include … charitable contributions….”

[303] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 8:

The Hope credit and the Lifetime Learning credit were added to the code in 1997. The Hope credit has been temporarily replaced by the American Opportunity Tax Credit (AOTC) for 2009 through 2017. The maximum value of the AOTC credit is $2,500 per student annually for the first four years of college. Prior to 2009, the maximum value of the Hope credit was $1,800, limited to the first two years of college. The Hope credit is scheduled to remain available after the AOTC expires at the end of 2017. The AOTC is partially refundable. Both the Hope credit and the AOTC phase out for higher-income individuals.

Additionally, qualified expenditures on tuition and related expenses may qualify taxpayers for the Lifetime Learning credit. The Lifetime Learning credit rate is 20% of costs up to $10,000 for qualified tuition and related expenses. The credit is capped at $2,000. The Lifetime Learning credit is nonrefundable and phases out for higher-income individuals.

[304] “Testimony of the Staff of the Joint Committee on Taxation Before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 37:

Another significant individual tax expenditure arises because pension benefits that accrue to individuals, either in defined contribution pension plans or in defined benefit pension plans, are not subject to the individual income tax. In the case of an employer’s contribution to an individual’s defined contribution pension plan, elimination of the tax expenditure could mean: counting the employer’s specific dollar contribution as part of the individual’s current taxable income. But the treatment of existing accounts is less clear. Would existing accounts still benefit from deferral of tax on earnings? It is even less clear what elimination of this tax expenditure means in the context of a defined benefit accrual. Often the accrual value attributable to any specific individual depends upon economic outcomes that are not currently known to either the employer or the employee.

[305] “Estimates of Federal Tax Expenditures for Fiscal Years 2014–2018.” Joint Committee on Taxation, August 5, 2014. <www.jct.gov>

Page 4:

All employee compensation is subject to tax unless the Code contains a specific exclusion for the income. Specific exclusions for employer-provided benefits include: coverage under accident and health plans,8 accident and disability insurance, group term life insurance, educational assistance, tuition reduction benefits, transportation benefits (parking, van pools, and transit passes), dependent care assistance, adoption assistance, meals and lodging furnished for the convenience of the employer, employee awards, and other miscellaneous fringe benefits (e.g., employee discounts, services provided to employees at no additional cost to employers, and de minimis fringe benefits). Each of these exclusions is classified as a tax expenditure in this report.

[306] Report: “Estimates of Federal Tax Expenditures.” Joint Committee on Taxation, March 14, 1978. <www.jct.gov>

Pages 1–2:

The Concept of Tax Expenditures

Tax expenditure data are intended to show the cost to the Federal Government, in terms of revenues it has foregone, from tax provisions that either have been enacted as incentives for the private sector of the economy or have that effect even though initially having a different objective. The tax incentives usually are designed to encourage certain kinds of economic behavior as an alternative to employing direct expenditures or loan programs to achieve the same or similar objectives. These provisions take the form of exclusions, deductions, credits, preferential tax rates, or deferrals of tax liability. Tax expenditures also are analogous to uncontrolled expenditures made through individual entitlement programs because the taxpayer who can meet the criteria specified in the Internal Revenue Code may use the provision indefinitely without any further action by the Federal Government. This is possible because provisions in the Internal Revenue Code rarely have expiration dates that would require specific congressional action to continue the availability of the tax provision. For many provisions, the revenue loss is determined by the taxpayer’s level of income and his tax rate bracket. From the viewpoint of the budget process, fiscal policy and the allocation of resources, uncontrollable outlays or receipts restrict the range of adjustments that can be made in public policy. One of the initial purposes of the enumeration of tax expenditures was to provide Congress with the information it would need to select between a tax or an outlay approach to accomplish a goal of public policy.

Pages 4–5:

Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses. Most other tax benefits to individual taxpayers are classified as exceptions to normal income tax law.

The Joint Committee staff views the personal exemptions and the standard deduction as defining the zero-rate bracket that is a part of normal tax law. An itemized deduction that is not necessary for the generation of income is classified as a tax expenditure, but only to the extent that it, when added to a taxpayer’s other itemized deductions, exceeds the standard deduction.

[307] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences—preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise. …

To illustrate, consider a dilemma that President Obama faced in constructing his 2012 budget. …

… The president thus structured his special, one-time payment as a $250 refundable tax credit for any retiree who did not qualify for Social Security. In Beltway parlance, he offered these men and women a tax cut.

But was it really a tax cut? The president’s $250 credit would have the same budgetary, economic, and distributional effects as his $250 boost in Social Security benefits. Both would deliver extra money to retirees, and both would finance those payments by adding to America’s growing debt. One benefit would arrive as a Social Security check, the other as a reduced tax payment or a refund. These superficial differences aside, however, the proposed tax credit would be, in effect, a spending increase.

[308] Working paper: “Tax Expenditures: The Size and Efficiency of Government, and Implications for Budget Reform.” By Leonard E. Burman and Marvin Phaup. National Bureau of Economic Research, August 2011. <www.nber.org>

Page 1: “Tax expenditures are not treated as spending at all, but as reductions in taxes. Their hidden nature has made tax expenditures irresistible to policymakers of both parties—many political or policy goals can be achieved through stealthy spending programs that are framed as tax cuts.”

Page 23: “[T]he largest new construction program is not financed by cash expenditures overseen by the Department of Housing and Urban Development, but the low-income housing credit. One of the largest cash assistance programs for low-income families is the earned income tax credit. And so on. All of these programs could be carried out with cash expenditures….”

[309] Report: “Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets.” U.S. Energy Information Administration, November 1992. <www.justfacts.com>

Page 21:

Tax expenditures are reductions in Government revenues resulting from preferential tax treatment for particular taxpayers. They are termed tax expenditures because the objectives they are intended to achieve can also be reached by a direct expenditure of Government funds. …

Many tax expenditure programs are functionally equivalent to direct expenditure programs. The basis for selecting one or the other approach to provide benefits to taxpayers is not always clear. Several factors may be considered during the selection process. Tax expenditures, in particular, may be less subject to annual review in the normal budget cycle. Also, tax expenditure programs are less visible than direct expenditure programs in the budget process.

[310] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

“The rationale for viewing the preferences as expenditures, rather than mere tax breaks, was (and is) that their budgetary, economic, and distributional effects are often indistinguishable from those of spending programs.”

[311] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Page 6:

Policymakers have long recognized that many social and economic goals can be pursued using tax preferences, not just government spending programs. Such preferences are recorded as revenue reductions, making the government appear smaller, but often have the same effects on income distribution and resource allocation as equivalent spending programs (Bradford 2003; Burman and Phaup 2011; Marron 2011). A complete measure of government size should treat these preferences as spending, not revenue reductions. Doing so raises measures of both spending and revenues, without affecting the deficit, and gives a different picture of the economic resources that the government directs.

[312] Webpage: “Ten Facts About the Child Tax Credit.” Internal Revenue Service. Last reviewed or updated March 5, 2020. <www.irs.gov>

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

1. Amount—With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

2. Qualification—A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

3. Age Test—To qualify, a child must have been under age 17—age 16 or younger—at the end of 2010.

4. Relationship Test—To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

5. Support Test—In order to claim a child for this credit, the child must not have provided more than half of their own support.

6. Dependent Test—You must claim the child as a dependent on your federal tax return.

7. Citizenship Test—To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.

8. Residence Test—The child must have lived with you for more than half of 2010. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.

9. Limitations—The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

10. Additional Child Tax Credit—If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

[313] “2010 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. <taxpayeradvocate.irs.gov>

Executive Summary: Preface & Highlights: “The Most Serious Problems Encountered by Taxpayers.” <taxpayeradvocate.irs.gov>

Pages xi–xii:

The IRS should revise its approach to social programs and incentives administered through the Code.

Over the last decade, the Internal Revenue Code has become filled with special incentives and programs that benefit groups of individual and business taxpayers.21 These provisions are known as “tax expenditures.”22 They can take many forms, including deductions, credits, or preferential tax rates. While some are easy for the IRS to administer—they are simply a matter of using information reported on the tax return and checking it against third party information reporting—others require information to which the IRS does not have access, thereby requiring it to do extensive and intrusive auditing in order to ensure compliance. Some of these provisions are designed to assist low income populations, which present socio-economic, education, mobility, and functional and language literacy challenges. When the tax administrator is tasked with delivering benefits to this population—and charged with ensuring compliance with the eligibility rules and guarding against fraud—the IRS’s traditional revenue collection approach just doesn’t work. Something different is needed—an approach that recognizes that the IRS no longer is just a revenue collection agency but is also a benefits administrator.

[314] Working paper: “Is the European Welfare State Really More Expensive? Indicators on Social Spending, 1980–2012; and a Manual to the OECD [Organization for Economic Cooperation and Development] Social Expenditure Database (SOCX).” By Willem Adema, Pauline Fron, and Maxime Ladaique. Organization for Economic Cooperation and Development, 2011. <www.oecd-ilibrary.org>

Page 25: “Tax breaks for social purposes: Governments also make use of the tax system to directly pursue social policy goals.”

Page 29:

Tax Breaks for Social Purposes (TBSPs) are defined as:

“those reductions, exemptions, deductions or postponements of taxes, which: a) perform the same policy function as transfer payments which, if they existed, would be classified as social expenditures; or b) are aimed at stimulating private provision of benefits.” …

Governments sometimes also use the tax system to stimulate the take-up of private social insurance coverage by individuals and/or employment-related plans.

NOTE: For more details about tax breaks for social purposes, see the next footnote.

[315] Article: “Spending in Disguise.” By Donald B. Marron (director of the Tax Policy Center and former acting director of the Congressional Budget Office). National Affairs, Summer 2011. <www.nationalaffairs.com>

Identifying preferences inevitably invites controversy, because it requires a benchmark notion of an idealized tax system against which any deviations are deemed preferences. Perhaps not surprisingly, tax experts differ on what kind of system represents the ideal benchmark. The Treasury, for instance, uses a comprehensive, progressive income tax as its benchmark, with a few adjustments to reflect the practical realities of administering the tax system. Other analysts believe a broad-based consumption tax would be a better benchmark. …

Although this disagreement reflects a fundamental debate about tax policy, it does not undermine the basic fact that tax preferences are enormous. Indeed, most provisions that are preferences relative to an income-tax-based system are also preferences relative to a system built around a consumption tax.

[316] Paper: “How Big is The Federal Government?” By Donald Marron and Eric Toder. Urban Institute and Urban-Brookings Tax Policy Center, March 26, 2012. <www.taxpolicycenter.org>

Page 6:

Policymakers have long recognized that many social and economic goals can be pursued using tax preferences, not just government spending programs. Such preferences are recorded as revenue reductions, making the government appear smaller, but often have the same effects on income distribution and resource allocation as equivalent spending programs (Bradford 2003; Burman and Phaup 2011; Marron 2011). A complete measure of government size should treat these preferences as spending, not revenue reductions. Doing so raises measures of both spending and revenues, without affecting the deficit, and gives a different picture of the economic resources that the government directs.

[317] Report: “Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets.” U.S. Energy Information Administration, November 1992. <www.justfacts.com>

Page 21:

Tax expenditures are reductions in Government revenues resulting from preferential tax treatment for particular taxpayers. They are termed tax expenditures because the objectives they are intended to achieve can also be reached by a direct expenditure of Government funds. …

Many tax expenditure programs are functionally equivalent to direct expenditure programs. The basis for selecting one or the other approach to provide benefits to taxpayers is not always clear. Several factors may be considered during the selection process. Tax expenditures, in particular, may be less subject to annual review in the normal budget cycle. Also, tax expenditure programs are less visible than direct expenditure programs in the budget process.

[318] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on municipal bonds] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[319] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[320] Report: “High-Income Tax Returns for Tax Year 2014.” By Justin Bryan. Internal Revenue Service Statistics of Income Bulletin, Summer 2017. <www.irs.gov>

Page 15:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[321] Book: The Bill of Rights and the States: The Colonial and Revolutionary Origins of American Liberties. Edited by Patrick T. Conley and John P. Kaminski. Madison House Publishers, 1992.

Chapter: “The Bill of Rights: A Bibliographic Essay.” By Gaspare J. Saladino.

Page 484:

The best historical treatments of the legislative history of the Bill of Rights in the first federal Congress are in the general accounts by Rutland, Dumbauld, Brant, Schwartz, and Levy, and in David M. Matteson, The Organization of the Government under the Constitution (1941; reprint edition, New York, 1970). All agree that James Madison, against considerable odds, took the lead in the House of Representatives, and that without his efforts there probably would have been no Bill of Rights. Madison’s amendments, a distillation of those from the state conventions (especially Virginia’s) were, for the most part, those that the House eventually adopted.

[322] Article: “Madison, James.” By Robert J. Brugger (Ph.D., Editor, Maryland Historical Magazine, Maryland Historical Society). World Book Encyclopedia, 2007 Deluxe Edition.

Madison, James (1751–1836), the fourth president of the United States, is often called the Father of the Constitution. He played a leading role in the Constitutional Convention of 1787, where he helped design the checks and balances that operate among Congress, the president, and the Supreme Court. He also helped create the U.S. federal system, which divides power between the central government and the states.

[323] Book: The Debates in the Federal Convention of 1787, Which Framed Constitution of the United States of America, Reported by James Madison, a Delegate From the State of Virginia. Edited by Gaillard Hund and James Brown Scott. Oxford University Press, 1920. <avalon.law.yale.edu>

June 6, 1787:

All civilized Societies would be divided into different Sects, Factions, & interests, as they happened to consist of rich & poor, debtors & creditors, the landed, the manufacturing, the commercial interests, the inhabitants of this district or that district, the followers of this political leader or that political leader, the disciples of this religious Sect or that religious Sect. In all cases where a majority are united by a common interest or passion, the rights of the minority are in danger. What motives are to restrain them? A prudent regard to the maxim that honesty is the best policy is found by experience to be as little regarded by bodies of men as by individuals. Respect for character is always diminished in proportion to the number among whom the blame or praise is to be divided. Conscience, the only remaining tie, is known to be inadequate in individuals: In large numbers, little is to be expected from it. Besides, Religion itself may become a motive to persecution & oppression. – These observations are verified by the Histories of every Country antient & modern. In Greece & Rome the rich & poor, the creditors & debtors, as well as the patricians & plebians alternately oppressed each other with equal unmercifulness. What a source of oppression was the relation between the parent cities of Rome, Athens & Carthage, & their respective provinces: the former possessing the power, & the latter being sufficiently distinguished to be separate objects of it? Why was America so justly apprehensive of Parliamentary injustice? Because G. Britain had a separate interest real or supposed, & if her authority had been admitted, could have pursued that interest at our expence. We have seen the mere distinction of colour made in the most enlightened period of time, a ground of the most oppressive dominion ever exercised by man over man. What has been the source of those unjust laws complained of among ourselves? Has it not been the real or supposed interest of the major number? Debtors have defrauded their creditors. The landed interest has borne hard on the mercantile interest. The Holders of one species of property have thrown a disproportion of taxes on the holders of another species. The lesson we are to draw from the whole is that where a majority are united by a common sentiment, and have an opportunity, the rights of the minor party become insecure. In a Republican Govt. the Majority if united have always an opportunity. The only remedy is to enlarge the sphere, & thereby divide the community into so great a number of interests & parties, that in the 1st. place a majority will not be likely at the same moment to have a common interest separate from that of the whole or of the minority; and in the 2d. place, that in case they shd. have such an interest, they may not be apt to unite in the pursuit of it. It was incumbent on us then to try this remedy, and with that view to frame a republican system on such a scale & in such a form as will controul all the evils wch. have been experienced.

[324] Calculated with data from: “Statistics of Income: Corporation Income Tax Returns Complete Report, 2017.” Internal Revenue Service, September 16, 2020. <www.irs.gov>

Pages 14–34: “Table 1. Selected Income Statement, Balance Sheet and Tax Items and Coefficients of Variation, by Minor Industry, Tax Year 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[325] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 2: “A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit.”

[326] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[327] Report: “Options for Reducing the Deficit: 2015 to 2024.” Congressional Budget Office, November 20, 2014. <www.cbo.gov>

Page 38:

Low- and moderate-income people are eligible for certain refundable tax credits under the individual income tax if they meet specified criteria. If the amount of a refundable tax credit exceeds a taxpayer’s tax liability before that credit is applied, the government pays the excess to that person. Two refundable tax credits are available only to workers: the earned income tax credit (EITC) and the refundable portion of the child tax credit (referred to in the tax code as the additional child tax credit).

[328] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

Credits Against Tax

An individual may reduce his or her tax liability by any available tax credits. For example, tax credits are allowed for certain business expenditures, certain foreign income taxes paid or accrued, certain energy conservation expenditures, certain education expenditures, certain child care expenditures, certain health care costs, and for certain elderly or disabled individuals.

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. Three large refundable credits in terms of cost are the child tax credit, the earned income tax credit, and the recovery rebate credit.34 …

A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37 The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children.

[329] Report: “Preview of the 2015 Annual Revision of the National Income and Product Accounts.” By Stephanie H. McCulla and Shelly Smith. U.S. Bureau of Economic Analysis, June 2015. <apps.bea.gov>

Page 2:

Federal Refundable Tax Credits

Federal income tax credits allow taxpayers who meet certain eligibility criteria to reduce the amount they are required to pay in federal income taxes. A tax credit is considered to be “refundable” if any excess of the tax credit over a taxpayer’s total tax liability is paid to the taxpayer as a refund. In contrast, tax credits are considered to be “nonrefundable” if taxpayers can only claim the credit up to the amount of their tax liability.1 Examples of refundable tax credits include the earned income tax credit and the temporary “Making Work Pay” tax credit (see table C).

Table C. Federal Refundable Tax Credit Programs

Major Programs

Program Dates

Earned Income Tax Credit

1975–present

Additional Child Tax Credit

1998–present

2008 Economic Stimulus Payments

2008

American Opportunity Tax Credit

2009–present

Making Work Pay Tax Credit

2010–2011

Health Insurance Premium Assistance Credits

2014–present

…

This change will be carried back to 1976, reflecting the introduction of the earned income tax credit, which is the earliest major refundable tax credit program.

[330] Webpage: “Recovery Rebate Credit.” U.S. Internal Revenue Service. Updated January 14, 2021. <www.irs.gov>

The Recovery Rebate Credit is authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-related Tax Relief Act. It is a tax credit against your 2020 income tax. Generally, this credit will increase the amount of your tax refund or decrease the amount of the tax you owe. …

Eligible individuals who did not receive the full amounts of both Economic Impact Payments may claim the Recovery Rebate Credit on their 2020 Form 1040 or 1040-SR.

[331] Report: “Overview of Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (ACA)” By Annie L. Mach. Congressional Research Service, April 23, 2013. <www.fas.org>

Page 11:

Premium Tax Credits

Certain individuals who obtain coverage through an exchange will be eligible to receive health insurance premium tax credits. Premium tax credits are generally available to individuals who

• purchase nongroup coverage through an exchange;

• have household income22 between 100% and 400% of the federal poverty level (FPL);23

• are not eligible for minimum essential coverage;24 and

• are U.S. citizens (or legally residing in the United States).

To receive a premium tax credit, individuals also must be part of a tax-filing unit, as the credits are administered through federal income tax returns.

While the tax credits are generally directed at individuals who do not have access to coverage outside the nongroup market, certain individuals with access to employer-sponsored insurance (ESI) may be eligible for premium tax credits.

[332] Webpage: “Poverty Guidelines for 2021.” U.S. Department of Health & Human Services, January 13, 2021. <aspe.hhs.gov>

2021 Poverty Guidelines for the 48 Contiguous States and the District of Columbia

Persons in Family/Household

Poverty Guideline

For families/households with more than 8 persons, add $4,540 for each additional person.

1

$12,880

2

$17,420

3

$21,960

4

$26,500

5

$31,040

6

$35,580

7

$40,120

8

$44,660

CALCULATIONS:

  • $21,960 × 400% = $87,840
  • $26,500 × 400% = $106,000
  • $31,040 × 400% = $124,160

[333] Report: “Early 2020 Effectuated Enrollment Snapshot.” U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, July 23, 2020. <www.cms.gov>

Pages 3–4: “Table 1: Total Effectuated Enrollment and Enrollees Receiving APTC [Advanced Premium Tax Credit] and CSR [Cost-Sharing Reduction] by State, February 2020 … Total … APTC Enrollment [=] 9,232,225”

Pages 5–6: “Average Total Premium and Average APTC by State, February 2020 … Total … Average APTC per Month [=] $491.53”

CALCULATION: $491.53 × 12 = $5,898.36

[334] Webpage: “Listings of WHO’s Response to Covid-19.” World Health Organization, June 29, 2020. Last updated January 29, 2021. <bit.ly>

“11 Mar 2020: Deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction, WHO made the assessment that Covid-19 could be characterized as a pandemic.”

[335] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[336] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[337] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[338] Report: “Individual Income Tax Returns, 2020.” Internal Revenue Service, November 2022. <www.irs.gov>

Pages 23–24: “In total, taxpayers claimed $148.2 billion in refundable tax credits.”

Item

2020

Amount (Millions)

Total refundable credits3 4

$148,170

Earned income credit, total

$59,240

American opportunity credit, total

$5,654

Additional child tax credit, total

$33,665

3 … For 2020, also includes the qualified sick and family leave credit

4 Includes the amount used to offset income tax before credits as well as the amount used to offset all other taxes and the refundable portion.

[339] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1: “To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential.”

[340] Article: “Covid-19 Restrictions.” USA Today. Last updated July 11, 2022. <www.usatoday.com>

Throughout the pandemic, officials across the United States have rolled out a patchwork of restrictions on social distancing, masking and other aspects of public life. The orders vary by state, county and even city. At the height of restrictions in late March and early April 2020, more than 310 million Americans were under directives ranging from “shelter in place” to “stay at home.” Restrictions are now ramping down in many places, as most states have fully reopened their economies.

[341] During 2020 and early 2021, federal politicians enacted six “Covid relief” laws that will cost a total of about $5.2 trillion over the course of a decade. This amounts to an average of $40,444 in spending per U.S. household.

Calculated with data from:

a) Report: “CBO Estimate for H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, as Posted on March 4, 2020.” Congressional Budget Office, March 4, 2020. <www.cbo.gov>

b) Report: “Cost Estimate for H.R. 6201, Families First Coronavirus Response Act, Enacted as Public Law 116-127 on March 18, 2020.” Congressional Budget Office, April 2, 2020. <www.cbo.gov>

c) Report: “Cost Estimate for H.R. 748, CARES Act, Public Law 116-136.” Congressional Budget Office, April 16, 2020. <www.cbo.gov>

d) Report: “CBO Estimate for H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act as Passed by the Senate on April 21, 2020.” Congressional Budget Office, April 22, 2020. <www.cbo.gov>

e) Report: “Estimate for Division N—Additional Coronavirus Response and Relief, H.R. 133, Consolidated Appropriations Act, 2021, Public Law 116-260, Enacted on December 27, 2020.” Congressional Budget Office, January 14, 2021. <www.cbo.gov>

f) Report: “Estimated Budgetary Effects of H.R. 1319, American Rescue Plan Act of 2021 as Passed by the Senate on March 6, 2021.” Congressional Budget Office, March 10, 2021. <www.cbo.gov>

g) Dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, November 2021. <www.census.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[342] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[343] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[344] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[345] Report: “Individual Income Tax Returns, 2020.” Internal Revenue Service, November 2022. <www.irs.gov>

Pages 23–24: “In total, taxpayers claimed $148.2 billion in refundable tax credits.”

Item

2020

Amount (Millions)

Total refundable credits3 4

$148,170

Earned income credit, total

$59,240

American opportunity credit, total

$5,654

Additional child tax credit, total

$33,665

3 … For 2020, also includes the qualified sick and family leave credit

4 Includes the amount used to offset income tax before credits as well as the amount used to offset all other taxes and the refundable portion.

[346] Report: “General Explanation of the Tax Reform Act of 1986.” Joint Committee on Taxation, May 4, 1987. <www.jct.gov>

Page 6:

The Tax Reform Act of 1986 (the “Act”) represents one of the most comprehensive revisions of the Federal income tax system since its inception. …

… The prior-law tax system intruded at nearly every level of decision-making by businesses and consumers. The sharp reductions in individual and corporate tax rates provided by the Act and the elimination of many tax preferences will directly remove or lessen tax considerations in labor, investment, and consumption decisions. The Act enables businesses to compete on a more equal basis, and business success will be determined more by serving the changing needs of a dynamic economy and less by relying on subsidies provided by the tax code.

… Beginning in 1988, the Act establishes two individual income tax rates—15 percent and 28 percent—to replace more than a dozen tax rates in each of the prior-law rate schedules, which extended up to 50 percent. Significant increases in the standard deduction and modifications to certain personal deductions provide further simplicity by greatly reducing the number of taxpayers who will itemize their deductions.

Page 273:

A principal objective of the Act was to reduce marginal tax rates on income earned by individuals and by corporations. Congress believed that lower tax rates promote economic growth by increasing the rate of return on investment. Lower tax rates also improve the allocation of resources within the economy by reducing the impact of tax considerations on business and investment decisions. In addition, lower tax rates promote compliance by reducing the potential gain from engaging in transactions designed to avoid or evade income tax. Under the Act, the maximum corporate rate is reduced from 46 percent to 34 percent.

Pages 1354–1358: “Table A-1.—Summary of Estimated Budget Effects of the Act (H.R. 3838), Fiscal Years 1987–1991 [Millions of dollars] … Grand total … 1987–91 [=] –257”

[347] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[348] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[349] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[350] Report: “General Explanation of the Tax Reform Act of 1986.” Joint Committee on Taxation, May 4, 1987. <www.jct.gov>

Page 7:

The Act retains the most widely utilized itemized deductions, including deductions for home mortgage interest. State and local income taxes, real estate and personal property taxes, charitable contributions, casualty and theft losses, and medical expenses (above an increased floor). Other deductions that benefited a limited number of taxpayers, added complexity to tax filing, or were subject to abuse are restricted by the Act.

[351] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 61–70:

E. New Tax Expenditures since the Tax Reform Act of 1986

The Tax Reform Act of 1986 “represents one of the most comprehensive revisions of the Federal income tax system since its inception.” Among other considerations, Congress was concerned that erosion of the tax base required tax rates to be higher than otherwise would be necessary. With the elimination of various tax expenditures and other preferences and the enactment of other base-broadening provisions, the Act sharply reduced individual income tax rates. The Act retained some of the tax expenditures most widely utilized by individuals and business tax expenditures believed to be beneficial to the economy.

Numerous changes to the Code have been enacted in subsequent tax legislation. The information that follows provides a list of the new tax expenditures contained in legislation since the passage of the Tax Reform Act of 1986. Modifications and extensions of pre-existing tax expenditures are not listed. Items are grouped by the legislation by which they were created. Items that have since expired are shown in italics. …

NOTE: This list contains 151 tax preferences.

[352] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 1:

The current version of the alternative tax, the alternative minimum tax (AMT), requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. (For details on the calculation of the AMT, see Box 1.) That second set of rules raises marginal tax rates (the tax on an additional dollar of income) for some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system.

Page 2:

The alternative minimum tax (AMT) is defined as the addition to regular income taxes, equal to the amount, if any, by which AMT liability exceeds regular tax liability (after applying appropriate credits). Taxpayers who potentially owe the AMT must recalculate their taxable income as defined by the AMT, apply alternative tax rates, allow for credits and other factors, and compare the resulting tentative AMT liability against their regular tax liability. Even though the AMT is technically the excess of AMT over regular tax liability, taxpayers effectively calculate their taxes under two systems and pay the higher of the two liabilities.

[353] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 1:

There are two AMTs [Alternative Minimum Taxes], one for individuals and the other for corporations.1 This report deals only with the AMT for individuals, which has more taxpayers and generates more tax revenue. …

… The goal of the AMT for individuals is to make everyone with significant income pay some federal income tax. The AMT has a lower top rate than the regular income tax but tries to catch more income in its net by defining taxable income (the tax base) more broadly. Compared to the regular income tax, the AMT has fewer “tax preferences”—deductions and other ways of reducing tax liability.

1 In the tax code, AMT provisions for individuals and corporations are intermingled. The reason is that one target of the AMT is people who own businesses. They can treat themselves as salaried employees subject to the individual income tax or as stockholders subject to corporate taxes.

[354] Paper: “The Expanding Reach of the Individual Alternative Minimum Tax.” By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center, Updated May 2005. <www.urban.org>

Page 4:

Because the alternative minimum tax does not allow exemptions for dependents or deductions for state taxes, it will impose particularly high burdens on taxpayers with children and those in high-tax states.6 Because the AMT exemption for couples is less than double the exemption for singles and because the tax brackets are not adjusted for marital status, the AMT imposes significant marriage penalties. In combination, these issues can raise AMT participation rates dramatically, as spelled out in table 2.

[355] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Page 12:

Alternative Minimum Tax Liability

The personal credits allowed against the regular tax are generally allowed against the alternative minimum tax (“AMT”). An AMT is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year.44 For 2020, the tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does not exceed $197,900 ($98,950 in the case of married filing separately)45 and (2) 28 percent of the remaining taxable excess.46

The taxable excess is so much of the alternative minimum taxable income (“AMTI”) as exceeds the exemption amount. AMTI is the taxpayer’s taxable income increased by the taxpayer’s tax preferences and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. For taxable years beginning in 2020, the exemption amount is $113,400 for married individuals filing jointly and surviving spouses, $72,900 for other unmarried individuals, $56,700 for married individuals filing separately, and $25,400 for estates or trusts. The exemption amount is phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI exceeds $1,036,800 for married individuals filing jointly and surviving spouses, $518,400 for other individuals, and $84,800 for estates or trusts. These amounts are indexed annually for inflation.

Among the tax preferences and adjustments included in AMTI are accelerated depreciation on certain property used in a trade or business, circulation expenditures, research and experimental expenditures, certain expenses and allowances related to oil and gas, certain expenses and allowances related to mining exploration and development, certain tax-exempt interest income, and a portion of the gain excluded with respect to the sale or disposition of certain small business stock. The standard deduction, and certain itemized deductions, such as the deduction for State and local taxes, are not allowed to reduce AMTI.

[356] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 64:

The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.

[357] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Pages 3–4:

Inflation is the most important driver of the long-term growth in receipts from the AMT. Under the regular individual income tax, the tax rate brackets, exemptions, and certain deductions and credits are adjusted automatically to keep pace with inflation. By contrast, the exemption amounts and rate brackets used to calculate the AMT are not indexed. If income grows at the rate of inflation, regular tax liability also rises with inflation; AMT liability grows faster, however, because income is rising but the AMT’s exemption amounts and rate brackets are not. Therefore, as prices rise over time, more and more taxpayers owe the alternative tax. The temporary increases in the AMT’s exemption amounts enacted since 2001 have effectively indexed the AMT for inflation.

Page 5:

As the AMT expands, it will reach taxpayers with different characteristics than those affected by the AMT in the past. Many of the taxpayers previously subject to the alternative tax were the relatively small number of higher-income filers who tended to itemize their deductions and used tax preferences that are available to itemizers but disallowed under the alternative tax. In the years to come, however, many taxpayers with lower income will move onto the AMT because it disallows some widely used features of the regular tax, such as the personal exemption (which all taxpayers use) and the standard deduction (which roughly two-thirds of filers use). In 2001, only about 6 percent of the 1 million taxpayers affected by the AMT claimed the standard deduction on their regular tax return. That share is projected to rise to nearly one-third of the projected 27 million taxpayers who will owe the AMT in 2010.

[358] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 5: “The AMT [Alternative Minimum Tax] tends to affect larger families and taxpayers with greater deductions for state and local taxes more than it affects other taxpayers.”

Page 7:

The regular income tax allows a deduction for state and local taxes paid on income and property.11 The deduction provides a considerable subsidy to residents in those jurisdictions because it decreases the net cost to taxpayers of paying deductible state and local taxes. By lowering the net cost of those taxes, the deduction allows state and local governments to impose higher taxes and provide more services than they otherwise could.

The deduction is disallowed under the AMT, so the AMT is more likely to affect taxpayers in higher-tax states, for whom the deduction is more valuable. In 2007, for example, 18 percent of taxpayers in New York (a high-tax state) with AGI between $100,000 and $200,000 paid the AMT, while fewer than 5 percent of taxpayers in the same income group in Florida (a state with no income tax) paid the alternative tax. By curtailing the use of the deduction, the AMT limits the implicit subsidy to state and local governments.

Page 8:

Exemptions for Dependents. The regular tax system offers benefits to larger families, allowing taxpayers to take child tax credits and personal exemptions for themselves and each of their qualifying dependents. Even though the AMT allows child tax credits, it replaces the personal exemptions with a single exemption amount based only on filing status, thereby reducing the tax benefit provided for larger families relative to smaller ones. For example, in 2006, married couples with three dependents and income between $100,000 and $200,000 were three times as likely to have AMT liability as couples with similar income and no dependents.

Other Tax Preferences. The AMT limits other regular income tax preferences, including deductions for medical expenses and for certain mortgage interest. The regular income tax allows taxpayers to deduct medical expenses in excess of 7.5 percent of AGI if they itemize their deductions, but the AMT limits the deduction to expenses exceeding 10 percent of AGI. As a result, the AMT reduces the amount of relief given to taxpayers with large medical expenses in a given year (although that limitation applies only to taxpayers subject to the AMT, who generally have higher income and may be in less need of relief). Similarly, although taxpayers may deduct mortgage interest paid to acquire, build, or improve a primary residence under both the regular and the alternative taxes, the AMT disallows the deduction for mortgage interest paid on secondary residences and interest paid on certain other mortgage debt.

[359] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 7: “The most important features of the regular income tax (the tax brackets, standard deduction, exemptions for dependents, and so on) have been automatically indexed for inflation annually since 1985. The AMT [Alternative Minimum Tax] is not indexed. Congress has periodically raised the exemption amounts for the AMT, but not fast enough to keep pace with inflation.”

[360] Report: “The Individual Alternative Minimum Tax.” Congressional Budget Office, January 15, 2010. <www.cbo.gov>

Page 9: “For most of the past decade, lawmakers have chosen to limit the number of taxpayers affected by the AMT by temporarily increasing the exemption amounts. Those amounts were initially increased by EGTRRA [Economic Growth and Tax Relief Reconciliation Act of 2001] in 2001 and subsequently increased and extended for a year or two at a time, most recently by the American Recovery and Reinvestment Act of 2009 (ARRA).”

[361] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 64:

Slightly more taxpayers would become subject to the alternative minimum tax (AMT) over time, although the share of taxpayers who would pay the alternative tax was greatly limited by the American Taxpayer Relief Act of 2012.10

10 The alternative minimum tax is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the alternative minimum tax and the regular income tax and pay the larger of the two amounts. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those exemption amounts for inflation. Also indexed for inflation were the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income would gradually make more taxpayers subject to the AMT, many of those newly affected would owe only slightly more than their regular income tax liability.

[362] Report: “The Budget and Economic Outlook: 2015 to 2025.” Congressional Budget Office, January 26, 2015. <www.cbo.gov>

Page 94:

The most significant factor pushing up taxes relative to income is real bracket creep. That phenomenon occurs because the income tax brackets and exemptions under both the regular income tax and the alternative minimum tax (AMT) are indexed only to inflation.2 If incomes grow faster than inflation, as generally occurs when the economy is growing, more income is pushed into higher tax brackets. In CBO’s estimates, real bracket creep raises revenues relative to GDP by 0.2 percentage points between 2014 and 2016.

[363] Report: “Federal Individual Income Tax Brackets, Standard Deduction, and Personal Exemption: 1988 to 2021.” Congressional Research Service. Updated February 16, 2021. <crsreports.congress.gov>

Page 2:

Before 2018, each taxpayer was allowed to reduce gross income by a fixed amount (i.e., an exemption) for herself or himself, a spouse, and all qualified dependents. The amount of the exemption was the same for every individual and indexed for inflation. In 2017, the amount was $4,050 per person. Under current law, the personal exemption is $0 from 2018 through 2025, but it will be reinstated in 2026, assuming no legislative changes.

[364] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary.

Page 15:

Personal Exemptions

2017 Tax Law … To calculate taxable income, taxpayers subtract from their adjusted gross income (AGI) the standard deduction or sum of their itemized deductions (whichever is greater) and the appropriate number of personal exemptions for themselves, their spouse (if married), and their dependents. For 2018, before enactment of P.L. 115-97, the person exemption amount would have been $4,150.

IRC Section 151

P.L. 115-97 … Repeals personal exemptions for the taxpayer, their spouse (if married), and their dependents.

Provision expires 12/31/25

(Section 11041 of P.L. 115-97)

State and Local Tax Deduction

2017 Tax Law … State and local (and foreign) income and property taxes are deductible as an itemized deduction. State and local sales taxes paid may be deducted in lieu of income taxes.

IRC Section 164

P.L. 115-97 … Limits itemized deductions for state and local income, sales, and property taxes to $10,000. No deduction is allowed for foreign real property taxes. Property taxes associated with carrying on a trade or business are fully deductible.

Provision expires 12/31/25

(Section 11042 of P.L. 115-97)

Page 19:

Individual Alternative Minimum Tax

2017 Tax Law … A tax is imposed at 26% on an individual’s alternative minimum taxable income (primarily income without a standard deduction, state and local income deduction, or deductions for personal exemptions) less an exemption amount. For 2018 the exemption is $55,400 for singles and $86,200 for married couples. The exemption phases out beginning at $123,100 for singles and $164,100 for married couples. A higher rate of 28% applies to taxpayers with incomes above $95,750 for single filers and $191,500 for married taxpayers filing joint returns. These amounts are indexed for inflation. Prior-year AMT amounts can be credited against regular tax.

IRC Section 55

P.L. 115-97 … Increases the AMT exemption amounts to $70,300 for unmarried taxpayers (single filers and heads of households) and $109,400 for married taxpayers filing joint returns. Exemption phases out at $500,000 for singles and $1,000,000 for married taxpayers filing jointly. These amounts are indexed for inflation.

Provision expires 12/31/2025

(Section 12003 of P.L. 115-97)

[365] Briefing Book. Urban-Brookings Tax Policy Center, 2020. <www.taxpolicycenter.org>

Page 201 (of PDF): “The AMT provisions, along with almost all other individual income tax measures in TCJA, are set to expire at the end of 2025. Thus, barring legislation from Congress, the AMT will return in force in 2026, affecting 6.7 million taxpayers. That number will rise to 7.6 million by 2030.”

Page 240 (of PDF):

Before the enactment of the TCJA [Tax Cuts and Jobs Act], some of the larger AMT preference items included the deduction for state and local taxes (62 percent of all preferences in 2012 according to data from the US Department of the Treasury), personal exemptions (21 percent), and the deduction for miscellaneous business expenses (9.5 percent). Because the TCJA temporarily repealed the latter two provisions and capped the deduction for state and local taxes at $10,000, other preferences, such as the standard deduction and the special AMT rules for the treatment of net operating losses, depreciation, and passive losses, will become more important through 2025.

[366] Calculated with data from:

a) Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 3: “Table 1. Basic data and projections on the alternative minimum tax for individuals”

b) Report: “Individual Income Tax Rates and Shares, 2011.” By Adrian Dungan and Michael Parisi. IRS, Statistics of Income Bulletin, Spring 2014. <www.irs.gov>

Page 14: “Figure F. Alternative Minimum Tax, Tax Years 1986–2011”

c) Report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 8, Lines 38, 39: “Table A. All Individual Income Tax Returns: Selected Income and Tax Items in Current and Constant 1990 Dollars, Tax Years 1990–2018—Continued”

Page 30: “Figure A. Total Number of Returns, and Selected Income and Tax Items for Taxable Returns, Tax Years 1986–2018”

NOTES:

  • Where possible, overlapping data points from the sources above were compared to make sure the sources’ definitions and methodologies were compatible. The maximum differential in any value was 0.1 percentage point.
  • An Excel file containing the data and calculations is available upon request.

[367] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Pages 4–5:

The minimum income tax of 1969. The AMT has its roots in a minimum income tax enacted in 1969. Congress enacted the minimum tax following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns. …

The minimum income tax was an “add-on” tax of 10 percent.12 People had to pay a 10 percent tax on the amount to which their reductions of tax liability (tax preferences) exceeded $30,000. Unlike today’s AMT, the add-on tax did not have rules for calculating taxable income that were separate from the rules for the regular income tax, nor did it have a separate list of reductions of tax liability.

[368] Testimony: “Economic Report of the President.” By Joseph Barr, U.S. Congress, Joint Economic Committee, January 17, 1969.

Page 6:

[T]here is going to be a taxpayer revolt over the income taxes in this country unless we move in this area. Now, the revolt is not going to come from the poor. They do not pay very much in taxes. The revolt is going to come from the middle class. It is going to come from those people with incomes from $7,000 to $20,000 who pay every nickel of taxes at the going rate. They do not have the loopholes and gimmicks to resort to, Mr. Chairman.

However, when these people see, as I see, that in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes over a million dollars for the year on which the “taxpayers” paid the U.S. Government not 1 cent of income taxes, I think those people are going to say it is time to do something about it and I concur.

[369] Paper: “The Expanding Reach of the Individual Alternative Minimum Tax.” By Leonard E. Burman, William G. Gale, and Jeffrey Rohaly. Tax Policy Center. Updated May 2005. <www.urban.org>

Page 1: “In January 1969, Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news created a political firestorm. In 1969, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war.”

NOTE: Just Facts searched for and did not find a primary source to substantiate the claim that “members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam war.” It seems implausible that Congress kept records of how many letters each Congressman received on this or any other issue. Nonetheless, as evidenced by the next footnote, Barr’s speech did lead to a public outcry.

[370] Editorial: “The Taxpayer and His Money: It Could Be Better Collected.” Life, August 15, 1969.

Page 30:

Congress is now considering the most drastic reform of the tax system since World War II. The House bill would lighten the burden on all classes of taxpayers, especially the lowest incomes, while offsetting most of this loss of needed revenue by plugging the most glaring “loopholes”—more properly known as tax preferences—now enjoyed by the rich and by certain industries. …

… Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over $200,000 were in 1967 able to pay no income tax at all.

[371] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.

[372] Report: “General Explanation of the Tax Reform Act of 1969, H.R. 13270, 91st Congress, Public Law 91-172.” U.S. Congress, Joint Committee on Internal Revenue Taxation, December 3, 1970. <www.jct.gov>

Page 1:

The Tax Reform Act of 1969 (H.R. 13270) is a substantive and comprehensive reform of the income tax laws. As the House and Senate Committee Reports suggest, there was no prior tax reform bill of equal substantive scope.

The congressional consideration of this Act lasted eleven months and one day. The schedule of the various actions by the committees on the bill was as follows:

January 29, 1969: Announcement by the House Committee on Ways and Means of its hearings on tax reform. …

December 22, 1969: Approval of the Conference Report by both the House and Senate by votes of 381 to 2 and 71 to 6, respectively.

December 30, 1969: Tax Reform Act of 1969 (Public Law 91-172) signed by the President.

From time to time, since the enactment of the present income tax over 50 years ago, various tax incentives or preferences have been added to the internal revenue laws. Increasingly in recent years, taxpayers with substantial incomes have found ways of gaining tax advantages from the provisions that were placed in the code primarily to aid limited segments of the economy. In fact, in many cases these taxpayers have found ways to pile one advantage on top of another. The House and Senate agreed that this was an intolerable situation. It should not have been possible for 154 individuals with adjusted gross incomes of $200,000 or more to pay no Federal income tax on 1966 income.

Page 5:

7. Minimum tax.—This tax, which applies to both individuals and corporations, supplements the action of the specific remedial provisions of the Act in curtailing tax preferences. It is computed by (1) totaling the amount of tax preferences received by the taxpayer (from the broad category of tax preferences specified in the Act), (2) subtracting from this total a $30,000 exemption and the amount of the taxpayer’s regular Federal income tax for the year, and (3) applying a 10-percent tax rate to the remainder.

[373] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 15:

Appendix. Legislative history of the AMT for individuals (major changes in italics)

Tax Reform Act of 1969 (P.L. 91-172) Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.

Excise, Estate, and Gift Tax Adjustment Act of 1970 (P.L. 91-614) Allowed deduction of the “unused regular tax carryover” from the base for the minimum tax.

Revenue Act of 1971 (P.L. 92-178) Imposed minor provisions regarding foreign income.

Tax Reform Act of 1976 (P.L. 94-455) Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.

Tax Reduction and Simplification Act of 1977 (P.L. 95-30) Reduced minimum tax preference for intangible costs of drilling oil and gas wells.

Revenue Act of 1978 (P.L. 95-600) Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.

Economic Recovery Tax Act of 1981 (P.L. 97-34) Lowered AMT rates to correspond with reductions in rates of regular income tax.

Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) Repealed “add-on” minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.

Deficit Reduction Act of 1984 (P.L. 98-369) Made minor changes concerning investment tax credit, intangible drilling costs, and other items.

Tax Reform Act of 1986 (P.L. 99-514) Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.

Revenue Act of 1987 (P.L. 100-203) Made technical corrections related to Tax Reform Act of 1986. Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) Made technical corrections related to Tax Reform Act of 1986.

Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) Made further technical amendments.

Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) Raised AMT rate to 24%.

Energy Policy Act of 1992 (P.L. 102-486) Changes regarding intangible costs of drilling oil and gas wells.

Omnibus Reconciliation Act of 1993 (P.L. 103-66) Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.

Taxpayer Relief Act of 1997 (P.L. 105-34) Changes regarding depreciation and farmers’ installment sales.

Tax Technical Corrections Act of 1998 (P.L. 105-206) Adjusted AMT for new capital gains rates.

Tax Relief Extension Act of 1999 (P.L. 106-170) Changed rules about nonrefundable credits.

Note: There may have been a few other quite minor changes made by bills omitted from this list. The provisions of the AMT for corporations and for individuals are mixed together in the tax code, so many bills apply to both types of AMT.

[374] Report: “Present Law and Background Relating to the Individual Alternative Minimum Tax.” U.S. Congress, Joint Committee on Taxation, June 25, 2007. <www.jct.gov>

Page 5:

The Tax Equity and Fiscal Responsibility Act of 1982 enacted the first comprehensive individual AMT.7 According to the legislative history of that Act, “the committee has amended the present minimum tax provisions applying to individuals with one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits.”8

The AMT provisions enacted in 1982 are the foundation for the present law individual AMT. Under the 1982 Act, in computing AMTI, the deduction for State and local taxes, the deduction for personal exemptions, the standard deduction, and the deduction for interest on home equity loans were not allowed. Incentive stock option gain was included in AMTI. These remain the principal preferences and adjustments under present law. A rate of 20 percent applied to AMTI in excess of an exemption amount of $40,000 ($30,000 for unmarried taxpayers). The exemption amounts were not indexed for inflation, even though the regular rates were scheduled to be indexed for inflation in future years. Nonrefundable credits (other than the foreign tax credit) were not allowed against the AMT.

The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, except that deferral preferences were properly adjusted over time and a minimum tax credit was added. …

8 Tax Equity and Fiscal Responsibility Act of 1982, S. Rpt. No. 97-494 Vol. 1, at 108 (July 12, 1982).

[375] Calculated with data from “Statistics of Income Bulletin, Volume 7, Number 4.” Internal Revenue Service, Spring 1988. <www.irs.gov>

Page 75: “Table 7.-Standard, Itemized, and Total Deductions Reported on Individual Income Tax Returns, Tax Years 1944–1986 [All figures are estimates based on samples-number of returns are in millions; money amounts are in billions of dollars] … Number of returns … 1967 [=] 71.7”

CALCULATION: 155 / 71,700,000 = 0.0002%

[376] “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed January 20, 2021 at <www.bls.gov>

“$200,000 in January 1967 has the same buying power as $1,506,790.27 in January 2018”

[377] Calculated with data from the report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 30: “Figure A. Total Number of Returns, and Selected Income and Tax Items for Taxable Returns, Tax Years 1986–2018” [Money amounts are in billions of dollars, except where indicated] … Tax Year 2018 … Number of taxable returns [=] 100,424,240”

Page 8: “Table A. All Returns: Selected Income and Tax Items in Current and Constant 1990 Dollars, Tax Years 2011–2018—Continued” [All figures are estimates based on samples—money amounts are in thousands of dollars] … Item [=] Alternative minimum tax: Number of returns … 2018 [=] 244,007”

CALCULATION: 244,007 / 100,424,240 = 0.2%

[378] Calculated with data from the report: “Individual Income Tax Returns Complete Report, 2018.” Department of the Treasury, Internal Revenue Service, September 2020. <www.irs.gov>

Page 35: “Returns with Alternative Minimum Tax Computation Reported on Form 6251: Total Adjustments and Preferences, and Alternative Minimum Taxable Income and Tax, by Size of Adjusted Gross Income, Tax Years 2017 and 2018 [Money amounts are in thousands of dollars]”

NOTE: An Excel file containing the data and calculations is available upon request.

[379] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 2 (of PDF):

For Tax Year 2017, there were almost 7.7 million individual income tax returns with an expanded income of $200,000 or more, accounting for 5.1 percent of all returns filed for the year. Of these, 10,988 returns had no worldwide income tax liability. …

Two income concepts are used in this article to classify tax returns as high income: the statutory concept of adjusted gross income (AGI) and the “expanded income” concept. The expanded income concept uses items reported on the tax return to obtain a more comprehensive measure of income than AGI. Specifically, expanded income is AGI plus tax-exempt interest, nontaxable Social Security benefits, the foreign-earned income exclusion, and items of “tax preference” for alternative minimum tax (AMT) purposes less unreimbursed employee business expenses, moving expenses, investment interest expense to the extent it does not exceed investment income, and miscellaneous itemized deductions not subject to the 2-percent-of-AGI floor.2,3,4

Page 3:

There are also two tax concepts in this article used to classify returns as taxable or nontaxable: “U.S. income tax” and “worldwide income tax.” U.S. income tax is total Federal income tax liability, which includes the AMT, less all credits against income tax, and does not include payroll or self-employment taxes. To be considered taxable, a return had to have a positive income tax liability after accounting for all credits. A nontaxable return, on the other hand, could either have a zero or negative income tax liability after accounting for all credits (including refundable credits). Since the Federal income tax applies to worldwide income and allows a credit (subject to certain limits) for income taxes paid to foreign governments, a return could be classified as nontaxable under the U.S. income tax concept even though income taxes had been paid to a foreign government. Worldwide income tax addresses this circumstance by adding back the allowable foreign tax credit and foreign taxes paid on excluded foreign-earned income to U.S. income tax. The sum of these two items is believed to be a reasonable proxy for foreign taxes actually paid.

Page 10: “Of the 10,988 returns without any worldwide income tax and expanded incomes of $200,000 or more, the most important item in eliminating tax, on 42.1 percent of returns, was the exclusion for interest income on State and local Government bonds (‘tax-exempt interest’)….”

Page 15:

[C]ertain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[380] Webpage: “Investor Bulletin: Municipal Bonds.” U.S. Securities and Exchange Commission, June 15, 2012. <www.sec.gov>

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

[381] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

Pages 3–4: “Under current tax law, interest payments from most municipal bonds are exempt from federal taxes. This exemption is most valuable for individuals in the highest tax brackets, so most of these bonds are held by high income, high tax bracket investors. Indeed, ownership of tax-exempt municipal bonds may be even more skewed toward high income earners than is ownership of dividend paying stocks.5”

[382] Editorial: “The Taxpayer and His Money: It Could Be Better Collected.” Life, August 15, 1969.

Page 30:

Another proposed change with some dubious side effects is the so-called minimum tax, which is designed for the admirable purpose of curing the scandal under which 155 individuals with incomes over 200,000 were in 1967 able to pay no income tax at all. But among the tax shelters this reform goes after is the interest on tax-exempt bonds, on the sale of which our hard-pressed state and local governments depend for financing their public works.

[383] “Form 9452: Filing Assistance Program.” Internal Revenue Service, 2018. Accessed January 20, 2020 at <www.irs.gov>

“Computing Your Total Gross Income … Interest income (Do not include tax-exempt interest, such as from municipal bonds)”

[384] Report: “The Federal Revenue Effects of Tax-Exempt and Direct-Pay Tax Credit Bond Provisions.” Joint Committee On Taxation, July 16, 2012. <www.jct.gov>

Page 2:

Under present law, gross income does not include interest on State and local bonds. State and local bonds are classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds whose proceeds are primarily used to finance governmental functions or which are repaid with governmental funds. Private activity bonds are bonds in which the State or local government serves as a conduit providing financing to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted purposes (“qualified private activity bonds”) and other requirements are met. During the period 2001–2010, the average annual volume of new tax-exempt bonds issued by State and local governments was $340 billion and the average annual volume of tax-exempt notes (bonds with maturities of less than one year) issued by State and local governments was $60 billion. As of the fourth quarter of 2011, State and local governments had total tax-exempt security liabilities of nearly $3.0 trillion.4

[385] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 7: “Because they do not generate AMT adjustments or preferences, tax-exempt bond interest (not including private activity bonds), itemized deductions for interest expenses, miscellaneous itemized deductions not subject to the 2-percentof-AGI floor, casualty or theft losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, produce nontaxability.”

[386] Testimony: “Federal Support for State and Local Governments Through the Tax Code.” By Frank Sammartino (Assistant Director for Tax Analysis). Congressional Budget Office, April 25, 2012. <www.cbo.gov>

Pages 3–4:

The federal government offers preferential tax treatment for bonds issued by state and local governments to finance governmental activities. Most tax-preferred bonds are used to finance schools, transportation infrastructure, utilities, and other capital-intensive projects. Although there are several ways in which the tax preference may be structured, in all cases state and local governments face lower borrowing costs than they would otherwise.

Types of Tax-Preferred Bonds

Borrowing by state and local governments benefits from several types of federal tax preferences. The most commonly used tax preference is the exclusion from federal income tax of interest paid on bonds issued to finance the activities of state and local governments. Such tax-exempt bonds—known as governmental bonds—enable state and local governments to borrow more cheaply than they could otherwise.

Another type of tax-exempt bond—qualified private activity bonds, or QPABs—is also issued by state and local governments. In contrast to governmental bonds, QPABs reduce the costs to the private sector of financing some projects that provide public benefits. Although the issuance of QPABs can be advantageous to state and local finances—for example, by encouraging the private sector to undertake projects whose public benefits would otherwise either have gone unrealized or required government investment to bring about—states and localities are not responsible for the interest and principal payments on such bonds. Consequently, QPABs are not the focus of this testimony (although the findings of some studies cited later in this section apply to them as well as to governmental bonds).6

[387] Article: “High-Income Tax Returns for Tax Year 2017.” By Justin Bryan. Internal Revenue Service, Statistics of Income Bulletin, Fall 2020. <www.irs.gov>

Page 15:

However, certain income items from tax-preferred sources may be reduced because of their preferential treatment. An example is interest from tax-exempt State and local Government bonds. The interest rate on tax-exempt bonds is generally lower than the interest rate on taxable bonds of the same maturity and risk, with the difference approximately equal to the tax rate of the typical investor in tax-exempt bonds. Thus, investors in tax-exempt bonds are effectively paying a tax, referred to as an “implicit tax,” and tax-exempt interest as reported is measured on an after-tax, rather than a pretax, basis.

[388] Report: “Who Benefits from Ending the Double Taxation of Dividends?” By Donald B. Marron. U.S. Congress, Joint Economic Committee, February 2003. <www.jec.senate.gov>

A static analysis—one that focuses solely on who pays taxes to the government—would suggest that the tax exemption [on munis] is a major boon for rich investors. After all, those investors get to earn tax-free interest on the bonds. The flaw in this reasoning is the fact that the interest rate that investors receive on tax-exempt debt is much lower than they could receive on comparable investments. Investors compete among themselves to get the best after-tax returns on their investments. This competition passes much of the benefit of tax exemption back to state and local governments in the form of lower interest rates, making it cheaper and easier to finance schools, roads, and other local projects.

Demonstrating this dynamic requires little effort beyond surfing to a financial web site and doing some simple arithmetic. At this writing, a leading web site reports that the average two-year municipal bond of highest quality yields 1.13 percent (i.e., an investor purchasing $10,000 of two-year municipal bonds would receive interest payments of $113 per year). At the same time, the average two-year Treasury yields 1.59 percent.

U.S. Treasuries are widely considered to be the safest investments in the world, yet they pay substantially more interest than do municipal bonds. Why? Because interest on municipal bonds is exempt from federal taxes.

[389] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 56: “CBO’s [Congressional Budget Office’s] baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged.”

Page 60: “For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP [gross domestic product] because rising real income tends to push a greater share of income into higher tax brackets—a phenomenon known as real bracket creep.”

Page 66: “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.”

[390] Report: “The ‘Fiscal Cliff’ and the American Taxpayer Relief Act of 2012.” By Mindy R. Levit and others. Congressional Research Service, January 4, 2013. <www.fas.org>

Page 1: “On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA; H.R. 8 as enacted), which prevented many—but not all—of the fiscal cliff policies from going into effect.”

Pages 3–6:

ATRA addressed several revenue provisions that had been set to expire at the end of 2012. These included the “Bush-era tax cuts,” provisions related to the estate tax, certain tax provisions enacted or expanded as part of the American Recovery and Reinvestment Act of 2009, the Alternative Minimum Tax (AMT), and a number of temporary tax provisions (also known as “tax extenders”). …

The Bush-era tax cuts included provisions—initially enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27)8—which reduced income tax liabilities from 2002 to 2010. These tax cuts were extended for 2011 and 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The Bush-era tax cuts lowered income taxes in a variety of ways, including by reducing marginal tax rates on ordinary income; reducing tax rates on long-term capital gains and dividends; reduced and ultimately repealed limitations for personal exemptions (PEP) and itemized deductions (Pease);9 and expanded certain tax credits, including the Earned Income Tax Credit (EITC),10 child tax credit,11 adoption tax credit,12 and dependent care tax credit.13 The Bush-era tax cuts also contained provisions to reduce the marriage tax penalty,14 as well as modifying and expanding various education-related tax incentives.

ATRA made a variety of changes to these tax provisions. The law permanently extended and in certain cases modified tax provisions originally included in EGTRRA and JGTRRA. Specifically, ATRA permanently extended the reduced tax rates on both ordinary income and capital gains and dividends for taxpayers with taxable income15 below $400,000 ($450,000 for married taxpayers filing jointly).16 For taxpayers with taxable income above these thresholds, the marginal tax rate on ordinary income rose from 35% to 39.6% on the portion of their income above these thresholds, and the top tax rate on long term capital gains and dividends rose from 15% to 20%. ATRA also reinstated PEP and Pease for taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for married couples filing jointly), allowing these limitations on personal exemptions and overall itemized deductions to expire for those with AGI below these thresholds. ATRA also permanently extended the tax changes to a variety of tax credits, the marriage penalty and education-related tax incentives. …

Estate and Gift Tax

EGTRRA enacted provisions to phase out the estate tax18 over a 10-year period. In 2010, there was no federal estate tax. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reinstated, through 2012, the estate tax. As reinstated, the top rate for the estate tax was lower than it had been in 2009 (35%, as opposed to 45%). The exemption amount, as reinstated, was also higher than it had been in 2009 ($5.0 million, as opposed to $3.5 million). Absent legislative action, after 2012 the estate tax would have returned to pre-EGGTRA rules, with a top rate of 55% and a $1 million exemption level per decedent. ATRA permanently extended the estate tax rules established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,19 except for the top tax rate which was increased from 35% to 40%. Hence, under ATRA, $5 million of a decedent’s estate would be exempt from the estate tax (this threshold is indexed for inflation occurring after 2011 and was $5.12 million per decedent in 2012), and the top rate on estates over this threshold would be 40%. …

19 Thus, ATRA also extends the gift tax levels of a $5.12 million ($5 million indexed for inflation after 2011) exemption and a 40% top rate. In addition, it extends portability rules related to the passing of an exemption amount onto a surviving spouse.

Alternative Minimum Tax (AMT) Patch

The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax.21 …

Crucially, prior to the enactment of H.R. 8, key parts of the AMT—including the exemption amount—were not indexed for inflation. This meant that additional taxpayers—an estimated 27 million in 2012—would be subject to the AMT due to the rise of their nominal income levels over time.22 Over the past decade, Congress had regularly enacted temporary increases of the AMT exemption amount to adjust for inflation and allowed nonrefundable personal tax credits to reduce AMT tax liability (these policies are often known as the AMT “patch”). ATRA permanently adjusts the AMT exemption amount for inflation,23 ending the need for temporary “patches,” and permanently allows nonrefundable personal tax credits to offset AMT liability.

[391] Report: “The 2013 Long-Term Budget Outlook.” By Joyce Manchester and others. Congressional Budget Office, September 2013. <www.cbo.gov>

Pages 66–67:

The American Taxpayer Relief Act of 2012 (Public Law 112-240), which was enacted in early January 2013, permanently extended some lower tax rates and other tax provisions that expired at the end of calendar year 2012. In addition, it modified the alternative minimum tax (AMT) to permanently limit its reach and temporarily extended other tax provisions.1 The staff of the Joint Committee on Taxation and the Congressional Budget Office (CBO) estimated that, relative to laws in place at the end of 2012, enactment of the American Taxpayer Relief Act would reduce revenues by $3.6 trillion over the 2013–2022 period. The reduction in 2022 amounted to $496 billion, or about 10 percent of the revenues CBO had previously projected. With some modifications affecting high-income taxpayers, the new law made permanent several major tax provisions, originally enacted in 2001 and 2003, that expired on December 31, 2012.2 Those provisions include the following:

• Lower tax rates on ordinary income (generally all income except capital gains and dividends);

• An expanded 15 percent tax bracket and an increase in the standard deduction for married couples;

• The child tax credit of $1,000 per child;

• The 15 percent tax rate on long-term capital gains realizations and dividends; and

• The estate and gift tax rules in effect in 2012, with some modifications.

Under prior law, at the end of 2012, tax rates on ordinary income were slated to rise from the lower rates in effect that year (10, 15, 25, 28, 33, and 35 percent) to the rates in effect before 2001 (15, 28, 31, 36, and 39.6 percent). The American Taxpayer Relief Act permanently extended the lower rates, with the following exception: The top tax rate for single taxpayers with income above $400,000 and for married taxpayers who file jointly and have income above $450,000 is now set at 39.6 percent, the same top rate that had been scheduled to take effect in 2013 before the law was enacted.

The new law permanently extended the increase in the child tax credit from $500 to $1,000 per child; it also permanently extended provisions (enacted in 2001) that made the credit refundable for more families. (Before 2001, the credit was refundable only for families with three or more children.) In addition, the law extended, through 2017, a lower earned income threshold for the refundability of the child tax credit, expansions of the earned income credit, and the American Opportunity Tax Credit (a refundable credit for postsecondary education expenses)—all of which were enacted in 2009.

Before the enactment of the American Taxpayer Relief Act, the tax rate on capital gains was scheduled to rise to 20 percent, and the tax rate on dividends was scheduled to equal the taxpayer’s rate on other income in 2013. The new law kept the 15 percent limit on those rates for most taxpayers and raised the top rate on dividends and capital gains to 20 percent for high-income taxpayers. Separately, the law permanently extended the estate and gift tax rules in effect in 2012, although with a higher top tax rate of 40 percent, and indexed the unified credit under that tax for inflation. The law also increased the AMT’s exemption amount (the higher amount had expired at the end of 2011) and indexed that amount (and other parameters of the tax) for inflation, beginning in 2013.

Several tax provisions extended by the new law through calendar year 2013 had expired at the end of calendar year 2011. Some of those, including the research and experimentation tax credit, have routinely been extended in the past. The law also extended for one year a tax provision that allows businesses to immediately deduct 50 percent of new investments in equipment.

[392] Calculated with the dataset: “The 2012 Long-Term Budget Outlook.” Congressional Budget Office, June 2012. <www.cbo.gov>

Tab: “Summary Extended Baseline. Summary Data for the Extended Baseline Scenario (Percentage of Gross Domestic Product)”

Tab: “Figure 6-2. Revenues, by Source, 1972 to 2011 (Percentage of gross domestic product)”

NOTE: An Excel file containing the data and calculations is available upon request.

[393] Report: “2012 Long-Term Budget Outlook.” Congressional Budget Office, June 2012. <www.cbo.gov>

Page 10:

If current law remained in effect, revenues would also rise considerably: By 2021, they would reach higher levels relative to the size of the economy than have ever been recorded in the nation’s history. Specifically, revenues would jump from about 16 percent of GDP now to 19 percent in 2013 as the economic recovery increased taxable income and as the tax cuts enacted since 2001, including relief from the AMT [Alternative Minimum Tax], expired in 2012 and 2013 as scheduled.14 In later years, revenues would continue to rise relative to GDP, for three main reasons. First, ongoing increases in real income (that is, the income growth that remains after removing growth attributable to inflation) would push taxpayers into higher income tax brackets because those brackets are indexed for inflation but not for increases in real income. Second, ongoing inflation, although projected to be modest, and increases in real income would cause more people to owe tax under the AMT (because the AMT is not indexed for inflation or for real income growth). And third, the excise tax on certain high-premium health insurance plans, which is scheduled to take effect in 2018, would have a growing impact on revenues. Taken together, those factors would cause marginal tax rates to increase and federal revenues to grow faster than the economy, reaching almost 24 percent of GDP in 2037. By comparison, federal revenues averaged 18 percent of GDP between 1972 and 2011, peaking at 20.6 percent in 2000.

Pages 86–87:

Expiring Individual Income Tax Provisions, Including the AMT. If left unchanged, certain aspects of current tax law would generate an increase in individual income tax revenues relative to GDP of 3.3 percentage points between 2012 and 2037 (see Table 6-2). Most of the provisions enacted since 2001 and extended by the 2010 tax act are scheduled to expire after December 31, 2012. If that occurs, certain features of the tax code would revert to prior law: Tax rates would rise, the value of some tax credits would decrease, other tax credits would expire, and thresholds for certain tax rates would change. Those changes would raise receipts as a share of GDP in 2013 and beyond.

Another factor that would increase revenues relative to GDP under current law is the growing impact of the AMT. The alternative minimum tax is a parallel individual income tax system that provides fewer exemptions, deductions, and rates than the regular income tax. Households must calculate the amount they owe under both the AMT and the regular income tax and then pay the higher amount.125 The parameters that determine the amount owed under the AMT are not indexed for inflation. Therefore, as inflation increases people’s income over time, more taxpayers become subject to the AMT, and that tax claims a larger share of GDP. Since 2001, lawmakers have reduced the impact of the AMT by temporarily raising its exemption amounts. The most recent of those temporary adjustments expired at the end of 2011, however.

[394] Calculated with data from:

a) Dataset: “2021 Long-Term Budget Outlook.” Congressional Budget Office, March 2021. <www.cbo.gov>

Tab: “1. Summary Data for the Extended Baseline”

b) Report: “The Budget and Economic Outlook: 2021 to 2031.” Congressional Budget Office, February 11, 2021. <www.cbo.gov>

Supplementary data: “Historical Budget Data.” <www.cbo.gov>

Tab: “2a. Revenues, by Major Source as a Share of GDP, Since 1962”

NOTE: An Excel file containing the data and calculations is available upon request.

[395] Report: “2021 Long-Term Budget Outlook.” Congressional Budget Office, March 4, 2021. <www.cbo.gov>

Page 10: “Revenues also rise after 2031—although not as quickly as mandatory spending—driven by real bracket creep (the process in which an ever-larger proportion of income becomes subject to higher tax rates as income rises faster than inflation).”

Pages 24–25:

In CBO’s [Congressional Budget Office’s] extended baseline projections, revenues measured as a share of GDP [gross domestic product] are generally higher than they have been, on average, in recent decades. Revenues have averaged 17.3 percent of GDP over the past 50 years, but they have fluctuated between 15 percent and 20 percent of GDP over that period because of changes in tax laws and interactions between those laws and economic conditions.

… CBO projects a continued decline in revenues as a percentage of GDP in 2021, reflecting the economic disruption caused by the pandemic and the federal government’s response to it, including the enactment of legislation. If current laws generally remained unchanged, revenues would grow for the remainder of the decade. After declining from 16.3 percent in 2020 to 16.0 percent in 2021, total revenues as a share of GDP are projected to reach 17.2 percent in 2025. Largely because of scheduled increases in taxes resulting from the expiration of certain provisions of the 2017 tax act that affect individual income taxes, revenues are projected to rise after 2025, reaching 17.9 percent of GDP by 2027. From 2028 to 2031, revenues grow more slowly than GDP. In the agency’s extended baseline projections, revenues grow faster than GDP after 2031 and total 18.5 percent of GDP in 2051. …

The largest contributor to the increase in total revenues over the next three decades is real bracket creep, which occurs when income grows faster than inflation, as typically happens during economic expansions. If current laws generally remained unchanged, real bracket creep would continue to gradually push up taxes in relation to income through 2051, CBO projects, thereby increasing tax receipts. Even though most income tax brackets, exemptions, credits, and other tax thresholds are indexed to inflation, more income is pushed into higher tax brackets, and credits

are phased out when income growth exceeds the rate of inflation.31 Between 2031 and 2051, the share of income taxed at the top rate of 39.6 percent would rise by 1 percentage point—and the share of income excluded from taxation would fall by 3 percentage points—because of real bracket creep (see Figure 12).38 …

Another factor pushing up taxes relative to income is the scheduled expiration after calendar year 2025 of nearly all provisions of the 2017 tax act that affect individual income taxes. The provisions that are scheduled to expire include lower statutory tax rates, the higher standard deduction, the repeal of personal exemptions, and the expansion of the child tax credit.33 Those expirations would cause tax liabilities to rise in calendar year 2026, boosting individual income tax receipts relative to GDP by 0.9 percentage points for the 2021–2031 period.

[396] Report: “The 2016 Long-Term Budget Outlook.” Congressional Budget Office, July 12, 2016. <www.cbo.gov>

Pages 59–60:

The cumulative effect of rising prices would significantly reduce the value of parameters of the tax system that are not indexed for inflation, CBO projects. For example, the amount of mortgage debt eligible for the mortgage interest deduction, which is not indexed for inflation, would fall from $1 million today to about $550,000 in 2046 measured in today’s dollars, CBO estimates. And the portion of Social Security benefits that is taxable would increase from about 36 percent now to over 50 percent by 2046, CBO estimates, because the thresholds for taxing benefits are not indexed for inflation. In addition, the maximum values of certain tax credits, such as the child tax credit, are not adjusted for inflation and thus would diminish in value over time.

Under the extended baseline, even tax parameters that are indexed for inflation would lose value over time when compared with income. The thresholds for taxing income at different rates rise with inflation, but because incomes tend to rise faster than inflation, those thresholds still decline relative to income over time. Similarly, according to CBO’s projections, the current $4,050 personal exemption amount would double by 2046 because it is indexed for inflation. But income per household will probably almost triple during that period, so the value of the exemption relative to income would decline by almost one-third. That decline would tend to boost average tax rates of lower-income taxpayers, for whom the personal exemption is larger relative to income, by more than those for higher-income taxpayers, for whom the personal exemption is smaller relative to income. And without legislative changes, the proportion of taxpayers claiming the earned income tax credit would fall from 16 percent this year to 12 percent in 2046, CBO projects, as growth in real income made more taxpayers ineligible for the credit.

Those developments and others would cause individual income taxes as a share of income to grow by different amounts for households at different points in the income distribution.

• According to CBO’s analysis, a married couple with two children earning the median total income of $108,700 (including both cash income and other compensation) in 2016 and filing a joint tax return will pay about 5 percent of their income in individual income taxes (see Table 5-3).12 By 2046, under current law, a similar couple earning the median income would pay 8 percent of their income in individual income taxes.

• For a married couple with two children earning half the median total income, the change in individual income taxes as a share of income would be much greater, CBO estimates: In 2016, such a family will typically receive a net payment from the federal government equal to 8 percent of its income in the form of refundable tax credits, but by 2046 the family would become a net taxpayer, paying about 2 percent of its income in income taxes.

• A married couple with two children earning four times the median total income would pay 22 percent of their income in individual income taxes in 2046, CBO projects, much higher than the amount paid by families with lower earnings. But the change in that share—up 3 percentage points from 2016—is much smaller than the 10 percentage-point increase in the share of taxes paid by similar families earning half the median total income.

Page 61: “Table 5-3. Individual Income and Payroll Taxes as a Share of Total Income Under CBO’s Extended Baseline … Taxes as a Share of Total Income (Percent) … Income and Payroll Taxesd … Married Couple (With Two Children) Filing a Joint Return … Median Total Income … 2016 [=] 17 … 2046 [=] 19 … d Payroll taxes include the share paid by employers.”

CALCULATION: (19 – 17) / 17 = 12%

[397] Calculated with data from the report: “How Income Growth Affects Tax Revenues in CBO’s Long-Term Budget Projections.” By Kathleen Burke and Edward Harris. Congressional Budget Office, June 2019. <www.cbo.gov>

Page 4: “In CBO’s projections, income per person grows at 3.3 percent per year, on average. But the C-CPI-U [chained consumer price index, the inflation measure] grows at just 2.1 percent per year. Therefore, over time, income growth substantially exceeds the growth not only of the unindexed elements of the tax system but also of the indexed elements.”

Page 8:

This family—a married couple (including one worker with average earnings) with two children—would see its tax rate rise 5 percentage points between 2026 and 2049. Several factors would account for the increase:

• The family’s taxable income would grow more rapidly than its total income because the standard deduction and person exemption would grow only at the rate of inflation.

• The taxes owed on taxable income would rise more quickly than taxable income as more income fell into higher tax brackets.

• The family would become ineligible for the child credit as its income grew past the upper income limit for that credit (which is not inflation-adjusted). …

Illustrative Example of Real Bracket Creep: A Four-Person Family With Average Earnings (Nominal Dollars)

2026

2049

Percentage change

Income

$72,000

$154,000

114

– Standard deduction

$15,400

$25,100

63

– Personal exemptions

$19,800

$32,200

63

= Taxable Income

$36,800

$96,700

163

Tax Before Credits

$4,390

$12,668

189

– Child credit

$2,000

$0

–100

= Tax After Credits

$2,390

$12,668

430

Average Tax Rate (Percent)

3.3%

8.2%

4.9%

To illustrate changes caused by real bracket creep, rather than changes caused by tax law, this example begins in 2026, after the expiration of most provisions of the 2017 tax act.

CALCULATION: (8.2% – 3.3%) / 3.3% = 148%

[398] Pamphlet: “Understanding the Benefits.” U.S. Social Security Administration, January 2021. <www.ssa.gov>

Pages 10–11:

Some people who get Social Security will have to pay taxes on their benefits. About 40 percent of our current beneficiaries pay taxes on their benefits.

You may have to pay taxes on your benefits if you file a federal tax return as an “individual” and your total income is more than $25,000. If you file a joint return, you may have to pay taxes if you and your spouse have a total income that is more than $32,000.

NOTE: For more detail about taxes on Social Security benefits, visit Just Facts’ research on Social Security.

[399] Report: “Social Security: Taxation of Benefits.” By Paul S. Davies. Congressional Research Service. Updated June 12, 2020. <fas.org>

Page 2 (of PDF):

The Congressional Budget Office (CBO) estimated that 49% of Social Security beneficiaries were affected by the income taxation of Social Security benefits in tax year 2014. That share is expected to grow over time because the income thresholds used to determine the taxable share of benefits are not indexed for inflation or wage growth. A Social Security Administration analysis projected that over 56% of Social Security beneficiary families will owe income tax on their Social Security benefits in 2050. Among those who owe income tax on their Social Security benefits, the tax liability increases with income.

[400] Report: “The 2016 Long-Term Budget Outlook.” Congressional Budget Office, July 12, 2016. <www.cbo.gov>

Pages 59–60:

The cumulative effect of rising prices would significantly reduce the value of parameters of the tax system that are not indexed for inflation, CBO [Congressional Budget Office] projects. For example, the amount of mortgage debt eligible for the mortgage interest deduction, which is not indexed for inflation, would fall from $1 million today to about $550,000 in 2046 measured in today’s dollars, CBO estimates.

[401] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary. For businesses, pass-through entities experience a reduction in effective tax rates via a new deduction, which is also temporary. The statutory corporate tax rate is permanently reduced. Many deductions, credits, and other provisions for businesses are also modified. The act also substantively changes the international tax system, generally moving the U.S. tax system towards a territorial system.

Page 15:

Mortgage Interest Deduction

2017 Tax Law … Mortgage interest is deductible on the first $1 million of combined (first and second home) acquisition debt, plus interest on $100,000 of home equity debt.

IRC Section 163(h)

P.L. 115-97 … Limits the amount of mortgage interest that may be deducted to the interest paid on the first $750,000 of mortgage debt. The limitation applies to new loans incurred after December 15, 2017. Mortgage debt that is the result of a refinance on or before December 15, 2017, is exempt from the reduction to the extent that the new mortgage does not exceed the amount refinanced. No interest deduction for new or existing home equity debt.

Provision expires 12/31/25

(Section 11043 of the P.L. 115-97)

[402] Book: Your Money 2020: The WSJ Tax Guide. By Laura Saunders, Richard Rubin, and the staff of the Wall Street Journal. Wall Street Journal. Updated April 2020. <1lib.us>

Page 25: “The new law allows homeowners with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home. …These limits aren’t indexed for inflation.”

[403] Report: “The 2016 Long-Term Budget Outlook.” Congressional Budget Office, July 12, 2016. <www.cbo.gov>

Page 55: “[R]evenues derived from excise taxes have declined over time relative to GDP [gross domestic product] because many excise taxes are levied on the unit quantity of a good purchased (such as a gallon of gasoline) as opposed to a percentage of the price paid. Because those levies are not indexed for inflation, the revenues they generate have declined as a share of GDP as prices have risen.”

[404] Report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 26:

Collections of excise taxes totaled $99 billion in 2019, or 0.5 percent of GDP [gross domestic product]. Those receipts are projected to remain at that level in 2020 before declining to 0.3 percent of GDP by 2030. That decline would occur primarily because many excise taxes are imposed as a fixed dollar amount per unit sold, and the number of units is growing slowly or declining.

[405] “2020 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2020. <www.cms.gov>

Page 10: “Starting in 2013, high-income workers pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples).”

[406] Report: “Overview of the Federal Tax System in 2020.” Congressional Research Service. Updated November 10, 2020. <fas.org>

Page 14:

The Medicare portion of the tax, or the Medicare hospital insurance (HI) tax, is 1.45% for both employees and employers (2.9% in total).71 There is no wage cap for the HI tax (the Medicare HI tax applies to all wage earnings). Certain higher-income taxpayers may be subject to an additional HI tax of 0.9%. For married taxpayers filing jointly, combined wages above $250,000 are subject to the additional 0.9% HI tax.72 The threshold for single and head of household filers is $200,000. These threshold amounts are not indexed for inflation.

72 The threshold amount for married taxpayers filing separately is $125,000.

[407] Webpage: “Questions and Answers on the Net Investment Income Tax.” Internal Revenue Service. Last updated January 22, 2021. <www.irs.gov>

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. …

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013. …

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status; Threshold Amount;

Married filing jointly; $250,000;

Married filing separately; $125,000;

Single; $200,000;

Head of household (with qualifying person); $200,000;

Qualifying widow(er) with dependent child; $250,000;

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

[408] “2019 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, April 22, 2019. <www.cms.gov>

Page 21: “The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 pay an additional Medicare contribution of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds.”

[409] Report: “Estimated Revenue Effects of the Amendment in the Nature of a Substitute to H.R. 4872, the Reconciliation Act of 2010, as Amended, in Combination with the Revenue Effects of H.R. 3590, the Patient Protection and Affordable Care Act (‘PPACA’), as Passed by the Senate, and Scheduled for Consideration by the House Committee on Rules on March 20, 2010.” United States Congress, Joint Committee on Taxation, March 20, 2010. <www.jct.gov>

Page 2: “Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed)”

[410] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 56: “CBO’s [Congressional Budget Office’s] baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged.”

Page 60:

Some of the variation in the amounts of revenue generated by different types of taxes has stemmed from changes in economic conditions and from the way those changes interact with the tax code. For example, in the absence of legislated tax reductions, receipts from individual income taxes tend to grow relative to GDP [gross domestic product] because rising real income tends to push a greater share of income into higher tax brackets—a phenomenon known as real bracket creep. In addition, because some parameters of the tax system are not indexed to increase with inflation, rising prices alone push a greater share of income into higher tax brackets.3

3 The parameters of the tax system include the amounts that define the various tax brackets; the amounts of the personal exemption, standard deductions, and credits; and tax rates. Many of the parameters—including the personal exemption, standard deduction, and tax brackets—are indexed for inflation, but some, such as the amount of the maximum child tax credit, are not. The effect of price increases on tax receipts was much more significant before 1984 when none of the parameters of the individual income tax were indexed for inflation.

Page 66:

Even tax parameters that are indexed for inflation would lose value relative to income over the long term under the extended baseline. For example, according to CBO’s projections, the current $3,950 personal exemption would rise by more than 80 percent by 2039 because it is indexed for inflation, but income per household would more than double during that period, so the value of the exemption relative to income would decline by more than 30 percent. If income grew at similar rates for higher income and lower-income taxpayers, the decline in the value of the personal exemption relative to income would tend to boost the average tax rates of lower-income taxpayers more than the average tax rates of other taxpayers because the personal exemption is larger relative to income for lower-income taxpayers. As another example, without legislative changes, the proportion of taxpayers claiming the earned income tax credit is projected to fall from 16 percent this year to 13 percent in 2039 as growth in real income would move more taxpayers out of the eligibility range for the credit.

[411] Report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 24:

The second largest factor pushing up taxes relative to income arises from the way certain parameters of the tax system are scheduled to change over time in relation to growth in income, which reflects the effects of both real (inflation-adjusted) economic activity and inflation. The most important component of that effect, real bracket creep, occurs because income tax brackets are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is expanding, more income is pushed into higher tax brackets.

[412] Report: “The 2016 Long-Term Budget Outlook.” Congressional Budget Office, July 12, 2016. <www.cbo.gov>

Page 58:

The AMT [alternative minimum tax] is a parallel income tax system with fewer exemptions, deductions, and rates than the regular income tax system. Households must calculate the amount they owe under both tax systems and pay whichever is larger. The American Taxpayer Relief Act raised the exemption amounts for the AMT for 2012 and, beginning in 2013, permanently indexed those amounts for inflation. The law also indexed for inflation the income thresholds at which those exemptions phase out and the income threshold at which the second rate bracket for the AMT begins. Although rising real income will gradually subject more taxpayers to the AMT, many of those newly affected taxpayers will owe only slightly more than their regular income tax liability.

[413] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary.

Page 19:

Individual Alternative Minimum Tax

2017 Tax Law … A tax is imposed at 26% on an individual’s alternative minimum taxable income (primarily income without a standard deduction, state and local income deduction, or deductions for personal exemptions) less an exemption amount. For 2018 the exemption is $55,400 for singles and $86,200 for married couples. The exemption phases out beginning at $123,100 for singles and $164,100 for married couples. A higher rate of 28% applies to taxpayers with incomes above $95,750 for single filers and $191,500 for married taxpayers filing joint returns. These amounts are indexed for inflation. Prior-year AMT amounts can be credited against regular tax.

IRC Section 55

P.L. 115-97 … Increases the AMT exemption amounts to $70,300 for unmarried taxpayers (single filers and heads of households) and $109,400 for married taxpayers filing joint returns. Exemption phases out at $500,000 for singles and $1,000,000 for married taxpayers filing jointly. These amounts are indexed for inflation.

Provision expires 12/31/2025

(Section 12003 of P.L. 115-97)

[414] Tax Policy Center Briefing Book. Urban-Brookings Tax Policy Center. Updated May 2020. <www.taxpolicycenter.org>

Page 208 (of PDF):

Unlike the regular income tax system, Congress did not index the AMT [alternative minimum] for inflation. Each year, the standard deduction, personal exemptions, and tax bracket thresholds in the regular income tax would rise to keep pace with inflation. In contrast, the AMT exemption and brackets stayed fixed. Thus, over time, as a taxpayer’s income rose with inflation, AMT liability rose relative to regular income tax liability. Because taxpayers paid the larger of the two taxes, inflation pushed more people onto the AMT, and AMT revenue increased steadily after 1987. …

The American Taxpayer Relief Act of 2012 (ATRA) enacted an AMT “fix” by establishing a higher AMT exemption, indexing the AMT parameters for inflation, and allowing certain tax credits under the AMT. Combined with the fact that ATRA raised regular income taxes on high-income taxpayers, the permanent AMT fix reduced AMT revenue to $27.1 billion, or 2.4 percent of income tax revenue, in 2013. …

The AMT provisions in TCJA [2017 Tax Cuts and Jobs Act], along with almost all its other individual income tax measures, are set to expire at the end of 2025. Thus, barring new legislation, AMT revenue will explode from $5.3 billion in 2025 to $59.8 billion in 2026. It will continue to rise to $75.1 billion—2.6 percent of all individual income tax revenue—by 2030 (figure 2).

[415] Report: “The 2016 Long-Term Budget Outlook.” Congressional Budget Office, July 12, 2016. <www.cbo.gov>

Page 60: “[E]ven tax parameters that are indexed for inflation would lose value over time when compared with income. … And without legislative changes, the proportion of taxpayers claiming the earned income tax credit would fall from 16 percent this year to 12 percent in 2046, CBO [Congressional Budget Office] projects, as growth in real income made more taxpayers ineligible for the credit.”

[416] Report: “The Earned Income Tax Credit (EITC): How it Works and Who Receives It.” Congressional Research Service. Updated January 12, 2021. <fas.org>

Page 7: “The EITC [earned-income tax credit] is completely phased out (EITC = $0) once the taxpayer’s AGI [adjusted gross income] (or earned income, whichever is greater) reaches $41,756. The earned income amounts and the phaseout amount thresholds are adjusted each year for inflation.”

Page 13:

Beginning in 2014, the total credit dollars claimed in real terms started to decline. It is unclear what is causing the decline. One possible explanation is that income growth among low-wage workers over this time period has reduced the number of people qualifying for the EITC.38

38 CRS Report R45090, Real Wage Trends, 1979 to 2019, by Sarah A. Donovan and David H. Bradley.

[417] Report: “The Budget and Economic Outlook: 2020 to 2030.” Congressional Budget Office, January 2020. <www.cbo.gov>

Page 68: “CBO [Congressional Budget Office] lowered its projections of outlays for the refundable portions of the earned income and child tax credits for the 2020–2029 period by $13 billion (or 1.5 percent), on net, because the agency increased its forecasts of wages and salaries over most of the projection period.”

[418] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 1: “A number of aspects of the Federal tax laws are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation. The standard deduction, tax rate brackets, and the annual gift tax exclusion are examples of amounts that are indexed for inflation.”

[419] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 12: “While the base gift tax exclusion amount is unchanged by P.L. 115-97, the inflation adjustment is changed to chained-CPI which may result in a slightly different exclusion amount in 2018.”

[420] Tax Policy Center Briefing Book. Urban-Brookings Tax Policy Center. Updated May 2020. <www.taxpolicycenter.org>

Page 402 (of PDF): “An additional amount each year is also disregarded for both the gift and estate taxes. This annual exclusion, $15,000 in 2020, is indexed for inflation in $1,000 increments and is granted separately for each recipient.”

[421] Commentary: “The Graph All Budget Discussions Should Start With.” By Ezra Klein. Washington Post, April 11, 2011. <www.washingtonpost.com>

“That’s Austin Frakt’s graph, which uses the Congressional Budget Office’s September numbers, and it shows what happens if we do … nothing. The answer, as you can see, is that the budget comes roughly into balance.”

NOTES:

  • The link Klein provided in the quote above states that the chart is for “CBO’s baseline projection,” which, as shown in the next footnote, reflects “current law.”
  • Klein is wrong that CBO published these numbers in September. The link he provided in the quote above leads to a blog post from April of 2011, which links to another blog post from September of 2010, which links to the CBO report cited below, which was published in June 2010 and revised in August 2010.

[422] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. Revised August 2010. <www.cbo.gov>

Page x: “The first long-term budget scenario used in this analysis, the extended-baseline scenario, adheres closely to current law.”

[423] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. Revised August 2010. <www.cbo.gov>

Page 6:

Revenues would also rise considerably under current law; by the 2020s, they would reach higher levels relative to the size of the economy than ever recorded in the nation’s history. … First, ongoing increases in real income would push taxpayers into higher tax brackets. Second, ongoing inflation, even if modest, would cause more people to owe tax under the AMT [Alternative Minimum Tax]. And third, the recently enacted excise tax on certain high-premium health insurance plans would have a growing effect on revenues.

Page 13: “[T]he effective marginal tax rate on labor income would rise from 29 percent today to about 38 percent in 2035. … All told, average tax rates (taxes as a share of income) would rise considerably, and people at various points in the income scale would pay a very different percentage of their income in taxes than people at the same points do today.”

Page 60: “Estate and gift taxes are projected to increase as a share of GDP following the reinstatement of the estate tax after 2010. The dollar amount of an estate that is exempt from taxation will remain fixed at $1 million starting in 2011 and not be indexed for inflation thereafter; as a result, a greater share of wealth would become subject to the tax over time.”

Page 64: “Over the coming decades, the cumulative effect of rising prices will sharply reduce the value of some parameters of the tax system that are not indexed for inflation. Under the extended-baseline scenario, the estate tax exemption, which will be $1 million in 2011 under current law, would be worth about $600,000 (in 2010 dollars) by 2035….”

[424] Calculated with data from:

a) Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. Revised August 2010. <www.cbo.gov>

Page 55: “Over the past 40 years, total federal revenues have ranged from 14.8 percent to 20.6 percent of GDP, averaging 18.1 percent, with no evident trend over time….”

b) Dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Figure A-1: “Revenues and Primary Spending, by Category, Under CBO’s Long-Term Budget Scenarios, Through 2084 (percentage of gross domestic product). … Extended-Baseline Scenario”

NOTE: An Excel file containing the data and calculations is available upon request.

[425] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. Revised August 2010. <www.cbo.gov>

Page x: “The first long-term budget scenario used in this analysis, the extended-baseline scenario, adheres closely to current law.”

[426] Dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Tab: “Summary Extended-Baseline”

[427] Webpage: “Jared Bernstein.” Center on Budget and Policy Priorities. Accessed August 24, 2018 at <www.cbpp.org>

“Jared Bernstein joined the Center on Budget and Policy Priorities in 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.”

[428] Commentary: “We Can Tame the Debt Without Breaking Medicare, Medicaid and Social Security.” By Jared Bernstein. Rolling Stone, June 7, 2012. <www.rollingstone.com>

Under that scenario, which in fact happens to conform to current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path. …

… The Bush tax cuts would all have to eventually sunset, and we’d need to continue—and ramp up—what looks like early progress on slowing the growth of health care spending.

But aside from dysfunctional politics feeding a largely misleading public debate, we could do this. If we, as a nation, decide that we want to achieve fiscal sustainability and preserve the entitlement programs, along with government’s other critical functions, it is well within our means to do so.

NOTE: In addition to neglecting the effects of bracket creep, Bernstein omitted several other important consequences of the current law scenario, which are detailed in the article below.

[429] Article: “Can We Prevent a Debt-Driven Economic Collapse Without Reforming Entitlements?” By James D. Agresti and Dustin Siggins. Just Facts, June 12, 2012. Updated 11/8/12. <www.justfactsdaily.com>

NOTE: An Excel file containing the Congressional Budget Office data in this article is available at <www.justfacts.com>

[430] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Pages 134–135:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions. As a consequence, many of the same aspects of the tax system that reduce economic efficiency also increase complexity.

Complexity also arises from efforts to achieve certain equity goals. Provisions that phase out various tax credits and deductions at higher income levels are designed to target benefits toward people with the greatest need, but they make taxes more difficult to calculate. Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer. In addition, the alternative minimum tax [AMT] is intended to limit the use of tax preferences by higher-income taxpayers, but it requires people to recalculate their tax liability in an entirely different way and then pay the larger of the regular tax or the AMT.

[431] Report: “Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance.” By James R. McTigue, Jr. Government Accountability Office, May 9, 2019. <www.gao.gov>

Pages 11–13:

The federal tax system contains complex rules that may be necessary to appropriately target tax policy goals, such as providing benefits to specific groups of taxpayers. However, this complexity imposes a wide range of recordkeeping, planning, computing, and filing requirements upon taxpayers. For example, taxpayers who receive income from rents, self-employment, and other sources may be required to make complicated calculations and keep detailed records. This complexity can lead to errors and underpaid or overpaid taxes. Complexity, and the lack of transparency that it can create, can also exacerbate doubts about the tax system’s integrity. Tax expenditures—tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates estimated by the Department of the Treasury to reduce tax revenue by about $1.38 trillion in fiscal year 2018—can add to tax code complexity. In part, this is because taxpayers must learn about, determine their eligibility for, and choose between tax expenditures that may have similar purposes. For example, as we reported in 2012, about 14 percent of filers in 2009 (1.5 million of almost 11 million eligible returns) did not claim an education credit or deduction for which they appeared eligible.15 …

Paid tax return preparers and tax software developers help taxpayers navigate the complexities of the tax code. However, some paid preparers may introduce their own mistakes. For example, in a limited study in 2014, we found that seven of 19 preparers who completed returns for our undercover investigators made errors with substantial tax consequences while, only two preparers calculated the correct refund amount.18 Likewise, using NRP [Internal Revenue Service’s National Research Program] data, which are statistically representative, we estimated that 60 percent of returns prepared by preparers contained errors.

18 GAO, “Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors,” GAO-14-467T (Washington, D.C.: Apr. 8, 2014).

[432] Webpage: “Tax Code, Regulations and Official Guidance.” Internal Revenue Service. Last updated May 1, 2020. <www.irs.gov>

Federal tax law begins with the Internal Revenue Code (IRC), enacted by Congress in Title 26 of the United States Code (26 U.S.C.). ….

… The version of the IRC underlying the retrieval functions presented above is generated from the official version of the U.S. Code made available to the public by Congress. However, this version is only current through the 1st Session of the 112th Congress convened in 2011. …

Finally, the IRC is complex and its sections must be read in the context of the entire Code and the court decisions that interpret it.

[433] U.S. Code Title 26: “Internal Revenue Code.” United States House of Representatives, Office of the Law Revision Counsel. Accessed January 27, 2021 at <uscode.house.gov>

NOTES:

  • Just Facts converted this webpage to a PDF document to ascertain page count, font, and page size. The exact number of pages in this PDF file is 5,672.
  • The vast majority of this PDF document is in size 11 font, but some parts (such as headers) are not. Thus, Just Facts uses the word “about” when quantifying the number of pages.

[434] “2017 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 2017. <taxpayeradvocate.irs.gov>

Volume 1. <www.taxpayeradvocate.irs.gov>

Page 84:

The printed code contains certain information that does not have the effect of law, such as a description of amendments that have been adopted, effective dates, cross references, and captions. … Therefore, our count somewhat overstates the number of words that are officially considered a part of the tax code, although as a practical matter, a person seeking to determine the law will likely have to read and consider many of these additional words, including effective dates, cross references, and captions.

[435] Webpage: “Tax Code, Regulations and Official Guidance.” Internal Revenue Service. Last updated May 1, 2020. <www.irs.gov>

“Treasury regulations (26 C.F.R.)—commonly referred to as Federal tax regulations—pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.”

[436] Code of Federal Regulations: “Title 26 – Internal Revenue, Parts 1–899.” U.S. Government Printing Office, April 1, 2020. <www.govinfo.gov>

NOTES:

  • The U.S. government has printed these regulations in 22 volumes that total 16,746 pages and contain 15,402 pages of regulations.
  • The page count of regulations does not include introductory pages or “finding aids” (a.k.a. indexes).
  • The vast majority of these regulations are in size 11 font, but some parts (such as headers) are not. Thus, Just Facts uses the word “about” when quantifying the number of pages.
  • An Excel file containing the breakdown of pages from each volume is available upon request.

[437] Code of Federal Regulations Title 26, Part 1, Sections 1.0-1.60: “Internal Revenue.” U.S. Government Printing Office. Revised as of April 1, 2020. <www.govinfo.gov>

Page v:

The Code of Federal Regulations is a codification of the general and permanent rules published in the Federal Register by the Executive departments and agencies of the Federal Government. The Code is divided into 50 titles which represent broad areas subject to Federal regulation. Each title is divided into chapters which usually bear the name of the issuing agency. Each chapter is further subdivided into parts covering specific regulatory areas.

Page vi: “Provisions of the Code that are no longer in force and effect as of the revision date stated on the cover of each volume are not carried.”

NOTE: This source is the first of the 22 volumes that contain the federal tax regulations. All of these volumes include a note stating that obsolete provisions are not carried.

[438] “2016 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 31, 2016. <taxpayeradvocate.irs.gov>

Volume 1. <taxpayeradvocate.irs.gov>

Page 307:

The Tax Code Imposes Onerous Compliance Burdens on Individual Taxpayers and Businesses …

According to a TAS [Taxpayer Advocate Service] analysis of IRS data, individuals and businesses spend about six billion hours a year complying with the filing requirements of the Internal Revenue Code (IRC).6 And that figure does not include the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits.

6 The TAS Research function arrived at this estimate by multiplying the number of copies of each form filed for calendar year 2015 by the average amount of time the IRS estimated it took to complete the form. Except as noted below, tax return counts are calendar year 2015 estimated counts and come from IRS Document 6149, Table 1 – 2015 Update (revised Nov. 2015)…. Information return counts are actual calendar year 2015 counts and come from IRS Document 6961, Table 2 – 2016 Update (revised July 2016)…. Time burden estimates are listed in form instructions or, some cases, on the forms themselves. … While the IRS’s estimates are the most authoritative available, the amount of time the average taxpayer spends completing a form is difficult to measure with precision. This TAS estimate may be low because it does not take into account all forms and, as noted in the text, it does not include the amount of time taxpayers spend responding to post-filing notices, examinations, or collection actions. Conversely, the TAS estimate may be high because IRS time estimates have not necessarily kept pace fully with technology improvements that allow a wider range of processing activities to be completed via automation.

Page 310:

If tax compliance were an industry, it would be one of the largest in the United States. To consume six billion hours, the “tax industry” requires the equivalent of three million full-time workers.7

7 This calculation assumes each employee works 2,000 hours per year (i.e., 50 weeks, with two weeks off for vacation, at 40 hours per week).

[439] Calculated with data from the footnote above and the dataset: “HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, Current Population Survey, December 2020. <www.census.gov>

“Year [=] 2017 … Total households [=] 126,224 [Number in thousands]”

CALCULATION: 6,000,000,000 hours / 126,224,000 households = 47.5 hours/household

[440] “2016 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 31, 2016. <taxpayeradvocate.irs.gov>

Volume 1. <taxpayeradvocate.irs.gov>

Page 310:

Compliance costs are huge—both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics data on the hourly cost of an employee, TAS [Taxpayer Advocate Service] estimates that the costs of complying with the individual and corporate income tax requirements for 2015 amounted to $195 billion—or more than ten percent of aggregate income tax receipts.8

8 The IRS and several outside analysts have attempted to quantify the costs of tax compliance. … There is no clearly correct methodology, and the results of these studies vary. All monetize the amount of time that taxpayers and their preparers spend complying with the tax code. TAS estimated the cost of complying with personal and business income tax requirements (and thus excluding the time spent complying with employment, estate and gift, excise, and exempt organization tax requirements) by multiplying the total number of hours spent on income tax compliance (5.80 billion) by the average hourly cost of a civilian employee ($33.58), as reported by the Bureau of Labor Statistics. … TAS estimated compliance costs as a percentage of total income tax receipts for 2015 by dividing the income tax compliance cost as computed above ($195 billion) by total 2015 income tax receipts ($1.88 trillion)….

[441] Press release: “IRS e-file Moves Forward; Successfully Executes Electronic Filing of Nation’s Largest Tax Return.” Internal Revenue Service, May 31, 2006. <www.irs.gov>

The Internal Revenue Service today announced significant progress in its corporate e-file program, including the successful May 18, 2006 e-filing of the nation’s largest tax return from General Electric (GE).

On paper, GE’s e-filed return would have been approximately 24,000 pages long. After filing, GE received IRS’ acknowledgement of its filing in about an hour. The file was 237 megabytes.

[442] Article: “GE Filed 57,000-Page Tax Return, Paid No Taxes on $14 Billion in Profits.” By John McCormack. Washington Examiner, November 17, 2011. <www.washingtonexaminer.com>

“Ken Kies, a tax lawyer who represents GE [General Electric], confirmed to The Weekly Standard the tax return would have been 57,000 pages had it been filed on paper. The size of GE’s tax return has more than doubled in the last five years.”

[443] Internal Revenue Service Data Book, 2019. Internal Revenue Service. Revised June 2020. <www.irs.gov>

Page 3 (of PDF): “This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2019 (October 1, 2018, through September 30, 2019).”

Page 71: “IRS’s actual expenditures were $11.8 billion for overall operations in Fiscal Year (FY) 2019, up from about $11.7 billion in FY 2018 (Table 30).”

Page 76:

Table 33. Internal Revenue Service and Chief Counsel Labor Force, Compared to National Totals for Federal and Civilian Labor Forces, by Gender, Race/Ethnicity, Disability, and Veteran Status, Fiscal Year 2019 … Number of employees … Total Internal Revenue Service and Chief Counsel … Gender, race/ethnicity, disability, and veteran status … Total [=] 78,004

[444] “2010 Annual Report to Congress.” Internal Revenue Service, Taxpayer Advocate Service, December 31, 2010. <taxpayeradvocate.irs.gov>

Executive Summary. <www.irs.gov>

Page 2:

Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit. …

Although there are multiple causes of noncompliance, tax law complexity plays a significant role. No one wants to feel like a “tax chump”—paying more while suspecting that others are taking advantage of loopholes to pay less. Because of tax complexity, taxpayers often suspect that the “special interests” are receiving tax breaks while they themselves are paying full freight.

[445] Calculated with data from the report: “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013.” By Barry W. Johnson and others. Internal Revenue Service, September 2019. <www.irs.gov>

Pages 1–2:

This overview presents estimates of the tax gap for the tax year (TY) 2011–2013 timeframe. The tax gap and associated concepts are a particular way of defining and analyzing compliance and noncompliance and are based on tax year liability. The tax gap provides a rough gauge of the level of overall noncompliance and voluntary compliance given all the events that occurred during the relevant tax periods and the Internal Revenue Code (IRC) provisions in effect at the time. Tax gap estimates provide the Internal Revenue Service (IRS) with periodic appraisals about the nature and extent of noncompliance for use in formulating tax administration strategies. The word “tax” in the phrase “tax gap” is used broadly to encompass both tax and refundable and non-refundable tax credits. …

Like the TY 2008–2010 tax gap estimates, these new estimates reflect an estimated average compliance rate and associated average annual tax gap covering a timeframe of three tax years. This approach is motivated primarily by the decision to pool multiple years of compliance data from the annual individual income tax reporting compliance component of the National Research Program (NRP) to provide greater reliability of individual income tax underreporting gap estimates by sources of noncompliance. …

The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely. The estimated gross tax gap is $441 billion. The net tax gap is the gross tax gap less tax that will be subsequently collected, either paid voluntarily or as the result of IRS administrative and enforcement activities; it is the portion of the gross tax gap that will not be paid. It is estimated that $60 billion of the gross tax gap will eventually be collected resulting in a net tax gap of $381 billion. The voluntary compliance rate (VCR) is a ratio measure of relative compliance and is defined as the amount of tax paid voluntarily and timely divided by total true tax, expressed as a percentage. The VCR corresponds to the gross tax gap. The estimated VCR is 83.6 percent. The net compliance rate (NCR) is a ratio measure corresponding to the net tax gap. The NCR is defined as the sum of “tax paid voluntarily and timely” and “enforced and other late payments” divided by “total true tax”, expressed as a percentage. The estimated NCR is 85.8 percent. …

The gross tax gap is composed of three components: nonfiling, underreporting, and underpayment. The estimated gross tax gaps for these components are $39 billion, $352 billion, and $50 billion respectively.

… The estimated net tax gap for individual income tax is $314 billion, for corporation income tax is $42 billion, for employment tax is $81 billion, and for estate and excise tax combined is $3 billion.

CALCULATION: 100% – 85.8% = 14.2%

NOTE: As of October 2020, the above study provides the latest available data on this issue. [Webpage: “The Tax Gap.” Internal Revenue Service. Last updated October 21, 2020. <www.irs.gov> “The latest estimates for tax years 2011, 2012, and 2013 show the nation’s tax compliance rate is substantially unchanged from prior years. … After late payments and enforcement efforts were factored in, the net tax gap was estimated at $381 billion.”]

[446] Report: “Reducing the Federal Tax Gap.” Internal Revenue Service, August 2, 2007. <www.irs.gov>

Page 2: “Based on the limited information available, compliance rates appear to have remained relatively stable at around 85 percent for decades.”

Pages 6–7:

The Internal Revenue Code places three primary obligations on taxpayers: (1) to file timely returns; (2) to make accurate reports on those returns; and (3) to pay the required tax voluntarily and timely. Taxpayers are compliant when they meet these obligations. Noncompliance—and the tax gap—results when taxpayers do not meet these obligations.

The tax gap is defined as the aggregate amount of true tax liability imposed by law for a given tax year that is not paid voluntarily and timely. True tax liability for any given taxpayer means the amount of tax that would be determined for the tax year in question if all relevant aspects of the tax law were correctly applied to all of the relevant facts of that taxpayer’s situation. For a variety of reasons, this amount often differs from the amount of tax that a taxpayer reports on a return. The taxpayer might not understand the law, might make inadvertent mistakes, or might misreport intentionally. …

It is important to emphasize that IRS estimates of the tax gap are associated with the legal sector of the economy only. Although tax is due on income from whatever source derived, legal or illegal, the tax attributable to income earned from illegal activities is extremely difficult to estimate. Moreover, the government’s interest in pursuing this type of noncompliance is, ultimately, to stop the illegal activity, not merely to tax it.

Although they are related, the tax gap is not synonymous with the “underground economy.” Definitions of the “underground economy” vary widely. However, most people characterize it in terms of the value of goods and services that elude official measurement. Furthermore, there are some items in the “underground economy” that are not included in the tax gap (such as tax due on illegal-source income), and there are contributors to the tax gap that no one would include in the “underground economy” (such as the tax associated with overstated exemptions, adjustments, deductions, or credits, or with claiming the wrong filing status). The greatest area of overlap between these two concepts is sometimes called the “cash economy,” in which income (usually of a business nature) is received in cash, which helps to hide it from taxation.

Pages 8–9:

As noted above, for the 2001 tax year, the overall gross tax gap was estimated to be approximately $345 billion, corresponding to a noncompliance rate of 16.3 percent. After accounting for enforcement efforts and late payments, the amount was reduced to $290 billion, corresponding to a net noncompliance rate of 13.7 percent.

• not filing required returns on time (nonfiling);

• not reporting one’s full tax liability on a timely filed return (underreporting); and

• not timely paying the full amount of tax reported on a timely return (underpayment). The IRS has separate tax gap estimates for each of these three types of noncompliance. Underreporting (in the form of unreported receipts and overstated expenses) constitutes over 82 percent of the gross tax gap, up slightly from earlier estimates. Underpayment constitutes nearly 10 percent and nonfiling almost 8 percent of the gross tax gap.

Nonfiling

The nonfiling gap is defined as the amount of true tax liability that is not paid on time by taxpayers who do not file a required return on time (or at all). It is reduced by amounts paid on time, such as through withholding, estimated payments, and other credits. The nonfiler population does not include legitimate nonfilers (i.e., those who have no obligation to file).

Underreporting

The underreporting gap is defined as the amount of tax liability not voluntarily reported by taxpayers who file required returns on time. For income taxes, the underreporting gap arises from three errors: underreporting taxable income, overstating offsets to income or to tax, and net math errors. Taxable income includes such items as wages and salaries, rents and royalties, and net business income. Offsets to income include income exclusions, exemptions, statutory adjustments, and deductions. Offsets to tax are tax credits. Net math errors involve arithmetic mistakes or transcription errors made by taxpayers that are corrected at the time the return is processed. In addition to developing an estimate of the aggregate underreporting gap, it is possible to break aspects of this estimate down into measures of the underreporting gap attributable to specific line items on the tax return.

Underpayment

The underpayment gap is the portion of the total tax liability that taxpayers report on their timely filed returns but do not pay on time. This arises primarily from insufficient remittances from taxpayers themselves. However, it also includes employer under-deposits of withheld income tax. In the case of withheld income tax, it is the responsibility of the employees to report the corresponding tax liability on timely filed returns, and it is the responsibility of their employers to deposit those withholdings with the government on time.

[447] Report: “Making Tax Compliance Easier and Collecting What’s Due.” By Nina E. Olson. IRS, Taxpayer Advocate Service, June 28, 2011. <www.irs.gov>

Page 2: “According to the IRS’s most recent comprehensive estimate, the net tax gap stood at $290 billion in 2001,2 when 132 million tax returns were filed.3 This means that each taxpayer was effectively paying a ‘surtax’ of some $2,200 to subsidize noncompliance by others. For this reason, it is important to reduce the tax gap.”

[448] Calculated with data from:

a) “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013.” By Barry W. Johnson and others. Internal Revenue Service, September 2019. <www.irs.gov>

Page 8: “Figure 1. TY 2011–2013 Tax Gap Map … (Money amounts are in billions of dollars; estimates are annual average amounts.) … Net Tax Gap (Tax Not Collected) [=] $381”

b) Dataset: “Table HH-1. Households by Type: 1940 to Present.” U.S. Census Bureau, December 2020. <www.census.gov>

“Total Households (In Thousands) … 2013 [=] 122,459”

c) “CPI Inflation Calculator.” Bureau of Labor Statistics. Accessed January 28, 2021 at <www.bls.gov>

“$381 in January 2013 has the same buying power as $430.96 in December 2020”

CALCULATION: $430,960,000,000 tax gap / 122,459,000 households = $3,519 / household

[449] Written statement: “How Tax Complexity Hinders Small Businesses: The Impact On Job Creation And Economic Growth.” By Nina E. Olson. Internal Revenue Service, National Taxpayer Advocate, April 13, 2011. <www.irs.gov>

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IRS data show that when taxpayers have a choice about reporting their income, tax compliance rates are remarkably low. Workers who are classified as employees have little opportunity to underreport their earned income because it is subject to tax withholding. Employees thus report about 99 percent of their earned income. But among workers whose income is not subject to withholding, compliance rates plummet. IRS studies show that nonfarm sole proprietors report only 43 percent of their business income and unincorporated farming businesses report only 28 percent.12

Noncompliance cheats honest taxpayers, who must pay more to make up the difference. To me, this raises an important question: Why is it that few Americans would steal from a local charity, yet a high percentage of taxpayers who have a choice about paying taxes appear to have no compunctions about cheating their fellow citizens?

The Taxpayer Advocate Service has conducted research into the causes of noncompliance and plans to conduct additional studies. While we do not have definitive answers, we can suggest at least two hypotheses. First, no one wants to feel like a “tax chump”—paying more while suspecting that others are taking advantage of loopholes to pay less. Taxpayers who believe they are unfairly paying more than others inevitably will feel more justified in “fudging” to right the perceived wrong. Transparency is a critical feature of a successful tax system. It is essential if the system is to build taxpayer confidence and maintain high rates of compliance. Simplifying the code to make computations more transparent would go a long way toward reassuring taxpayers that the system is not rigged against them.

12 See IRS News Release, IRS Updates Tax Gap Estimates, IR-2006-28 (Feb. 14, 2006) (accompanying charts at <www.irs.gov>).

[450] Report: “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013.” By Barry W. Johnson and others. Internal Revenue Service, September 2019. <www.irs.gov>

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Findings from earlier tax gap analyses that compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding continue to hold. The extent of coverage by information reporting and/or withholding is called “visibility” because incomes that are reported to the IRS are more “visible” to both the IRS and taxpayers. Based on the TY [tax year] 2011–2012 estimates, misreporting of income amounts subject to substantial information reporting and withholding is 1 percent; of income amounts subject to substantial information reporting but not withholding, it is 5 percent; and of income amounts subject to little or no information reporting, such as nonfarm proprietor income, it is 55 percent.

[451] Report: “Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance.” By James R. McTigue, Jr. Government Accountability Office, May 9, 2019. <www.gao.gov>

Pages 7–8:

As we have previously reported, the extent to which individual income tax taxpayers accurately report their income is closely aligned with the amount of income that third parties report to them and to IRS. For example, according to 2008–2010 IRS data, taxpayers misreported more than half of the types of income for which there is little or no third-party information reporting, such as business income (see figure 3). In contrast, when employers both withheld taxes from, and reported information on, wages and salaries to employees and IRS (through Form W-2, Wage and Tax Statement), taxpayers misreported on only 1 percent of such income. Similarly, taxpayers misreported less than 10 percent of investment income that banks and other financial institutions reported to account holders and IRS (through Forms 1099).

Figure 3: Effect of Third-Party Information Reporting on Individual Income Tax Compliance, Tax Years 2008 to 2010

Net misreporting percentage

Substantial third-party information reporting and withholdinga (Wages, Salaries, Tips) [=] 1%

Substantial third-party information reportinga (Interest income, Dividend income, State tax refunds, Pensions, Annuities, Unemployment, Social Security) [=] 7%

Some third-party information reportinga (Partnerships, S corporations, Estates and trusts, Alimony, Capital gains) [=] 19%

Little or no third-party information reportinga (Sales of business property, Sole proprietor, Farming income, Rents and royalties, Other income) [=] 63%

Note: Net misreporting percentage is the sum of the net misreported amount divided by the absolute values (over or underreported) of the amounts that should have been reported, expressed as a percentage.

a IRS receives information from third parties that it uses to verify income or deduction amounts that taxpayers report on their tax returns. IRS categorized various line items on the individual income tax return into four different groupings of third-party reporting in IRS Publication 5161, “Estimation of the Underreporting Tax Gap for Tax Years 2008–2010: Methodology Research, Analysis and Statistics.”

[452] U.S. Code Title 26, Chapter 75, Subchapter A, Part I, Section 7201: “Attempt to Evade or Defeat Tax.” Accessed January 27, 2021 at <www.law.cornell.edu>

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution. (Aug. 16, 1954, ch. 736, 68A Stat. 851; Pub. L. 97–248, title III, § 329(a), Sept. 3, 1982, 96 Stat. 618.)

[453] Criminal Tax Manual. U.S. Department of Justice. Updated March 6, 2015. <www.justice.gov>

Page 2 (of PDF):

8.01 Statutory Language: 26 U.S.C. § 7201

Section 7201. Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.1

1 For offenses under section 7201, the maximum permissible fine is at least $250,000 for individuals and at least $500,000 for organizations. 18 U.S.C. § 3571(b) & (c). Alternatively, “[i]f any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss.” 18 U.S.C. § 3571(d).

[454] U.S. Code Title 18, Chapter 227, Subchapter C, Section 3571: “Sentence of Fine.” Accessed January 27, 2021 at <www.law.cornell.edu>

(a) In General.—A defendant who has been found guilty of an offense may be sentenced to pay a fine.

(b) Fines for Individuals.—Except as provided in subsection (e) of this section, an individual who has been found guilty of an offense may be fined not more than the greatest of—

(1) the amount specified in the law setting forth the offense;

(2) the applicable amount under subsection (d) of this section;

(3) for a felony, not more than $250,000;

(4) for a misdemeanor resulting in death, not more than $250,000;

(5) for a Class A misdemeanor that does not result in death, not more than $100,000;

(6) for a Class B or C misdemeanor that does not result in death, not more than $5,000; or

(7) for an infraction, not more than $5,000.

(c) Fines for Organizations.—Except as provided in subsection (e) of this section, an organization that has been found guilty of an offense may be fined not more than the greatest of—

(1) the amount specified in the law setting forth the offense;

(2) the applicable amount under subsection (d) of this section;

(3) for a felony, not more than $500,000;

(4) for a misdemeanor resulting in death, not more than $500,000;

(5) for a Class A misdemeanor that does not result in death, not more than $200,000;

(6) for a Class B or C misdemeanor that does not result in death, not more than $10,000; and

(7) for an infraction, not more than $10,000.

(d) Alternative Fine Based on Gain or Loss.—If any person derives pecuniary gain from the offense, or if the offense results in pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain or twice the gross loss, unless imposition of a fine under this subsection would unduly complicate or prolong the sentencing process.

(e) Special Rule for Lower Fine Specified in Substantive Provision.—If a law setting forth an offense specifies no fine or a fine that is lower than the fine otherwise applicable under this section and such law, by specific reference, exempts the offense from the applicability of the fine otherwise applicable under this section, the defendant may not be fined more than the amount specified in the law setting forth the offense.

[455] Report: “The Alternative Minimum Tax for Individuals: A Growing Burden.” By Kurt Schuler. U.S. Congress, Joint Economic Committee, May 2001. <www.jec.senate.gov>

Page 2: “A tax credit is a provision that allows a reduction in tax liability by a specific dollar amount, regardless of income. For example, a tax credit of $500 allows both taxpayers with income of $40,000 and those with income of $80,000 to reduce their taxes by $500, if they qualify for the credit.”

[456] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 7: “If a tax credit is refundable, and the credit amount exceeds tax liability, a taxpayer receives a payment from the government.”

[457] Report: “Options for Reducing the Deficit: 2015 to 2024.” Congressional Budget Office, November 20, 2014. <www.cbo.gov>

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Low- and moderate-income people are eligible for certain refundable tax credits under the individual income tax if they meet specified criteria. If the amount of a refundable tax credit exceeds a taxpayer’s tax liability before that credit is applied, the government pays the excess to that person. Two refundable tax credits are available only to workers: the earned income tax credit (EITC) and the refundable portion of the child tax credit (referred to in the tax code as the additional child tax credit).

[458] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

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Refundable credits can result in refunds even if no income tax is withheld or paid; that is, the credits can exceed the liability for the tax. Two of the largest refundable tax credits are the EITC [Earned Income Tax Credit] and the ACTC [Additional Child Tax Credit]. …

The ACTC is the refundable portion of the Child Tax Credit (CTC). The CTC can reduce an individual’s taxes owed by as much as $1,000 for each qualifying child. The ACTC is provided in addition to the CTC to individuals whose taxes owed were less than the amount of CTC they were entitled to claim. The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid. As with all refundable credits, the risk of fraud for these types of claims is significant.

[459] Report: “Existing Compliance Processes Will Not Reduce the Billions of Dollars in Improper Earned Income Tax Credit and Additional Child Tax Credit Payments.” Treasury Inspector General for Tax Administration, September 29, 2014. <www.treasury.gov>

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Compliance resources are limited, and additional alternatives to traditional compliance methods have not been developed. Consequently, the IRS does not address the majority of potentially erroneous EITC [Earned Income Tax Credit] claims. …

In addition to limited compliance resources and the reliance on traditional compliance methods, statutory requirements further limit the IRS’s ability to ensure that EITC claims are valid before they are paid. The Internal Revenue Code requires the IRS to process tax returns and pay any related tax refunds within 45 calendar days of receipt of the tax return or the tax return due date, whichever is later. Because of this requirement, the IRS cannot conduct extensive eligibility checks similar to those that occur with other Federal programs that typically certify eligibility prior to the issuance of payments or benefits.

[460] “Individual Income Tax Returns Complete Report, 2018.” Internal Revenue Service, September 2020. <www.irs.gov>

Page 24: “In total, taxpayers claimed $109.4 billion in refundable tax credits. … The refundable amount of the additional child tax credit ($34.2 billion), along with the EIC [earned income credit] ($56.2 billion), made up nearly all (95.5 percent) of this refundable portion.”

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Item

2018

Amount (millions)

Total refundable credits3,4

$109,439

Earned income credit, total

$64,924

American opportunity credit, total

$6,394

Additional child tax credit, total

$36,235

3Includes net premium tax credit, regulated investment company credit, health coverage tax credit, and prior-year returns claiming the refundable prior-year minimum tax credit.

4 Includes the amount used to offset income tax before credits as well as the amount used to offset all other taxes and the refundable portion

[461] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 135: “Similarly, refundable tax credits—such as the earned income tax credit and the child tax credit—provide cash assistance to low-income workers with children, but their eligibility rules are often difficult to administer.”

[462] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

An individual may reduce his or her income tax liability using available tax credits. …

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. …

A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37 The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children. For 2020, the maximum EITC for taxpayers is $6,660 with more than two qualifying children, $5,920 with two qualifying children, $3,584 with one qualifying child, and $538 with no qualifying children.

[463] Report: “Improper Payment Reporting Has Improved; However, There Have Been No Significant Reductions to the Billions of Dollars of Improper Payments.” Treasury Inspector General for Tax Administration, April 30, 2020. <www.tigta.gov>

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For Fiscal Year 2019, in response to Treasury Inspector General for Tax Administration (TIGTA) recommendations,6 the IRS correctly rated the Additional Child Tax Credit (ACTC) and the American Opportunity Tax Credit (AOTC) as also being susceptible to significant improper payments (hereafter referred to as high risk) similar to the Earned Income Tax Credit (EITC). The specific dollar amount and percentage rate of improper payments the IRS calculated for these programs is as follows:

• EITC – The IRS estimates 25.3 percent ($17.4 billion) of the total EITC payments of $68.7 billion made in Fiscal Year 2019 were improper.

[464] Report: “Improper Payments: Government-Wide Estimates and Reduction Strategies.” By Beryl H. Davis (Director, Financial Management and Assurance). United States Government Accountability Office, July 9, 2014. <www.gao.gov>

Page 1:

It is important to note that reported improper payment estimates may or may not represent a loss to the government. For example, errors consisting of insufficient or lack of documentation for a payment are included in the improper payment estimates. …

An improper payment is defined by statute as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes any payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment for a good or service not received (except for such payments where authorized by law), and any payment that does not account for credit for applicable discounts. Office of Management and Budget guidance also instructs agencies to report as improper payments any payments for which insufficient or no documentation was found.

[465] Internal Revenue Service Data Book, 2019. Internal Revenue Service. Revised June 2020. <www.irs.gov>

Page 3 (of PDF): “This report describes activities conducted by the Internal Revenue Service during Fiscal Year 2019 (October 1, 2018, through September 30, 2019).”

Page 71: “IRS’s actual expenditures were $11.8 billion for overall operations in Fiscal Year (FY) 2019, up from about $11.7 billion in FY 2018 (Table 30).”

[466] Report: “Improper Payment Reporting Has Improved; However, There Have Been No Significant Reductions to the Billions of Dollars of Improper Payments.” Treasury Inspector General for Tax Administration, April 30, 2020. <www.tigta.gov>

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For Fiscal Year 2019, in response to Treasury Inspector General for Tax Administration (TIGTA) recommendations,6 the IRS correctly rated the Additional Child Tax Credit (ACTC) and the American Opportunity Tax Credit (AOTC) as also being susceptible to significant improper payments (hereafter referred to as high risk) similar to the Earned Income Tax Credit (EITC). The specific dollar amount and percentage rate of improper payments the IRS calculated for these programs is as follows: …

• ACTC – The IRS estimates 15.2 percent ($7.2 billion)7 of the total ACTC payments of $47.7 billion in Fiscal Year 2019 were improper.

[467] Report: “Overview of the Federal Tax System as in Effect for 2020.” U.S. Congress, Joint Committee on Taxation, May 1, 2020. <www.jct.gov>

Pages 10–11:

Credits Against Tax

An individual may reduce his or her tax income tax liability using available tax credits. …

In some instances, a credit is wholly or partially “refundable,” that is, if the amount of these credits exceeds tax liability (net of other nonrefundable credits), such credits create an overpayment, which may generate a refund. Three large refundable credits in terms of cost are the child tax credit, the earned income tax credit, and the recovery rebate credit.34

An individual may claim a tax credit for each qualifying child under age 17. The amount of the credit per child is $2,000.35 The aggregate amount of child credits that may be claimed is phased out for individuals with incomes over certain threshold amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000, or fraction thereof, of modified AGI [adjusted gross income] over $400,000 for married individuals filing jointly and $200,000 for all other individuals. To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of $2,500,36 not to exceed $1,400 per child in 2020. The maximum amount of the refundable portion of the credit is indexed for inflation.

For taxpayers with dependents other than qualifying children, such as a 17-year-old child living at home, a full-time college student, or other adult member of the household for whom the taxpayer provides financial support, taxpayers are able to claim a $500 non-refundable credit.

A refundable earned income tax credit (“EITC”) is available to low-income workers who satisfy certain requirements.37 The amount of the EITC varies depending on the taxpayer’s earned income and whether the taxpayer has more than two, two, one, or no qualifying children. For 2020, the maximum EITC for taxpayers is $6,660 with more than two qualifying children, $5,920 with two qualifying children, $3,584 with one qualifying child, and $538 with no qualifying children. The credit amount begins to phase out at an income level of $25,220 for joint-filers with qualifying children, $19,330 for other taxpayers with qualifying children, $14,680 for joint-filers with no qualifying children, and $8,790 for other taxpayers with no qualifying children. The phaseout percentages, or the rates at which the credit amount phases out, are 21.06 percent for taxpayers with two or more qualifying children, 15.98 percent for taxpayers with one qualifying child, and 7.65 percent for taxpayers with no qualifying children.

36 Families with three or more children may determine the additional child tax credit by taking the greater of (1) the earned income formula, or (2) the alternative formula, i.e. the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income tax credit.

[468] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Page 1:

Everyone who is employed in the United States (U.S.) is required to have a Social Security Number (SSN). An SSN is a unique, nine-digit identification number used for taxpayer identification, income reporting, and record-keeping purposes. The Social Security Administration issues numbers to all U.S. citizens, permanent residents, and eligible foreign nationals. Generally, only those noncitizens authorized to work in the United States by the Department of Homeland Security can get an SSN.

Any person required to file a tax return is required to include an identifying number, referred to as a taxpayer identification number. For the majority of filers, the taxpayer identification number is the individual’s SSN. Non-U.S. citizens who do not have employment authorization must prove a valid reason for requesting an SSN in order to receive one. There are very limited circumstances for this, and these Social Security Cards are marked “Not Valid for Employment.”

Many individuals who are not eligible to obtain an SSN earn income in the United States. This presents a problem for tax administration because the Internal Revenue Code requires foreign investors and individuals working without authorization in the United States to file tax returns and pay any Federal income taxes owed. As explained by a former Internal Revenue Service (IRS) Commissioner, “the IRS’s job is to make sure that everyone who earns income within our borders pays the proper amount of taxes, even if they may not be working here legally.” …

An Individual Taxpayer Identification Number (ITIN) is available to individuals who are required to have a taxpayer identification number for tax purposes, but do not have and are not eligible to obtain an SSN because they are not authorized to work in the United States. An ITIN is issued by the IRS and looks very similar to an SSN in that it is a nine-digit number. ITINs are issued regardless of immigration status, because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. ITINs are for Federal tax reporting only and are not intended to serve any other purpose. Even income obtained illegally is subject to income taxes. Therefore, the IRS issues ITINs to help individuals comply with the U.S. tax laws and to provide a means to process and account for tax returns and payments for those not eligible for SSNs. An ITIN does not authorize an individual to work in the United States or provide eligibility for Social Security benefits or the Earned Income Tax Credit (EITC); however, the IRS currently processes claims for the Additional Child Tax Credit (ACTC), a refundable tax credit, filed by taxpayers with ITINs.

Page 2:

Refundable credits can result in refunds even if no income tax is withheld or paid; that is, the credits can exceed the liability for the tax. Two of the largest refundable tax credits are the EITC and the ACTC. The appropriations for these credits in Fiscal Year 2010 were $54.7 billion for the EITC and $22.7 billion2 for the ACTC. Because concerns were raised by Congress, the Government Accountability Office, and the IRS regarding noncompliance with EITC requirements, a law was passed in Calendar Year 1996 to deny the EITC to individuals who file a tax return without an SSN that is valid for employment.3 As such, filers using an ITIN are not eligible for the EITC. The change in the law was made prior to the establishment of the ACTC.4 However, the same law prohibits aliens residing without authorization in the United States from receiving most Federal public benefits, with the exception of certain emergency services and programs.

Nonetheless, IRS management’s view is that the law does not provide sufficient legal authority for the IRS to disallow the ACTC to ITIN filers. In addition, the Internal Revenue Code does not require an SSN to claim the ACTC and does not provide the IRS math error authority to deny the credit without an examination. As such, the IRS continues to pay the ACTC to ITIN filers.

The ACTC is the refundable portion of the Child Tax Credit (CTC). The CTC can reduce an individual’s taxes owed by as much as $1,000 for each qualifying child. The ACTC is provided in addition to the CTC to individuals whose taxes owed were less than the amount of CTC they were entitled to claim. The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid. As with all refundable credits, the risk of fraud for these types of claims is significant. …

3 The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Pub. L. No. 104-193).

4 The Taxpayer Relief Act of 1997 (Pub. L. No. 105-34) established the Child Tax Credit and the Additional Child Tax Credit.

Page 4:

Although they are not authorized to work in the United States, ITIN filers are receiving billions of dollars in CTCs and ACTCs intended for working families. Prior to Tax Year7 2001, the CTC was only refundable if the taxpayer had three or more qualifying children and Social Security taxes8 exceeding any earned income credits. The Economic Growth and Tax Relief Reconciliation Act of 20019 removed these requirements and increased the CTC over time from $500 to $1,000 per child, making more families eligible for the refundable portion of the credit (known as the ACTC). Since then, claims for the ACTC by ITIN filers have increased significantly. In Processing Year 2005, 796,000 ITIN filers claimed ACTCs totaling $924 million. By Processing Year 2008, these claims had risen to 1,526,276 ITIN filers claiming ACTCs totaling $2.1 billion.

The American Recovery and Reinvestment Act of 2009 (Recovery Act)10 temporarily increased eligibility by changing the income threshold for calculating the ACTC for Tax Years 2009 and 2010. Prior to the Recovery Act, the ACTC would have been limited to 15 percent of earned income more than $12,550. The Recovery Act changed this threshold to 15 percent of earned income more than $3,000. As such, more taxpayers could claim the ACTC or claim a greater amount. In Processing Year 2010, 2.3 million ITIN filers claimed ACTCs totaling $4.2 billion.11

NOTE: See the next footnote for an example of a federal benefit that illegal immigrants do receive.

[469] Report: “EMTALA [Emergency Medical Treatment and Active Labor Act]: Access to Emergency Medical Care.” By Edward C. Liu. Congressional Research Service, July 1, 2010. <www.everycrsreport.com>

Page 2 (of PDF):

The Emergency Medical Treatment and Active Labor Act (EMTALA) ensures universal access to emergency medical care at all Medicare participating hospitals with emergency departments. Under EMTALA, any person who seeks emergency medical care at a covered facility, regardless of ability to pay, immigration status, or any other characteristic, is guaranteed an appropriate screening exam and stabilization treatment before transfer or discharge.

[470] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Page 1:

Everyone who is employed in the United States (U.S.) is required to have a Social Security Number (SSN). … The Social Security Administration issues numbers to all U.S. citizens, permanent residents, and eligible foreign nationals. …

Many individuals who are not eligible to obtain an SSN earn income in the United States. This presents a problem for tax administration because the Internal Revenue Code requires foreign investors and individuals working without authorization in the United States to file tax returns and pay any Federal income taxes owed. …

An Individual Taxpayer Identification Number (ITIN) is available to individuals who are required to have a taxpayer identification number for tax purposes, but do not have and are not eligible to obtain an SSN because they are not authorized to work in the United States.

Page 2: “The ACTC [Additional Child Tax Credit] is the refundable portion of the Child Tax Credit (CTC). … The ACTC is always the refundable portion of the CTC, which means an individual claiming the ACTC receives a refund even if no income tax was withheld or paid.”

Page 7: “Erroneous or fraudulent claims are not unique to the ACTC, nor are they unique to ITIN filers. However, ITIN filers are much more likely to claim the ACTC than other individual taxpayers. We found that in Processing Year 2010, 72 percent of all ITIN filers claimed the ACTC, while only 14 percent of non-ITIN filers claimed the ACTC.”

[471] Article: “Tax Loophole Costs Billions.” By Bob Segall. WTHR, April 26, 2012. Updated July 5, 2012. <www.wthr.com>

But 13 Investigates has found many undocumented workers are claiming the tax credit for kids who live in Mexico—lots of kids in Mexico. …

The whistleblower has thousands of examples, and he brought some of them to 13 Investigates. …

WTHR spoke to several undocumented workers who confirmed it is easy. …

Full Statement to WTHR From the Internal Revenue Service …

The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund.

[472] Article: “IRS Workers OK ‘Phony’ Documents From Illegal Immigrants.” By Bob Segall. WTHR, May 24, 2012. <www.wthr.com>

[473] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

Page 2 (of PDF): “In Calendar Year 1996, the IRS created the Individual Taxpayer Identification Number (ITIN) so that individuals who are not eligible to obtain Social Security Numbers could obtain an identification number for tax purposes. … In Processing Year 2011, the IRS processed more than 2.9 million ITIN tax returns resulting in tax refunds of $6.8 billion.”

Page 2:

An ITIN is issued regardless of an individual’s immigration status. However, individuals assigned an ITIN should either be a resident not authorized to work in the United States or a nonresident. Nonresident aliens must file a tax return only if they are engaged in a trade or business in the United States or if they have any other U.S. sources of income on which the tax was not fully paid by the amount of tax withheld at the source.

Page 3: “The IRS Submission Processing Center in Austin, Texas, is responsible for processing all ITIN applications.”

[474] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

Page 17: “Figure 5: Most Frequently Used Addresses on ITIN Applications”

Addresses on ITIN Applications

[475] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

Page 18: “Figure 6: Most Frequently Used Addresses for ITIN Tax Refunds”

Addresses for ITIN Tax Refunds

[476] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

Page 18: “Figure 7: Most Frequently Used Bank Accounts for ITIN Tax Refunds”

Bank Accounts for ITIN Tax Refunds

[477] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

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The Questionable Identification Detection Team was in place from October 2007 to April 2010. While in operation, procedures required all questionable ITIN applications with identified discrepancies to be sent to this team. The purpose of this team was to reduce misuse of ITINs by identifying patterns involving questionable applications and fraudulent tax refund claims. Despite its successes in identifying ITIN application fraud schemes and patterns, IRS management disbanded the Questionable Identification Detection Team but did not put in place similar adequate processes to identify schemes and detect trends that could indicate fraud.

IRS guidelines directed tax examiners to refer daily those ITIN applications with questionable documentation. Tax examiners did not have to identify a certain number of errors with ITIN applications to make a referral to the Questionable Identification Detection Team. Any ITIN application and tax return with similar characteristics or patterns were routed to this team for analysis. The Questionable Identification Detection Team consisted of three experienced tax examiners who, upon receipt of referred applications, would prepare case summary sheets that captured characteristics from questionable applications to identify fraud schemes. According to IRS records, this team prepared 6,395 case summary sheets during the time period it was in place.

The Questionable Identification Detection Team worked in partnership with Criminal Investigation by referring potential fraud schemes for review. Based on this work, thousands of fraudulent ITIN tax returns with erroneous tax refunds totaling more than $43 million were identified.

[478] Report: “Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications.” Treasury Inspector General for Tax Administration, July 16, 2012. <www.justfacts.com>

Page 7:

The environment created by management discourages tax examiners from identifying questionable ITIN applications. Although the IRS states that the mission of the ITIN Program is to ensure ITINs are issued timely to qualifying individuals, IRS management’s primary focus is on quickly processing the applications rather than on ensuring ITINs are issued only to qualifying individuals.

Page 10:

This could negatively impact tax examiners’ performance rating, the length of their employment, and whether they are called to return to duty (for seasonal tax examiners). Below are examples of tax examiners’ comments relating to the quality review process.15

• “If TEs [tax examiners] do not identify supporting documents as questionable or fraudulent, they are not charged with a quality error. So where is the incentive to report fraud…Where is the disincentive NOT to report fraud? In fact TE’s are negatively impacted with regard to their quality and efficiency ratings when they do identify and properly process fraudulent applications as they take longer and are more prone to errors.”

• “There is no penalty if TEs fail to properly or diligently identify questionable fraudulent documents or applications.”

• “QR [quality review] has issues also in being able to determine if a document is valid, most times they want it changed to valid when it is truly fraudulent.”

Page 22:

Individuals applying for an ITIN are not required to provide original documents and/or copies of documents certified by the issuing agency (reproduction of a document or record authenticated by the issuing agency) to establish their identity and foreign status. The IRS will accept notarized copies. However, notarized copies have serious limitations and present difficulties for tax examiners required to verify these documents and confirm the identity and foreign status of the individual applying for the ITIN. Concerns about this issue were raised in an IRS ITIN Task Force report in September 2002. The Task Force recommended that all supporting required documents be one of the following:

• Original.

• Certified by the issuing agency.

The IRS did not act on the recommendation and continues to accept notarized copies of the documentation required to be provided in support of ITIN applications. Figure 10 provides a list of acceptable documentation.

Page 23:

The IRS’s acceptance of notarized copies differs significantly from other Federal agencies. For example, original documents or copies certified by the issuing agency are required to obtain an SSN or a passport. The SSA accepts only original documents or certified documents from applicants submitting an application for an SSN and returns these documents submitted with the application. We discussed this issue with representatives from the SSA, who stated that notarized documents are not accepted because a notary does not authenticate the legitimacy of the documents or prove the identity of the individuals. Unlike an original document or a copy certified by the issuing agency, notaries are not responsible for the accuracy or legality of documents they notarize. A notary only certifies the identity of signers by witnessing the signature of the individual signing the documents. The signers are responsible for the content of the documents. Figure 11 shows a comparison of the requirements for obtaining an ITIN to other Federal Government programs.

[479] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Highlights:

Although the law prohibits aliens residing without authorization in the United States from receiving most Federal public benefits, an increasing number of these individuals are filing tax returns claiming the Additional Child Tax Credit (ACTC), a refundable tax credit intended for working families. The payment of Federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts Federal law and policy to remove such incentives.

[480] Article: “Tax Scam: IRS Pays Out Billions in Fraudulent Refunds.” By Eamon Javers. CNBC, August 2, 2012. <www.cnbc.com>

The IRS is paying out billions of dollars in fraudulent tax refunds to identity thieves; a problem that the tax service’s inspector general told CNBC is a “growing problem” involving numbers that are increasing “exponentially.” …

“Once the money is out the door, it is almost impossible to get it back,” IRS inspector general J. Russell George told CNBC. “The bad guys know that the IRS is unable, given the limited number of its staff it has, to address every single allegation of tax fraud it has.”

[481] House Resolution 5652: “Sequester Replacement Reconciliation Act of 2012.” U.S. House of Representatives, 112th Congress (2011–2012). Accessed March 13, 2020 at <www.gpo.gov>

Page 157 (Title VI, Subtitle B):

Social Security Number Required to Claim the Refundable Portion of the Child Tax Credit

(a) In General.—Subsection (d) of section 24 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

“(5) Identification Requirement with Respect to Taxpayer.—

“(A) In General.—Paragraph (1) shall not apply to any taxpayer for any taxable year unless the taxpayer includes the taxpayer’s Social Security number on the return of tax for such taxable year. …”

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.

[482] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Highlights:

Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns.

Pages 10–12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else’s SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer’s SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[483] Calculated with data from vote 247: “To Provide for Reconciliation Pursuant to Section 201 of the Concurrent Resolution on the Budget for Fiscal Year 2013.” U.S. House of Representatives, May 10, 2012. <clerk.house.gov>

House

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

218

90%

16

7%

7

3%

Democrat

0

0%

183

96%

7

4%

Independent

0

0%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[484] Webpage: “Actions on House Resolution 5652: Sequester Replacement Reconciliation Act of 2012.” U.S. House of Representatives, 112th Congress (2011–2012). Accessed March 13, 2020 at <www.congress.gov>

5/15/2012

Read the second time. Placed on Senate Legislative Calendar under General Orders. Calendar No. 398.

5/14/2012

Received in the Senate. Read the first time. Placed on Senate Legislative Calendar under Read the First Time.

5/10/2012

Motion to reconsider laid on the table Agreed to without objection.

5/10/2012

On passage Passed by recorded vote: 218–199, 1 Present (Roll no. 247). (text: CR H2583–2600)

[485] Webpage: “Summary of House Resolution 556: Refundable Child Tax Credit Eligibility Verification Reform Act of 2013.” U.S. House of Representatives, 113th Congress (2013–2014). Accessed March 13, 2020 at <www.congress.gov>

“Sponsor: Rep. Johnson, Sam [R-TX] (Introduced 02/06/2013)”

SUMMARY:

Refundable Child Tax Credit Eligibility Verification Reform Act of 2013—Amends the Internal Revenue Code, with respect to the child tax credit, to require taxpayers claiming such credit to provide their social security numbers on their tax returns.

Prohibits taxpayers who improperly claimed such credit in a previous year from claiming such credit during a disallowance period of: (1) 2 years for claims made with reckless or intentional disregard of rules governing such credit, or (2) 10 years for fraudulent claims.

Requires the Secretary of the Treasury to prescribe a form for completion by paid income tax preparers in connection with claims for the refundable portion of the child tax credit. Imposes a penalty on preparers who fail to comply with due diligence requirements for claiming the refundable portion of the credit.

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.

[486] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Highlights: “Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns.”

Pages 10–12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else’s SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer’s SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[487] Webpage: “Cosponsors of House Resolution 556: Refundable Child Tax Credit Eligibility Verification Reform Act of 2013.” U.S. House of Representatives, 113th Congress (2013–2014). Accessed March 13, 2020 at <www.congress.gov>

“Sponsor: Rep. Johnson, Sam [R-TX]; Cosponsor statistics: 67 current … Party … Republican [67]”

[488] Webpage: “Actions on House Resolution 556: Refundable Child Tax Credit Eligibility Verification Reform Act of 2013.” U.S. House of Representatives, 113th Congress (2013–2014). Accessed March 13, 2020 at <www.congress.gov>

2/26/2013

Referred to the House Committee on Ways and Means.

Action By: House of Representatives

2/26/2013

Introduced in House

Action By: House of Representatives

[489] Webpage: “Summary House Resolution 713: To Amend the Internal Revenue Code of 1986 to Disallow the Refundable Portion of the Child Credit to Taxpayers Using Individual Taxpayer Identification Numbers Issued by the Internal Revenue Service.” House of Representatives, 114th Congress (2015–2016). Accessed March 13, 2020 at <www.congress.gov>

“Sponsor: Rep. Bucshon, Larry [R-IN] (Introduced 02/04/2015)”

SUMMARY:

Amends the Internal Revenue Code to disallow the refundable portion of the child tax credit to taxpayers who use individual taxpayer identification numbers issued by the Internal Revenue Service instead of social security account numbers to claim such credit on their tax returns.

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.

[490] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Highlights: “Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns.”

Pages 10–12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else’s SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer’s SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[491] Webpage: “Cosponsors of Summary House Resolution 713: To Amend the Internal Revenue Code of 1986 to Disallow the Refundable Portion of the Child Credit to Taxpayers Using Individual Taxpayer Identification Numbers Issued by the Internal Revenue Service.” House of Representatives, 114th Congress (2015–2016). Accessed March 13, 2020 at <www.congress.gov>

“Sponsor: Rep. Johnson, Sam [R-TX]; Cosponsor statistics: 4 current … Party … Republican [4]”

[492] Webpage: “Actions on House Resolution 713: To Amend the Internal Revenue Code of 1986 to Disallow the Refundable Portion of the Child Credit to Taxpayers Using Individual Taxpayer Identification Numbers Issued by the Internal Revenue Service.” U.S. House of Representatives, 114th Congress. Accessed April 03, 2017 at <www.congress.gov>

2/04/2015

Referred to the House Committee on Ways and Means.

Action By: House of Representatives

2/04/2015

Introduced in House

Action By: House of Representatives

[493] Webpage: “Summary of House Resolution 1041: SHUT Act of 2017.” U.S. House of Representatives, 115th Congress (2017–2018). Accessed December 24, 2019 at <www.congress.gov>

Sponsor: Rep. Bilirakis, Gus M. [R-FL-12] (Introduced 02/14/2017) …

Summary: …

Stop Handouts to Unauthorized Taxpayers Act of 2017 or the SHUT Act of 2017

This bill amends the Internal Revenue Code to deny the refundable portion of the child tax credit to individuals unless they include their Social Security number on their tax return or otherwise demonstrate that they are authorized to be employed in the United States.

The bill prohibits the Department of the Treasury or any delegate of Treasury from issuing an individual taxpayer identification number unless the supporting documentary evidence is submitted to a Treasury employee.

NOTE: The information in the next footnote shows why this bill would restrict illegal immigrants from obtaining refundable child tax credits.

[494] Report: “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits.” Treasury Inspector General for Tax Administration, July 7, 2011. <www.treasury.gov>

Page 2 (of PDF): “Many individuals who are not authorized to work in the United States, and thus not eligible to obtain a Social Security Number (SSN) for employment, earn income in the United States. The Internal Revenue Service (IRS) provides such individuals with an Individual Taxpayer Identification Number (ITIN) to facilitate their filing of tax returns.”

Pages 10–12:

Although the IRS created the ITIN to help individuals who cannot legally obtain an SSN comply with the U.S. tax laws, the fact remains that these individuals generally cannot obtain a job in the United States without an SSN. Therefore, these individuals may either fabricate an SSN or improperly use someone else’s SSN (and sometimes their name) to obtain employment. These SSNs may also be used for other purposes, such as to obtain credit, which can cause significant hardships to the lawful taxpayers to whom these SSNs belong.

In the process of validating wages and withholding, AMTAP [Accounts Management Taxpayer Assurance Program] function employees are in a unique position to identify cases in which a taxpayer’s SSN has been compromised. In reviewing the Forms W-2 attached to the returns, these employees can see that an SSN was used to gain employment that did not belong to the person filing the return.

[495] Webpage: “Cosponsors of House Resolution 1041: SHUT Act of 2017.” U.S. House of Representatives, 115th Congress (2017–2018). Accessed December 24, 2019 at <www.congress.gov>

“Sponsor: Rep. Bilirakis, Gus M. [R-FL-12] Cosponsor statistics: 2 current … Party … Republican [2]”

[496] Webpage: “Actions on House Resolution 1041: SHUT Act of 2017.” U.S. House of Representatives, 115th Congress (2017–2018). Accessed December 24, 2019 at <www.congress.gov>

2/14/2017 Referred to the House Committee on Ways and Means.

[497] Public Law 115-97: “Tax Cuts and Jobs Act.” 115th Congress. Signed into law by Donald Trump on December 22, 2017. <www.congress.gov>

Section 11022. Increase in and Modification of Child Tax Credit …

Social security number required.—No credit shall be allowed under this section to a taxpayer with respect to any qualifying child unless the taxpayer includes the social security number of such child on the return of tax for the taxable year. For purposes of the preceding sentence, the term ‘social security number’ means a social security number issued to an individual by the Social Security Administration, but only if the social security number is issued—

(A) to a citizen of the United States or pursuant to subclause (I) (or that portion of subclause (III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security Act, and

(B) before the due date for such return.

[498] Calculated with data from the report: “U.S. Unauthorized Immigrant Total Dips to Lowest Level in a Decade.” By Jeffrey S. Passel and others. Pew Research Center, November 27, 2018. Updated 6/25/19. <www.pewresearch.org>

Page 12:

Most unauthorized immigrants live with spouses, partners, their children or other relatives. In 2016, 5.6 million children younger than 18 were living with unauthorized immigrant parents.5 Of these, 675,000 were unauthorized immigrants themselves, a number that has fallen by half since 2007. The other 5 million children were born in the U.S., a number that rose from 4.5 million in 2007.

5 More than 99% of the U.S.-born and unauthorized immigrant children live with their unauthorized immigrant parents or live in households where the only adult(s) are a related unauthorized immigrant or a related couple where one or both spouses/partners are unauthorized immigrants. See Methodology for details.

Page 48:

Small modifications to these definitions are made in defining “U.S.-born children of unauthorized immigrants” and “unauthorized immigrant children.” First, these groups comprise all individuals under 18 who are the child of an unauthorized immigrant in the household even if the child is a parent or spouse/partner themselves. More than 99% of individuals classified as children of unauthorized immigrants fit this definition. Then, individuals under 18 who live in households where the only adult(s) are an unauthorized immigrant or a couple in which one or both are unauthorized immigrants; further, an adult is a relative of the child. This group accounts for about 45,000 of the 5 million U.S.-born children of unauthorized immigrant in 2016 and about 4,000 of the 675,000 unauthorized immigrant children. Finally, the 5 million U.S.-born children of unauthorized immigrants include about 10,000 children who are actually lawful immigrants with an unauthorized immigrant parent.

CALCULATION: (5,600,000 – 675,000) / 5,600,000 = 88%

[499] Conference report: “Tax Cuts and Jobs Act.” U.S. House of Representatives, December 15, 2017. <docs.house.gov>

Page 43:

The conference agreement temporarily increases the child tax credit to $2,000 per qualifying child. The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The provision generally retains the present-law definition of dependent. …

Additionally, a qualifying child who is ineligible to receive the child tax credit because that child did not have a Social Security number as the child’s taxpayer identification number may nonetheless qualify for the nonrefundable $500 credit.

NOTE: This conference report was approved by Congress and incorporated into the final law. [Webpage: “Actions Overview: H.R.1—115th Congress (2017–2018).” U.S. Congress. Accessed February 23, 2021 at <www.congress.gov>. “12/15/2017 Conference report filed: Conference report H. Rept. 115-466 filed. … 12/19/2017 Conference report agreed to in House: On agreeing to the conference report Agreed to by the Yeas and Nays: 227–203… 12/22/2017 Became Public Law No: 115-97.”]

[500] Public Law 115-97: “Tax Cuts and Jobs Act.” 115th Congress. Signed into law by Donald Trump on December 22, 2017. <www.congress.gov>

Section 11022. Increase in and Modification of Child Tax Credit …

(4) Partial Credit Allowed for Certain Other Dependents.—

“(A) In General.—The credit determined under subsection (a) (after the application of paragraph (2)) shall be increased by $500 for each dependent of the taxpayer (as defined in section 152) other than a qualifying child described in subsection (c).

“(B) Exception for Certain Noncitizens.—Subparagraph (A) shall not apply with respect to any individual who would not be a dependent if subparagraph (A) of section 152(b)(3) were applied without regard to all that follows ‘resident of the United States.’

“(C) Certain Qualifying Children.—In the case of any qualifying child with respect to whom a credit is not allowed under this section by reason of paragraph (7), such child shall be treated as a dependent to whom subparagraph (A) applies. …

(7) Social Security Number Required.—No credit shall be allowed under this section to a taxpayer with respect to any qualifying child unless the taxpayer includes the social security number of such child on the return of tax for the

taxable year. For purposes of the preceding sentence, the term ‘social security number’ means a social security number issued to an individual by the Social Security Administration, but only if the social security number is issued—

“(A) to a citizen of the United States or pursuant to subclause (I) (or that portion of subclause (III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security Act, and

“(B) before the due date for such return.”

[501] Pamphlet: “Understanding your IRS Individual Taxpayer Identification Number.” U.S. Internal Revenue Service. Revised February 2021. <www.irs.gov>

Page 15:

If your child doesn’t have a valid SSN [Social Security number], your child may still qualify you for the Other Dependents Credit (ODC). This is a non-refundable credit of up to $500 per qualifying person. If your dependent child lived with you in the United States and has an ITIN [Individual Taxpayer Identification Number], but not an SSN, issued by the due date of your 2018 return (including extensions), you may be able to claim the Other Dependents Credit (ODC) for that child.

[502] Conference report: “Tax Cuts and Jobs Act.” U.S. House of Representatives, December 15, 2017. <docs.house.gov>

Pages 48–50:

The American Opportunity credit provides individuals with a tax credit of up to $2,500 per eligible student per year for qualified tuition and related expenses (including course materials) paid for each of the first four years of the student’s post-secondary education in a degree or certificate program. The credit rate is 100 percent on the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000 of qualified tuition and related expenses. …

House Bill …

[U]nder the provision, in order to claim the American Opportunity credit, the identification number provided with respect to the student to whom the tuition and related expenses relate must be a Social Security number. …

Conference Agreement

The conference agreement does not contain the House bill provision.

NOTE: This conference report was approved by Congress and incorporated into the final law. [Webpage: “Actions Overview: H.R.1—115th Congress (2017–2018).” U.S. Congress. Accessed February 23, 2021 at <www.congress.gov>. “12/15/2017 Conference report filed: Conference report H. Rept. 115-466 filed. … 12/19/2017 Conference report agreed to in House: On agreeing to the conference report Agreed to by the Yeas and Nays: 227–203… 12/22/2017 Became Public Law No: 115-97.”]

[503] Report: “Budget of the U.S. Government: A New Foundation for American Greatness.” White House Office of Management and Budget, May 23, 2017. <www.govinfo.gov>

Pages 10–11: “The Budget also proposes to require a Social Security Number (SSN) that is valid for work in order to claim the CTC [Child Tax Credit] and EITC [Earned Income Tax Credit]. Under current law, individuals who do not have SSNs valid for work can claim the CTC, including the refundable portion of the credit. This proposal would ensure only people who are authorized to work in the United States are eligible for the CTC.”

Page 37: “Require Social Security Number (SSN) for Child Tax Credit & Earned Income Tax Credit”

Page 39: “Require Social Security Number (SSN) for Child Tax Credit & Earned Income Tax Credit”

[504] Report: “Efficient, Effective, Accountable: An American Budget.” White House Office of Management and Budget, February 2018. <www.govinfo.gov>

Page 91:

The Budget also includes several proposals to ensure that taxpayers comply with their obligations, that tax refunds are only paid to those taxpayers who are eligible for them, and that taxpayer dollars are protected from criminals seeking to commit fraud: …

• Requiring a valid Social Security Number for work in order to claim the Child Tax Credit and Earned Income Tax Credit—this proposal would ensure that only individuals authorized to work in the United States could claim these credits.

Page 137: “Require Social Security Number (SSN) for Child Tax Credit & Earned Income Tax Credit”

[505] Report: “A Budget for a Better America.” White House Office of Management and Budget, March 21, 2019. <www.whitehouse.gov>

Page 129: “Require Social Security Number for Child Tax Credit, Earned Income Tax Credit, and credit for other dependents”

Page 132: “Require Social Security Number for Child Tax Credit, Earned Income Tax Credit, and credit for other dependents”

[506] Report: “A Budget for a America’s Future.” White House Office of Management and Budget, February 10, 2020. <www.govinfo.gov>

Page 87: “The Budget also includes several proposals to ensure that taxpayers comply with their obligations and that tax refunds are only paid to those who are eligible, including … requiring a valid Social Security Number for work in order to claim certain tax credits….”

Page 119: “Require Social Security Number for Child Tax Credit, Earned Income Tax Credit, and credit for other dependents”

[507] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 25–26:

Some analysts have suggested that high marginal tax rates may alter taxpayers’ decisions to work and alter economic output. For example, assume a taxpayer in the 35 percent tax bracket is considering working on an overtime assignment which pays $1,000, and which the taxpayer would certainly choose to undertake if he or she received the full $1,000. However, the taxpayer’s net of tax remuneration for the project is $650. The taxpayer may feel the net remuneration of $650 is insufficient to offset the loss of leisure time and the effort that would be expended to complete the project. If the taxpayer chooses not to work, society loses the benefit of his or her labor.

There is disagreement among economists on the extent to which labor supply decisions are affected by the marginal tax rate on labor income. Empirical evidence indicates that taxpayer response is likely to vary depending upon a number of taxpayer-specific factors. In general, findings indicate that the labor supply of so called “primary earners” tends to be less responsive to changes in marginal tax rates than is the labor supply of “secondary earners.”26 Some have suggested that the labor supply decision of the lower earner or “secondary earner” in married households may be quite sensitive to the household’s effective marginal tax rate.27 Other evidence suggests the decision to work additional hours may be less sensitive to changes in the marginal tax rate than the decision to enter the labor force.28 That is, there may be more effect on an individual currently not in the labor force than on an individual already in the labor force.

26 The phrase “primary earner” refers to the individual in the household who is responsible for providing the largest portion of household income. “Secondary earners” are earners other than the primary earner.

27 For a review of econometric studies on labor supply of so-called primary and secondary earners, see United States Congress, Congressional Budget Office Memorandum, “Labor Supply and Taxes,” 2006, and Charles L. Ballard, John B. Shoven, and John Whalley, “General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States,” American Economic Review, 75, March 1985. See also John Pencavel, “A Cohort Analysis of the Association between Work Hours and Wages Among Men,” Journal of Human Resources 37(2), 2002, pages 251–274; and Francine D. Blau and Lawrence M. Kahn “Changes in the Labor Supply Behavior of Married Women: 1980–2000,” Journal of Labor Economics, July 2007.

[508] Article: “Capital Gains Taxation.” By Gerald E. Auten (U.S. Treasury Department). NTA [National Tax Association] Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Because capital gains are taxed only when realized, high capital gains tax rates discourage the realization of capital gains and encourage the realization of capital losses. Investors induced to hold appreciated assets because of capital gains tax when they would otherwise sell are said to be “locked in.” Lock-in effects impose efficiency losses when investors are induced to hold suboptimal portfolios with inappropriate risk or diversification, or to forego investment opportunities offering higher expected pre-tax returns. Investors with appreciated property may also incur unnecessary transactions costs to avoid capital gains taxes if they obtain cash from their investment by using it as security for a loan, or reduce their risk by selling short an equivalent asset (selling short against the box). The lock-in effect is greater for long-held, highly appreciated assets and is increased by the step-up in basis at death.

[509] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Pages 20–21:

Marriage Penalties and Bonuses

Defining the married couple as a single tax unit under the federal individual income tax violates the principle of marriage neutrality. Some married couples pay more income tax than they would as two unmarried singles (a marriage tax penalty) while other married couples pay less income tax than they would as two unmarried singles (a marriage tax bonus).44 This can be viewed as a violation of the principle of horizontal equity, whereby individuals with equal income should have similar tax burdens.

The most important structural factors affecting the marriage neutrality of the income tax are the earned income tax credit (EITC), the marginal tax rate schedules, and the phaseout of credits and deductions for higher-income individuals. Under the current tax system, single individuals, heads of households, and married couples are subject to different tax rate schedules.45 In addition, the EITC amounts and phaseout ranges vary based on the number of dependents claimed. These differences give rise to structural marriage tax bonuses and penalties.

Generally, the more evenly divided the earned income of the two spouses, the more likely they are to have a structural marriage tax penalty. Hence, married couples in which each spouse earns 50% of the total earned income have the largest marriage tax penalties. Specifically, two individuals having $80,000 each in taxable income would be in the 25% marginal tax bracket when being taxed as individuals. Their federal income tax liability would be $15,928.75 each (or $31,857.50 jointly).46 However, were these same persons taxed as a married couple, they would be in the 28% marginal tax bracket and have a joint federal income tax liability of $32,265.50.The marriage tax penalty for this couple would be $408.

On the other hand, married couples where one spouse earns all the earned income have the largest marriage tax bonuses. For example, an individual with a taxable income of $100,000 would have a federal income tax liability of $21,283.25. If that individual took a spouse who had no earnings, the tax liability for a couple with $100,000 in taxable income is $16,857.50. Hence, this couple would have a marriage tax bonus of $4,435.75.

44 Research looking at 2007 tax law found that amongst cohabiting unmarried couples, if those couples were to marry, 48% would experience a marriage penalty while 38% would have a marriage bonus. See Emily Y. Lin and Patricia K. Tong, “Marriage and Taxes: What Can We Learn From Tax Returns Filed by Cohabiting Couples,” National Tax Journal, vol. 65, no. 4 (December 2012), pages 807–826.

45 Prior to 2003, the standard deduction for married couples filing jointly was less than twice the standard deduction available to individual filers, leading many filers to experience a marriage tax penalty.

46 Calculations in this section are based on 2013 tax schedules.

[510] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Pages 73–74:

Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people’s incentive to save. However, because that higher marginal tax rate also decreases people’s return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO’s analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.

[511] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, 2005. <www.cbo.gov>

Page 1: “Taxes influence many of the economic decisions that people make: whether to work, in what occupation, and to what extent; what fringe benefits employers offer and how much value workers place on those benefits relative to wages; how much to consume or save; what type of investments to make; whether to buy a home; and how much to donate to charity.”

[512] Report: “The Taxation of Capital and Labor Through the Self-Employment Tax.” Congressional Budget Office, September 2012. <www.cbo.gov>
 

Pages 1–2:

How the FICA [Federal Insurance Contributions Act] and SECA [Self-Employment Contributions Act] Tax Bases Differ

A tax’s “base” is the measure—for example, income or property—that is subject to the tax. The FICA tax base includes the wages of employees, and the SECA tax base is the net business income (that is, receipts minus expenses) of self-employed workers. The FICA tax base is limited to labor income, but the SECA base can include some capital income. Although the intent of the Congress was to tax the self-employed “on remuneration received for one’s own labor,” the tax base that was enacted did not conform to that intent.3

Specifically, the SECA tax base can include the return on investments in tangible and intangible (but not financial) assets made by an unincorporated business. In contrast, if an incorporated business makes the same investment, the return is reflected in the company’s profits, not in its employees’ wages, and therefore is not included in the FICA tax base. Another difference is that when a person’s labor income exceeds net business income across all businesses (or portions thereof) owned by that person, the excess labor income is excluded from the SECA tax base. In contrast, for an incorporated business, profitability has no effect on the FICA tax liability of its owners.

Those differences can affect an individual’s decision about whether to be self-employed or to work for somebody else. It can also influence the choice of how to organize a firm: A business owner’s capital income (and losses) will be taxed differently under the Social Security Act depending on whether the business incorporates. In both cases, the tax code can prompt people to make choices that they would not otherwise make, thereby reducing the efficient allocation of resources.

[513] Article: “Dividends, Double Taxation of.” By Joseph J. Cordes. Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Double taxation also makes equity finance “more costly” to the corporation than debt finance. This is because corporations are allowed to deduct interest payments on corporate taxes as a business expense but are not allowed to take a tax deduction for the costs of equity finance. As a consequence, the returns from corporate investments that are ultimately paid out to bondholders are subject to only one level of tax. In effect, this means that one dollar of investment that is financed by debt needs to earn a lower overall rate of return in order to pay bondholders their required return after tax, because this dollar is subject only to the personal income tax, than does one dollar of investment that is financed by equity, which is subject to both the corporate and personal income taxes.

[514] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 29: “Marginal tax rates are the rates that taxpayers pay on the next dollar of income that is earned. Marginal tax rates can be presented as both marginal statutory rates and marginal effective rates.”

[515] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, 2005. <www.cbo.gov>

Page 1: “In general, the type of tax rate that most directly affects decisions about whether to engage in more of an activity is the effective marginal tax rate—the percentage of an additional dollar of income that will have to be paid in taxes.”

Page 2:

The effective marginal tax rate depends on features of tax law besides statutory rates. Most taxpayers’ effective marginal rate is the same as their statutory marginal rate. But in some cases, the two rates differ because of the phasing in or out of particular tax provisions. …

A person’s effective marginal tax rate influences many different decisions about working: whether to take on an overtime shift, bargain for wages or fringe benefits, get a second job, or enter the labor force at all.

[516] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 25:

Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.25 Thus, in order to minimize economic inefficiency, economists in general have long recommended a broad base of taxation in order to keep marginal tax rates as low as possible subject to revenue needs.

25 The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer’s behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pages 20–31 and Harvey S. Rosen, Public Finance, 7th edition, (Boston MA: McGraw-Hill), 2004.

[517] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 4: “Different maximum marginal tax rates apply to different sources of income. … A taxpayer’s average tax rate (total tax paid divided by total income) is generally less than the taxpayer’s marginal tax rate (the increased tax that accrues from an additional dollar of income).”

[518] Report: “Effective Marginal Tax Rates on Labor Income.” Congressional Budget Office, 2005. <www.cbo.gov>

Page 3: “Average tax rates are only loosely related to statutory rates, in part because total income differs from taxable income by the exemptions and deductions that taxpayers claim and because income can fall into multiple statutory brackets, as described above.”

Page 7: “To determine regular [individual income] tax liability, a taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases.”

[519] Calculated with the dataset: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2019, 2019 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2019, 2019 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[520] Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>

Page 16:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. The taxes allocated to households in the analysis account for approximately 93 percent of all federal revenues collected in 2019.12 …

… Among households in the lowest two quintiles, individual income taxes are negative, on average, because they include refundable tax credits, which can result in net payments from the government.

12 The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 33–34:

Data

The core data used in CBO’s [Congressional Budget Office’s] distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the Internal Revenue Service (IRS). The number of returns sampled grew over the period studied—1979 to 2019—rising from roughly 90,000 in some of the early years to more than 350,000 in later years. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. …

Information from tax returns is supplemented with data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which contains survey data on the demographic characteristics and income of a large sample of households.5 The two sources are combined by statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.6

Page 35:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses, information on taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information on nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 39–40:

Household income, unless otherwise indicated, refers to income before accounting for the effects of means-tested transfers and federal taxes. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital income (including capital gains). Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales); taxable and tax-exempt interest; dividends paid by corporations (but not dividends from S corporations, which are considered part of business income); positive rental income; and the share of corporate income taxes borne by capital owners.†

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), unemployment insurance, and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local government general assistance programs.

Average means-tested transfer rates are calculated as means-tested transfers divided by income before transfers and taxes.

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 93 percent of federal revenues in fiscal year 2019. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received that year, regardless of when the taxes are paid. Those taxes comprise the following:

• Individual income taxes. Individual income taxes are paid by U.S. citizens and residents on their income from all sources, except those sources exempted under the law. Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries and generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.-based corporations organized as C corporations. In its analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes divided by income before transfers and taxes.

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationships. The income quintiles (fifths) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (hundredth) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses are larger than its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[521] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2019.” Congressional Budget Office, November 2022. <www.cbo.gov>. Page 33: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[522] Just Facts estimated the marginal tax rate in this example by summing the following categories of tax rates: Social Security payroll taxes, Medicare payroll taxes, and individual income taxes. This approximate marginal tax rate is based upon the research in the sections above pertaining to each of these types of taxes.

CALCULATION: 12.4% in Social Security payroll taxes + 2.9% in Medicare payroll taxes + 24%† in individual income taxes = 39.3% marginal tax rate

NOTE: † Report: “Overview of the Federal Tax System as in Effect for 2019.” U.S. Congress, Joint Committee on Taxation, March 20, 2019. <www.jct.gov>

Pages 5–7:

To determine regular tax liability, a taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her regular taxable income. The rate schedules are broken into several ranges of income, known as income brackets, with the marginal tax rate increasing as a taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status. For 2019, the regular individual income tax rate schedules are as follows: …

Table 1.–Federal Individual Income Tax Rates for 2019 …

NOTE: The following information is derived from Table 1:

Taxable Income

Rate

Lower Threshold

Upper Threshold

$0

$9,700

10%

$9,700

$39,475

12%

$39,475

$84,200

22%

$84,200

$160,725

24%

$160,725

$204,100

32%

$204,100

$510,300

35%

$510,300

infinity

37%

[523] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 25:

There is disagreement among economists on the extent to which labor supply decisions are affected by the marginal tax rate on labor income. Empirical evidence indicates that taxpayer response is likely to vary depending upon a number of taxpayer-specific factors. …

The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer’s behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pages 20–31 and Harvey S. Rosen, Public Finance, 7th edition, (Boston MA: McGraw-Hill), 2004.

[524] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 132:

Changes in marginal tax rates have two different types of effects on people. On the one hand, the lower those tax rates are, the greater the share of the returns from additional work or saving that people can keep, thus encouraging them to work and save more. On the other hand, because lower marginal tax rates increase after-tax income, they make it easier for people to attain their consumption goals with a given amount of work or saving, thus possibly causing people to work and save less. On balance, the evidence suggests that reducing tax rates boosts work and saving relative to what would occur otherwise, if budget deficits remain the same. But without other changes to taxes or spending, reducing tax rates from current levels would generally decrease revenues and increase deficits; higher deficits, even with lower tax rates, can reduce economic activity over the longer term.

[525] Report: “The 2012 Long-Term Budget Outlook.” By Joyce Manchester and others. Congressional Budget Office, June 2012. <cbo.gov>

Pages 36–37:

Similarly, a lower marginal tax rate on labor income increases the incentive to work, raising the number of hours people work and therefore the amount of output and income. However, because that lower marginal tax rate increases people’s after-tax income from the work they are already doing, they do not need to work as much to maintain their standard of living, which reduces the supply of labor. Again, CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter and that lower marginal tax rates on labor income increase the labor supply. A higher marginal tax rate on labor income has the opposite effect.

To reflect the high degree of uncertainty that attends the effect of the marginal tax rate on labor supply, CBO produced estimates of the economic effects of the two budget scenarios using three assumptions about how people would adjust the number of hours they worked in response to changes in marginal tax rates (and changes in pretax wages as well):

• A “strong labor supply response,” under which workers’ response is on the high side of the consensus range of empirical estimates;

• A “weak labor supply response,” under which workers’ response is on the low side of the consensus range; and

• A “medium labor supply response,” under which workers’ response is roughly midway between strong and weak.

The responsiveness of labor supply to taxes is often expressed as the total wage elasticity (the change in total labor income caused by a 1 percent change in after-tax wages). The total wage elasticity, in turn, has two components: a substitution elasticity (which measures the effect of changes in marginal tax rates) and an income elasticity (which measures the effect of changes in average tax rates). In this analysis, CBO’s assumptions for labor supply response correspond to total wage elasticities of about 0.35 for the strong response (composed of a substitution elasticity of 0.35 and an income elasticity of zero); about –0.05 for the weak response (composed of a substitution elasticity of 0.15 and an income elasticity of –0.20); and about 0.15 for the medium response (composed of a substitution elasticity of 0.25 and an income elasticity of –0.1). (Reflecting CBO’s review of research in this area, the strong labor supply response is substantially stronger, and the weak labor supply response slightly weaker, than those used for CBO’s 2011 long-term budget outlook.)

[526] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 25–26:

Some analysts have suggested that high marginal tax rates may alter taxpayers’ decisions to work and alter economic output. For example, assume a taxpayer in the 35 percent tax bracket is considering working on an overtime assignment which pays $1,000, and which the taxpayer would certainly choose to undertake if he or she received the full $1,000. However, the taxpayer’s net of tax remuneration for the project is $650. The taxpayer may feel the net remuneration of $650 is insufficient to offset the loss of leisure time and the effort that would be expended to complete the project. If the taxpayer chooses not to work, society loses the benefit of his or her labor.

There is disagreement among economists on the extent to which labor supply decisions are affected by the marginal tax rate on labor income. Empirical evidence indicates that taxpayer response is likely to vary depending upon a number of taxpayer-specific factors. In general, findings indicate that the labor supply of so called “primary earners” tends to be less responsive to changes in marginal tax rates than is the labor supply of “secondary earners.”26 Some have suggested that the labor supply decision of the lower earner or “secondary earner” in married households may be quite sensitive to the household’s effective marginal tax rate.27 Other evidence suggests the decision to work additional hours may be less sensitive to changes in the marginal tax rate than the decision to enter the labor force.28 That is, there may be more effect on an individual currently not in the labor force than on an individual already in the labor force.

26 The phrase “primary earner” refers to the individual in the household who is responsible for providing the largest portion of household income. “Secondary earners” are earners other than the primary earner.

27 For a review of econometric studies on labor supply of so-called primary and secondary earners, see United States Congress, Congressional Budget Office Memorandum, “Labor Supply and Taxes,” 2006, and Charles L. Ballard, John B. Shoven, and John Whalley, “General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States,” American Economic Review, 75, March 1985. See also John Pencavel, “A Cohort Analysis of the Association between Work Hours and Wages Among Men,” Journal of Human Resources 37(2), 2002, pages 251–274; and Francine D. Blau and Lawrence M. Kahn “Changes in the Labor Supply Behavior of Married Women: 1980–2000,” Journal of Labor Economics, July 2007.

[527] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 25:

Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.25 Thus, in order to minimize economic inefficiency, economists in general have long recommended a broad base of taxation in order to keep marginal tax rates as low as possible subject to revenue needs. …

25 The magnitude of the efficiency loss from taxation depends upon a measure of the taxpayer’s behavioral response, or the elasticity, and the square of the total effective marginal tax rate. Hence, a small change in an effective tax rate can create an efficiency loss that is large in relation to the change in revenue. For a detailed discussion of this point, see Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, pages 20–31 and Harvey S. Rosen, Public Finance, 7th edition, (Boston MA: McGraw-Hill), 2004.

[528] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 27:

In addition to labor supply and saving effects, increased marginal tax rates may encourage taxpayers to seek compensation in the form of tax free fringe benefits rather than taxable compensation and to engage in other tax avoidance activities, including deductible expenses or deductible consumption, or even illegal tax evasion. Such distortions in consumption represent an efficiency loss to the economy. …

Increased marginal tax rates also may alter taxpayers’ decisions regarding when to recognize income or to claim expenses. Any such tax motivated changes in the timing of income or expense generally require time and expense by the taxpayer. Such time and expense represents an efficiency loss to the economy.

[529] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Pages 73–74:

Increases in marginal tax rates on labor and capital income reduce output and income relative to what would be the case with lower rates (all else held equal). A higher marginal tax rate on capital income decreases the after-tax rate of return on saving, weakening people’s incentive to save. However, because that higher marginal tax rate also decreases people’s return on their existing savings, they need to save more to have the same future standard of living, which tends to increase the amount of saving. CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter, so that a higher marginal tax rate on capital income decreases saving. Specifically, CBO’s analyses of fiscal policy incorporate an estimate that an increase in the marginal tax rate on capital income that decreases the after-tax return on saving by 1 percent results in a decrease in private saving of 0.2 percent. (A lower marginal tax rate on capital income has the opposite effect.) Less saving results in less investment, a smaller capital stock, and lower output and income.

[530] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 26–27:

The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers’ decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return.29 Other studies have argued that large behavioral responses to changes in the net return need not occur.30 Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results.31 Some find personal saving responds strongly to increases in the net return to saving,32 while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives,34 while others find little or no increase as retirement plan savings substitute for other saving.35 With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.

[531] Report: “The 2012 Long-Term Budget Outlook.” By Joyce Manchester and others. Congressional Budget Office, June 2012. <cbo.gov>

Page 36:

Changes in marginal tax rates (the rates that apply to an additional dollar of a taxpayer’s income) also affect output and income. For example, a lower marginal tax rate on capital income (income derived from wealth, such as stock dividends, realized capital gains, or the owner’s profits from a business) increases the after-tax rate of return on saving, strengthening the incentive to save; more saving implies more investment, a larger capital stock, and greater output and income. However, because that lower marginal tax rate increases people’s after-tax returns on savings, they do not need to save as much to have the same future standard of living, which reduces the supply of saving. CBO [Congressional Budget Office] concludes, as do most analysts, that the former effect outweighs the latter, such that a lower marginal tax rate on capital income increases saving. A higher marginal tax rate on capital income has the opposite effect.

[532] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 26–27:

The distorted choices that may result from increased marginal tax rates are not limited to decisions to work. By reducing the net return to saving, increased marginal tax rates may distort taxpayers’ decisions to save. Substantial disagreement exists among economists as to the effect on saving of changes in the net return to saving. Empirical investigation of the responsiveness of personal saving to after tax returns provides no conclusive results. Some studies have argued that one should expect substantial increases in saving from increases in the net return. Other studies have argued that large behavioral responses to changes in the net return need not occur. Empirical investigation of the responsiveness of personal saving to the taxation of investment earnings provides no conclusive results. Some find personal saving responds strongly to increases in the net return to saving, while others find little or a negative response.33 Studies of retirement savings incentives follow a similar pattern, with some finding an increase in saving as a result of the incentives, while others find little or no increase as retirement plan savings substitute for other saving. With respect to the tax advantaged forms of saving, the revenue loss to the Federal government represents a decline in government saving (unless offset by equal spending cuts), and thus must be accounted for to determine net national saving. If saving is reduced by its treatment under the income tax, future productivity and income is lost to society.

[533] Report: “The 2012 Long-Term Budget Outlook.” By Joyce Manchester and others. Congressional Budget Office, June 2012. <cbo.gov>

Pages 25–26:

Long-term economic growth could differ greatly from the path that underlies the budget projections in this report. CBO [Congressional Budget Office] assumes that in the long run, total factor productivity will grow by 1.3 percent annually, approximately the average rate seen over the past half century. A small change in the growth of productivity can, over a long period, have a larger effect on GDP [gross domestic product] than most recessions do. For example, CBO estimates that during the depths of the recessions experienced since the 1970s, GDP was more than 4 percent lower, on average, than it could have been if the nation’s labor force and capital stock had been fully utilized; in addition, output subsequently remained below potential levels for an average of three years. Over the course of a lengthy recession, the cumulative loss in GDP would be substantial, but as long as the economy fully recovered, GDP would return to its previous growth path. By comparison, if productivity growth was 0.3 percentage points lower every year than CBO had assumed, GDP in the 10th year would be 3 percent lower than projected, but cumulative GDP over that decade would be lower by about 16 percent of one year’s output, and that shortfall would be growing at an increasing rate. In other words, the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount.

[534] Article: “U.S. Firms Move Abroad to Cut Taxes: Despite ‘04 Law, Companies Reincorporate Overseas, Saving Big Sums on Taxes.” By John D. McKinnon And Scott Thurm. Wall Street Journal, August 28, 2012. <online.wsj.com>

“More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes.”

[535] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 10: “[T]he corporate income tax … favors corporate debt over corporate equity investment since the former is not subject to the tax.”

[536] Article: “Dividends, Double Taxation of.” By Joseph J. Cordes. Encyclopedia of Taxation and Tax Policy (2nd edition). Edited by Joseph J. Cordes and others. Urban Institute Press, 2005. <www.taxpolicycenter.org>

Double taxation also makes equity finance “more costly” to the corporation than debt finance. This is because corporations are allowed to deduct interest payments on corporate taxes as a business expense but are not allowed to take a tax deduction for the costs of equity finance. As a consequence, the returns from corporate investments that are ultimately paid out to bondholders are subject to only one level of tax. In effect, this means that one dollar of investment that is financed by debt needs to earn a lower overall rate of return in order to pay bondholders their required return after tax, because this dollar is subject only to the personal income tax, than does one dollar of investment that is financed by equity, which is subject to both the corporate and personal income taxes.

[537] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 28: “Note that amounts paid as interest to the debtholders of a corporation generally are subject to only one level of tax (at the recipient level) because the corporation generally is allowed a deduction for the amount of interest expense paid or accrued.”

[538] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 12: “Excise taxes are a form of consumption tax—levies on the consumption of goods and services rather than income. Unlike sales taxes, they apply to particular commodities, rather than to broad categories.”

[539] Report: “Overview of the Federal Tax System as in Effect for 2018.” U.S. Congress, Joint Committee on Taxation, February 7, 2018. <www.jct.gov>

Page 22:

The Federal tax system imposes excise taxes on selected goods and services. Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service. Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous products (e.g., the tax on ozone depleting chemicals, and a tax on crude oil and certain petroleum products to fund the Oil Spill Liability Trust Fund), coal, certain telephone communications (e.g. local service), certain wagers, indoor tanning services, and vehicles lacking in fuel efficiency.

[540] Report: “Present Law and Background Information on Federal Excise Taxes.” United States Congress, Joint Committee on Taxation, January 2011. <www.jct.gov>

Page 1: “In addition to excise taxes the primary purpose of which is revenue production, excise taxes also are imposed to promote adherence to other policies (e.g., penalty excise taxes).”

[541] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

Excise taxes serve a variety of fiscal purposes. Some were enacted simply to raise revenue (for example, the telephone tax and certain fuel taxes were enacted for deficit reduction). The taxes linked with trust funds serve to fund expenditure programs by taxing their beneficiaries, or by taxing those responsible for certain problems addressed by expenditure programs. Some excise taxes adjust for the effects of negative externalities—that is, they seek to ensure that the price of products that produce side-effects like the consumption of alcohol and tobacco reflects their true cost to society. Other purposes of excise taxes include adjusting the price of imports to reflect domestic taxes and regulation of activities thought to be undesirable.

[542] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 43–44: “Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.”

[543] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) Dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[544] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Page 49 (of PDF):

Table 33: State & Local Excise Tax Collections Per Capita, Fiscal Year 2018 … U.S. [=] $613 … Vt. [=] $1,134 … Rank [=] 1 … Arizona [=] $328 … Rank [=] 50 …

Note: Excise taxes are sales and other special taxes imposed on select items, such as tobacco products, alcoholic beverages, and motor fuels. This table also includes excise taxes, or selective sales taxes, on amusements, insurance premiums, parimutuels, and public utilities. D.C.’s rank does not affect states’ ranks, but the figure in parentheses indicates where it would rank if included.

[545] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 43–44: “Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service.”

[546] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

Federal excise taxes are levied on a variety of products. The collection point of the tax varies across products; for some goods taxes are collected at the production level while other excise taxes are collected on retail sales. In terms of receipts, the single largest tax is the excise tax on gasoline.33 Other prominent excise taxes are those on diesel fuel, domestic air passengers, distilled spirits, beer,34 cigarettes, and telephone services.

[547] Report: “The Distribution of Household Income and Federal Taxes, 2011.” Congressional Budget Office, November 12, 2014. <www.cbo.gov>

Pages 11–12: “The burden of excise taxes relative to income is greatest for lower-income households, which tend to spend a larger share of their income on those taxed goods and services.”

Page 32:

CBO [Congressional Budget Office] allocated excise taxes to households according to their consumption of taxed goods and services (such as gasoline, tobacco, and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household’s spending on taxed goods and services was the same as that reported in the Bureau of Labor Statistics’ Consumer Expenditure Survey for a household with comparable income and other characteristics.

[548] Book: Basic Economics (15th edition). By Frank V. Mastrianna. Cengage Learning, 2008.

Page 353:

The burden of a tax does not always fall on the person or firm paying the tax. Where it does fall depends on the slopes of the supply and demand curves for the product being taxed. For example, the burden of taxes on cigarettes, liquor, and other consumer goods with very inelastic demands is usually shifted to the final consumer. The tax is paid by the manufacturer or distributor, who, because of the inelastic demand for the product, then adds the amount of the tax to the selling price of the good and passes the burden of the tax on to the consumer.

[549] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13:

The burden of excise taxes is thought to fall on consumption and more heavily on individuals with lower incomes. The tax is believed to be usually passed on by producers to consumers in the form of higher prices. Because consumption is a higher proportion of income for lower-income persons than upper-income individuals, excise taxes are usually considered regressive. However, the incidence of excise taxes in particular cases depends on the market conditions, and how consumers and producers respond to price changes. Further, some economists have argued that consideration of the incidence of excise taxes over an individual’s lifetime reduces their apparent regressivity.

[550] Webpage: “Excise Tax.” Internal Revenue Service. Last updated December 1, 2020. <www.irs.gov>

“Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product.”

[551] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Page 44:

In 2010, the Congress enacted several new excise taxes. These taxes are: the Patient-Centered Outcomes Research Trust Fund taxes;69 the annual fee on branded prescription pharmaceutical manufacturers and importers;70 the excise tax on indoor tanning services;71 the excise tax on certain medical devices;72 the annual fee on health insurance providers;73 the excise taxes on individuals without minimum essential health coverage;74 the excise tax on certain large employers not offering health care coverage;75 the excise tax on insurers for high-cost employer-sponsored health coverage;76 and the foreign procurement excise tax.77

69 Sec. 4375 (relating to health insurance); and sec. 4376 (relating to self-insured health plans).

70 Sec. 9008 of Pub. L. No 111-148, as amended by sec. 1404 of Pub. L. No. 111-152.

71 Sec. 5000B.

72 Sec. 4191.

73 Sec. 9010 of Pub. L. No. 111-148, as amended by sec. 10905 of such Act, as further amended by sec. 1406 of Pub. L. No. 111-152.

74 Sec. 5000A.

75 Sec. 4980H.

76 Sec. 4980I.

77 Sec. 5000C.

NOTE: All of the provisions above are contained in two laws collectively known as the Affordable Care Act or Obamacare. Details about these laws and some of the taxes above are available in Just Facts’ research on healthcare.

[552] Report: “Prescription for Change ‘Filled’: Tax Provisions in the Patient Protection and Affordable Care Act, Updated to Reflect Changes Approved in the Reconciliation Act of 2010.” By Clint Stretch and others. Deloitte, March 30, 2010. <www.deloitte.com>

Page 29: “Revenue provision effective dates.”

Obamacare provision effective dates

[553] Report: “Legislative Actions to Modify the Affordable Care Act in the 111th–115th Congresses.” By Annie L. Mach. Congressional Research Service, June 27, 2018. <digital.library.unt.edu>

Page 2 (of PDF):

Summary

The Patient Protection and Affordable Care Act (ACA; P.L. 111-148) was signed into law on March 23, 2010. The law comprises numerous provisions in 10 titles. The provisions in Titles IVIII largely relate to how health care in the United States is financed, organized, and delivered. Title IX contains revenue provisions. Title X reauthorizes the Indian Health Care Improvement Act, establishes some new programs and requirements, and amends provisions included in the other nine titles of the ACA. On March 30, 2010, the Health Care and Education Reconciliation Act (HCERA; P.L. 111-152) was signed into law, which included new provisions and amended several ACA provisions.

Since enactment of the ACA and HCERA, lawmakers have repeatedly debated the laws’ implementation and considered bills to repeal, defund, or otherwise amend them. This report summarizes legislative actions taken during the 111th–115th Congresses to modify the health care-related provisions of the ACA and HCERA. …

Identifying legislation that modifies the ACA and HCERA has become increasingly difficult over the years. This is because of the vast number of ACA and HCERA provisions, their complexity, and the fact that these provisions are codified in many different parts of the U.S. Code. As a result, the legislation presented in this report’s tables may not include all enacted legislation that modifies the ACA or HCERA, or all House- or Senate-passed legislation that would have modified the ACA or HCERA, had it been enacted. Due to the increasing complexity of tracking such legislation and concerns about the ability to do so authoritatively, the Congressional Research Service (CRS) does not intend to update this report.

Page 6:

Table 2. Enacted Legislation in the 111th–115th Congresses That Repealed, Modified, Extended, or Rescinded Funding for Programs Established by the ACA

Congress [=] 115th … Public Law [=] P.L. 115-120: Making further continuing appropriations for the fiscal year ending September 30, 2018, and for other purposes … Date of Enactment [=] Jan. 22, 2018 … Summary of Repealed or Amended ACA Provisions [=] Delayed implementation of the excise tax on high-cost employer-sponsored insurance (often referred to as the Cadillac tax) until TY2022. … Similar Provisions or Interactions with Other Laws [=] Implementation of the Cadillac tax was first delayed from TY [tax year] 2018 until TY2020 under P.L. 114-113. … ACA Section [U.S. Code] [=] ACA §9001 [26 U.S.C. §4980I]

[554] Public Law 116-94: “Further Consolidated Appropriations Act of 2020.” 116th U.S. Congress. Signed into law by Donald Trump December 20, 2019. <www.congress.gov>

Division N, Title I, Subtitle E:

Sec. 501. Repeal of Medical Device Excise Tax.

(a) In General.—Chapter 32 of the Internal Revenue Code of 1986 is amended by striking subchapter E.

(b) Conforming Amendments.—

(1) Subsection (a) of section 4221 of the Internal Revenue Code of 1986 is amended by striking the last sentence.

(2) Paragraph (2) of section 6416(b) of such Code is amended by striking the last sentence.

(c) Clerical Amendment.—The table of subchapters for chapter 32 of the Internal Revenue Code of 1986 is amended by striking the item relating to subchapter E.

(d) Effective Date.—The amendments made by this section shall apply to sales after December 31, 2019. …

Sec. 503. Repeal of Excise Tax on High Cost Employer-Sponsored Health Coverage.

(a) In General.—Chapter 43 of the Internal Revenue Code of 1986 is amended by striking section 4980I.

(b) Conforming Amendments.—

(1) Section 6051 of such Code is amended— (A) by striking ‘‘section 4980I(d)(1)’’ in subsection (a)(14) and inserting ‘‘subsection (g)’’, and (B) by adding at the end the following new subsection:

“(g) Applicable Employer-Sponsored Coverage.—For purposes of subsection (a)(14)—

“(1) In General.—The term ‘applicable employer-sponsored coverage’ means, with respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under section 106, or would be so excludable if it were employer-provided coverage (within the meaning of such section 106).

“(2) Exceptions.—The term ‘applicable employer-sponsored coverage’ shall not include—“(A) any coverage (whether through insurance or otherwise) described in section 9832(c)(1) (other than subparagraph (G) thereof) or for long-term care, ‘‘(B) any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye, or “(C) any coverage described in section 9832(c)(3) the payment for which is not excludable from gross income and for which a deduction under section 162(l) is not allowable.

“(3) Coverage Includes Employee Paid Portion.—Coverage shall be treated as applicable employer-sponsored coverage without regard to whether the employer or employee pays for the coverage.

“(4) Governmental Plans Included.—Applicable employer-sponsored coverage shall include coverage under any group health plan established and maintained primarily for its civilian employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any such government.” (2) Section 9831(d)(1) of such Code is amended by striking ‘‘except as provided in section 4980I(f)(4).” (3) The table of sections for chapter 43 of such Code is amended by striking the item relating to section 4980I.

(c) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2019.

[555] Textbook: Public Finance (2nd edition). By John E. Anderson. South-Western Cengage Learning, 2012.

Page 398:

[M]ost state sales tax statutes require the seller of the product to pay the state sales tax rather than the buyer. Although you might think that you pay the state sales tax on your purchase at Wal-Mart, that is not so. … It appears as though the retailer requires us to pay the whole sales tax, simply adding the tax to our bill, but the reality is that the retailer may still bear a part of the tax burden implicitly through a lower price received on the product than would be charged in the absence of the sales tax. … The true economic incidence of the tax is likely to be shared between the retailer and the customer. …

Economic incidence is concerned with how the burden of the tax is distributed among economic agents (producers, consumers, employees, and shareholders) as determined by market forces, not by the law. It is one thing to specify in law that the sales tax be collected and paid by Wal-Mart, for example, but it is quite another to determine how Wal-Mart then passes some portion of the tax burden along to its customers, workers, and owner-shareholders, depending on the economic forces at work in each of these market contexts. Economic incidence is the pattern of tax burden as it is distributed by supply and demand forces in each of these markets.

[556] Book: Basic Economics (15th edition). By Frank V. Mastrianna. Cengage Learning, 2008.

Page 353:

The burden of a tax does not always fall on the person or firm paying the tax. Where it does fall depends on the slopes of the supply and demand curves for the product being taxed. For example, the burden of taxes on cigarettes, liquor, and other consumer goods with very inelastic demands is usually shifted to the final consumer. The tax is paid by the manufacturer or distributor, who, because of the inelastic demand for the product, then adds the amount of the tax to the selling price of the good and passes the burden of the tax on to the consumer.

[557] Book: Handbook on Taxation. Edited by W. Bartley Hildreth and James A. Richardson. Marcel Dekker, 1999.

Page 445: “Businesses making retail sales to households would be responsible for remitting the tax to the government and thus in a literal sense would pay the tax. In an economic sense, however, households would pay the tax as part of the overall price they pay for goods and services. … [S]tate and local sales taxes are now listed separately on sales receipts….”

[558] Report: “State Sales Tax Rates and Food & Drug Exemptions (As of January 1, 2021).” Federation of Tax Administrators, January 2021. <www.taxadmin.org>

State Sales Tax Rates and Food & Drug Exemptions (As of January 1, 2021)

State

Tax Rate (percentage)

Exemptions

Food (1)

Prescription Drugs

Nonprescription Drugs

Alabama

4

*

Alaska

none

--

--

--

Arizona

5.6

*

*

Arkansas

6.5

0.125% (4)

*

California (3)

7.25

*

*

Colorado

2.9

*

*

Connecticut

6.35

*

*

Delaware

none

--

--

--

Florida

6

*

*

*

Georgia

4

* (4)

*

Hawaii

4

*

Idaho

6

*

Illinois

6.25

1%

1%

1%

Indiana

7

*

*

Iowa

6

*

*

Kansas

6.5

*

Kentucky

6

*

*

Louisiana

4.45

* (4)

*

Maine

5.5

*

*

Maryland

6

*

*

*

Massachusetts

6.25

*

*

Michigan

6

*

*

Minnesota

6.875

*

*

*

Mississippi

7

*

Missouri

4.225

1.225%

*

Montana

none

--

--

--

Nebraska

5.5

*

*

Nevada

6.85

*

*

New Hampshire

none

--

--

--

New Jersey

6.625

*

*

*

New Mexico

5.125

*

*

New York

4

*

*

*

North Carolina

4.75

* (4)

*

North Dakota

5

*

*

Ohio

5.75

*

*

Oklahoma

4.5

*

Oregon

none

--

--

--

Pennsylvania

6

*

*

*

Rhode Island

7

*

*

South Carolina

6

*

*

South Dakota

4.5

*

Tennessee

7

4% (4)

*

Texas

6.25

*

*

*

Utah

6.1 (5)

3.0% (5)

*

Vermont

6

*

*

*

Virginia

5.3 (2)

2.5% (2)

*

*

Washington

6.5

*

*

West Virginia

6

*

*

Wisconsin

5

*

*

Wyoming

4

*

*

Dist. of Columbia

6

*

*

*

* -- indicates exempt from tax, blank indicates subject to general sales tax rate.
Source: Compiled by FTA from various sources.
(1) Some state tax food, but allow a rebate or income tax credit to compensate poor households. They are: HI, ID, KS, OK, and SD.
(2) Includes statewide 1.0% tax levied by local governments in Virginia.
(3) Tax rate may be adjusted annually according to a formula based on balances in the unappropriated general fund and the school foundation fund.
(4) Food sales subject to local taxes.
(5) Includes a statewide 1.25% tax levied by local governments in Utah.

[559] Calculated with the dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[560] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[561] Book: The Oxford Companion to American Law. Edited by Kermit L. Hall and others. Oxford University Press, 2002.

Page 789:

Property taxes are annual levies on the assessed value of property. … Imposts based on the ownership of property were used in ancient times but the modern tax has roots in the feudal obligations owed to British and European kings or landlords. In the fourteenth and fifteenth centuries, British tax assessors used ownership of property to estimate ability to pay. In time the tax came to be regarded as a levy on the property (in rem) itself. In the United Kingdom the tax developed into a system of “rates” based upon the annual (rental) value of the property.

[562] Article: “Brown University, PILOTS, and Tax-Exemptions.” By I. Harry David. Tax Foundation, May 10, 2012. <taxfoundation.org>

Although Brown University is a non-profit institution and is exempt from paying property taxes to the city of Providence, Rhode Island, it still makes payments of $4 million per year to the city. This week the city convinced Brown University to pay $31 million more over the next 11 years. To put this in perspective, if Brown had to pay the commercial property real estate tax, it would owe about $38 million per year. The city will raise a total of nearly $100 million by collecting these payments in lieu of taxes (PILOTs) from nine of the city’s tax exempt organizations.

Generally, municipal governments exempt universities, hospitals and other nonprofits from paying property taxes. But the government is often partially compensated for lost tax revenue by collecting PILOTs either from the exempt organizations or from the state government. As for colleges and universities, a “significant minority” pay PILOTs, according to the Lincoln Institute. In Brown’s case, the state government used subtle coercion to increase these payments by considering legislation to require PILOTs from tax exempt organizations. In another example of coercion, Baltimore threatened to tax hospital and dorm beds at Johns Hopkins University if it didn’t agree to a PILOT arrangement. …

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero).

[563] Book: 2009 Federal Tax Course. CCH, 2008.

Page 8: “States that impose a tax on tangible personal property generally tax property that taxpayers registers with the state, like motor vehicles, boats, and aircraft.”

[564] Calculated with the dataset: “Table 3.3. State and Local Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[565] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Pages 15–16 (of PDF): “Table 8: Sources of State and Local Tax Collections, Percentage of Total from Each Source, Fiscal Year 2018”

NOTE: An Excel file containing the data and calculations is available upon request.

[566] Report: “Facts & Figures 2021: How Does Your State Compare?” By Janelle Cammenga. Tax Foundation, March 10, 2021. <files.taxfoundation.org>

Page 51 (of PDF): “Table 35. State & Local Property Tax Collections Per Capita, Fiscal Year 2018 … U.S. [=] $1,675 … N.J. [=] $3,378 … Rank [=] 1 … Ala. [=] $598 … Rank [=] 50”

[567] Book: Handbook on Taxation. Edited by W. Bartley Hildreth and James A. Richardson. Marcel Dekker, 1999.

Page 359:

Evaluation of property tax hinges crucially on assumptions made about its economic tax incidence (i.e., who actually bears the burden of the tax). Unlike retail sales and personal income taxes, the incidence of the property tax is complex and controversial. Debate still rages among public finance scholars as to whether capital owners, renters/consumers, or labor bear the burden of the tax. As discussed in Chapter 6, there are three different views of property tax incidence. All views concur that the land portion of the tax is borne by land owners and owner-occupied housing is borne by home owners. Controversy surrounds commercial and industrial property (Mieszkowski and Zodrow, 1989).

[568] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 11: “The federal estate tax is imposed when property is transferred at death. The taxable unit is the estate, in contrast to an inheritance tax, which is levied on heirs. The base of the federal estate tax is property transferred at death, less allowable deductions and exemptions.”

Page 12: “The federal gift tax operates alongside the estate tax to prevent individuals from avoiding the estate tax by transferring property to heirs before dying.”

[569] Report: “Statistics of Income Bulletin.” Internal Revenue Service, Fall 1984. <www.irs.gov>

Page 3: “Today’s estate tax was instituted by the Revenue Act of 1916, 3 years after the inception of the modern income tax in 1913. No 1onger necessary strictly for wartime revenue, the estate tax was to serve the dual purposes of producing revenue and redistributing wealth.”

[570] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of dollars].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

b) “Table 3.3. State and Local Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

c) Dataset: “Table 5.11. Capital Transfers Paid and Received, by Sector and by Type [Billions of Dollars].” U.S. Bureau of Economic Analysis. Last revised July 31, 2020. <apps.bea.gov>

d) Dataset: “Table 5.11U. Capital Transfers Paid and Received, by Sector and by Type [Millions of Dollars; Quarters Seasonally Adjusted at Annual Rates].” U.S. Bureau of Economic Analysis. Last revised March 25, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[571] Letter from Congressional Budget Office Director Douglas W. Elmendorf to U.S. Senator Charles E. Grassley, March 4, 2010. <www.cbo.gov>

Page 2:

The President proposes to assess an annual fee on liabilities of banks, thrifts, bank and thrift holding companies, brokers, and security dealers, as well as U.S. holding companies controlling such entities. …

… However, the ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government. The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses, if they did not have better employment opportunities available to them. Investors could bear some of the cost in the form of lower prices of their stock if the fee reduced the institution’s future profits.

[572] “Testimony of the Staff of the Joint Committee On Taxation before the Joint Select Committee on Deficit Reduction.” By Thomas A. Barthold. United States Congress, Joint Committee on Taxation, September 22, 2011. <www.jct.gov>

Pages 43–44:

Generally, excise taxes are taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service. Among the goods and services subject to U.S. excise taxes are motor fuels, alcoholic beverages, tobacco products, firearms, air and ship transportation, certain environmentally hazardous activities and products, coal, telephone communications, certain wagers, and vehicles lacking in fuel efficiency.

[573] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 23–24:

CBO [Congressional Budget Office] also assumed that the economic cost of excise taxes falls on households according to their consumption of taxed goods (such as tobacco and alcohol). Excise taxes on intermediate goods, which are paid by businesses, were attributed to households in proportion to their overall consumption. CBO assumed that each household spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the Bureau of Labor Statistics’ Consumer Expenditure Survey.

Page 9: “The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes.”

[574] Report: “Overview of the Federal Tax System.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, November 21, 2014. <www.fas.org>

Page 13: “Federal excise taxes are levied on a variety of products. The collection point of the tax varies across products; for some goods taxes are collected at the production level while other excise taxes are collected on retail sales.”

[575] Calculated with data from the report: “Gasoline Taxes.” American Petroleum Institute, January 1, 2022. <www.api.org>

Page 1 (of PDF): “The federal tax on gasoline is 18.40 cpg. [cents per gallon] … Regional Gasoline Motor Fuel Taxes [cents per gallon] … Region [=] U.S. … State Excise [=] 26.16”

CALCULATION: 18.4 + 26.16 = 44.56

[576] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In the judgment of CBO [Congressional Budget Office] and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.”

[577] Report: “Understanding the Tax Reform Debate: Background, Criteria, & Questions.” Prepared under the direction of James R. White (Director, Strategic Issues, Tax Policy and Administration Issues). United States Government Accountability Office, September 2005. <www.gao.gov>

Page 68: “Payroll Taxes Often synonymous with social insurance taxes. However, in some cases the term ‘payroll taxes’ may be used more generally to include all tax withholding. For the purposes of this report, payroll taxes are synonymous with social insurance taxes.”

Page 69: “Social Insurance Taxes Tax payments to the federal government for Social Security, Medicare, and unemployment compensation. While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.”

[578] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 23: “CBO [Congressional Budget Office] further assumed—as do most economists—that employers pass on their share of payroll taxes to employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share of payroll taxes in households’ before-tax income and in households’ taxes.”

[579] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[580] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[581] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[582] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

Page 24:

Far less consensus exists about how to allocate corporate income taxes (and taxes on capital income generally). In this analysis, CBO allocated 75 percent of the burden of corporate income taxes to owners of capital in proportion to their income from interest, dividends, adjusted capital gains, and rents. The agency used capital gains scaled to their long-term historical level given the size of the economy and the tax rate that applies to them rather than actual capital gains so as to smooth out large year-to-year variations in the total amount of gains realized. CBO allocated 25 percent of the burden of corporate income taxes to workers in proportion to their labor income.

[583] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 133: “In addition, households bear the burden of corporate income taxes, although the extent to which they do so as owners of capital, as workers, or as consumers is not clear.”

[584] In May 2012, Just Facts conducted a search of academic literature to determine the range of scholarly opinion on this subject. The search found that estimates for the portion of corporate income taxes that are borne by owners of capital ranged from nearly 100% down to 33%. Here are two extremes:

a) Report: “An Analysis of the ‘Buffett Rule.’ ” By Thomas L. Hungerford. Congressional Research Service, October 7, 2011. <www.fas.org>

Page 4: “The evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital.”

b) Working paper: “International Burdens of the Corporate Income Tax.” By William C. Randolph. Congressional Budget Office, August, 2006. <www.cbo.gov>

Pages 51–52: “In the base case (Table 3), the model used in this study predicts that domestic labor bears 74 percent, domestic capital owners bear 33 percent, foreign capital owners bear 72 percent, foreign labor bears –71 percent, and the excess burden equals about 4 percent of the revenue.”

[585] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[586] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[587] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[588] Calculated with the dataset: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

“Table 3. Average Household Income, by Income Source and Income Group, 1979 to 2020, 2020 Dollars”

“Table 7. Components of Federal Taxes, by Income Group, 1979 to 2020, 2020 Dollars”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[589] Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>

Page 8:

In this analysis, federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.7 Taken together, those taxes accounted for over 90 percent of all federal revenues collected in 2020. Among the sources of revenues, individual income taxes and payroll taxes are the largest, followed by corporate taxes and excise taxes.8

7 The remaining federal revenue sources not allocated to U.S. households are states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve System, customs duties, and miscellaneous fees and fines.

Pages 31–32: “Individual income taxes can be negative because they include the effects of refundable tax credits, which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer.”

Page 20:

Data

The core data used in CBO’s distributional analyses come from the Statistics of Income (SOI), a nationally representative sample of individual income tax returns collected by the IRS. That sample of tax returns becomes available to CBO approximately two years after the returns are filed. Data on household income are systematically and consistently reported in the SOI. The sample is therefore considered a reliable resource to use when analyzing the effects of fiscal policy on income. However, certain types of income are not reported in the SOI. In 2020, for example, the portion of payments from the Paycheck Protection Program that was not used to pay for employees’ wages was not taxable and therefore not available in the SOI data.

SOI data include information about tax filers’ family structure and age, but they do not include certain demographic information or data on people who do not file taxes. For that information, CBO uses data from the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey (CPS), which has data on the demographic characteristics and income of a large sample of households.6

CBO combines the two data sources, statistically matching each SOI record to a corresponding CPS record on the basis of demographic characteristics and income. Each pairing results in a new record that takes on some characteristics of the CPS record and some characteristics of the SOI record.7

Page 22:

Measures of Income, Federal Taxes, and Means-Tested Transfers

Most distributional analyses rely on a measure of annual income as the metric for ranking households. In CBO’s analyses of the distribution of household income, information about taxable income sources for tax-filing units that file individual income tax returns comes from the SOI, whereas information about nontaxable income sources and income for tax-filing units that do not file individual income tax returns comes from the CPS. Among households at the top of the income distribution, the majority of income data are drawn from the SOI. In contrast, among households in the lower and middle quintiles, a larger portion of income data is drawn from the CPS….

Pages 31–32:

Household income, unless otherwise indicated, refers to income before the effects of means-tested transfers and federal taxes are accounted for. Throughout this report, that income concept is called income before transfers and taxes. It consists of market income plus social insurance benefits.

Market income consists of the following five elements:

• Labor income. Wages and salaries, including those allocated by employees to 401(k) and other employment-based retirement plans; employer-paid health insurance premiums (as measured by the Census Bureau’s Current Population Survey); the employer’s share of payroll taxes for Social Security, Medicare, and federal unemployment insurance; and the share of corporate income taxes borne by workers.

• Business income. Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.

• Capital gains. Net profits realized from the sale of assets (but not increases in the value of assets that have not been realized through sales).

• Capital income. Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), rental income, and the share of corporate income taxes borne by capital owners.

• Other income sources. Income received in retirement for past services and other nongovernmental sources of income.

Social insurance benefits consist of benefits from Social Security (Old Age, Survivors, and Disability Insurance), Medicare (measured by the average cost to the government of providing those benefits), regular unemployment insurance (but not expanded unemployment compensation), and workers’ compensation.

Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs. Eligibility to receive such transfers is determined primarily on the basis of income, which must be below certain thresholds. Means-tested transfers are provided through the following programs: Medicaid and the Children’s Health Insurance Program (measured by the average cost to the federal government and state governments of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); housing assistance programs; Supplemental Security Income; Temporary Assistance for Needy Families and its predecessor, Aid to Families With Dependent Children; child nutrition programs; the Low Income Home Energy Assistance Program; and state and local governments’ general assistance programs. For 2020, CBO included expanded unemployment compensation in means-tested transfers.

Average means-tested transfer rates are calculated as means-tested transfers (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Federal taxes consist of individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Those four sources accounted for 94 percent of federal revenues in fiscal year 2020. Revenue sources not examined in this report include states’ deposits for unemployment insurance, estate and gift taxes, net income of the Federal Reserve System that is remitted to the Treasury, customs duties, and miscellaneous fees and fines.

In this analysis, taxes for a given year are the amount a household owes on the basis of income received in that year, regardless of when the taxes are paid. Those taxes comprise the following four categories:

• Individual income taxes. Individual income taxes are levied on income from all sources, except those excluded by law. Individual income taxes can be negative because they include the effects of refundable tax credits (including recovery rebate credits), which can result in net payments from the government. Specifically, if the amount of a refundable tax credit exceeds a filer’s tax liability before the credit is applied, the government pays that excess to the filer. Statutory marginal individual income tax rates are the rates set in law that apply to the last dollar of income.

• Payroll taxes. Payroll taxes are levied primarily on wages and salaries. They generally have a single rate and few exclusions, deductions, or credits. Payroll taxes include those that fund the Social Security trust funds, the Medicare trust fund, and unemployment insurance trust funds. The federal portion of the unemployment insurance payroll tax covers only administrative costs for the program; state-collected unemployment insurance payroll taxes are not included in the Congressional Budget Office’s measure of federal taxes (even though they are recorded as revenues in the federal budget). Households can be entitled to future social insurance benefits, including Social Security, Medicare, and unemployment insurance, as a result of paying payroll taxes. In this analysis, average payroll tax rates capture the taxes paid in a given year and do not capture the benefits that households may receive in the future.

• Corporate income taxes. Corporate income taxes are levied on the profits of U.S.–based corporations organized as C corporations. In this analysis, CBO allocated 75 percent of corporate income taxes in proportion to each household’s share of total capital income (including capital gains) and 25 percent to households in proportion to their share of labor income.

• Excise taxes. Sales of a wide variety of goods and services are subject to federal excise taxes. Most revenues from excise taxes are attributable to the sale of motor fuels (gasoline and diesel fuel), tobacco products, alcoholic beverages, and aviation-related goods and services (such as aviation fuel and airline tickets).

Average federal tax rates are calculated as federal taxes (totaled within an income group) divided by income before transfers and taxes (totaled within an income group).

Income after transfers and taxes is income before transfers and taxes plus means-tested transfers minus federal taxes.

Income groups are created by ranking households by their size-adjusted income before transfers and taxes. A household consists of people sharing a housing unit, regardless of their relationship. The income quintiles (or fifths of the distribution) contain approximately the same number of people but slightly different numbers of households…. Similarly, each full percentile (or hundredth of the distribution) contains approximately the same number of people but a different number of households. If a household has negative income (that is, if its business or investment losses exceed its other income), it is excluded from the lowest income group but included in totals.

NOTE: † See Just Facts’ research on the distribution of the federal tax burden for details about how the Congressional Budget Office determines the share of corporate income taxes borne by workers and owners of capital.

[590] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office (CBO) previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§ #

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • # Report: “The Distribution of Household Income, 2020.” Congressional Budget Office, November 2023. <www.cbo.gov>. Page 19: “The estimates in this report were produced using the agency’s framework for analyzing the distributional effects of both means-tested transfers and federal taxes.2 That framework uses income before transfers and taxes, which consists of market income plus social insurance benefits.”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[591] Report: “EMTALA: Access to Emergency Medical Care.” By Edward C. Liu. Congressional Research Service, July 1, 2010. <www.everycrsreport.com>

Page 2 (of PDF):

The Emergency Medical Treatment and Active Labor Act (EMTALA) ensures universal access to emergency medical care at all Medicare participating hospitals with emergency departments. Under EMTALA, any person who seeks emergency medical care at a covered facility, regardless of ability to pay, immigration status, or any other characteristic, is guaranteed an appropriate screening exam and stabilization treatment before transfer or discharge. Failure to abide by these requirements can subject hospitals or physicians to civil monetary sanctions or exclusion from Medicare. Hospitals may also be subject to civil liability under the statute for personal injuries resulting from the violation.

NOTE: More details about this law are presented in Just Facts’ research on healthcare.

[592] Article: “New York Offers Costly Lessons on Insurance.” By Anemona Hartocollis. New York Times, April 17, 2010. <www.nytimes.com>

In 1993, motivated by stories of suffering AIDS patients, the state became one of the first to require insurers to extend individual or small group coverage to anyone with pre-existing illnesses. …

Healthy people, in effect, began to subsidize people who needed more health care. The healthier customers soon discovered that the high premiums were not worth it and dropped out of the plans. The pool of insured people shrank to the point where many of them had high health care needs. Without healthier people to spread the risk, their premiums skyrocketed, a phenomenon known in the trade as the “adverse selection death spiral.”

NOTE: Details regarding the preexisting condition mandate in the Affordable Care Act (a.k.a. Obamacare) are presented in Just Facts’ research on healthcare.

[593] Paper: “The High Cost of Renewable-Electricity Mandates.” By Robert Bryce. Manhattan Institute, February 2012. <www.manhattan-institute.org>

Page 3 (of PDF): “Motivated by a desire to reduce carbon emissions, and in the absence of federal action to do so, 29 states (and the District of Columbia and Puerto Rico) have required utility companies to deliver specified minimum amounts of electricity from ‘renewable’ sources, including wind and solar power.”

Pages 3–4:

Although the push for more renewable energy is contributing to the rising cost of electricity, it’s certainly not the only factor—new environmental regulations and overall expansion of the electricity transmission system are also to blame. Without rigorous cost-benefit analysis by the states, it’s difficult to isolate the cost of the renewable mandates from these other factors. …

That said, we have compared the costs of electricity in RPS [renewable portfolio standards] and non-RPS states, using price information from the EIA [Energy Information Administration]. …

In the ten-year period between 2001 and 2010—the period during which most of the states enacted their RPS mandates—residential and commercial electricity prices in RPS states increased at faster rates than those in non-RPS states. …

To get closer to an “apples to apples” comparison of electricity rates, we focused on seven states with RPS mandates and seven without. All 14 are heavily dependent on coal—responsible, on average, for 63 percent of their electricity—and also on natural gas. To be certain, this is not a perfect comparison. The combined population of the non-RPS states is only about half that of the states with RPS mandates, for example. Nevertheless, a striking pattern of higher rates in coal-dependent RPS states emerged from this analysis….

Between 2001 and 2010, electricity rates in the coal-dependent RPS states increased by an average of 54.2 percent, more than twice the increase seen in the coal-dependent non-RPS states.

[594] Constitution of the United States. Signed September 17, 1787. <justfacts.com>

Article I, Section 7:

[Clause 1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

[Clause 2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Article I, Section 8, Clause 1: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States….”

[595] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 56: “CBO’s [Congressional Budget Office’s] baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged.”

Page 66:

Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.

[596] Calculated with data from:

a) Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of Dollars].” U.S. Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

NOTES:

  • This dataset goes back to 1929. That federal revenues never exceeded 20.4% of GDP [gross domestic product] prior to 1929 is ascertained from a 2010 Congressional Budget Office report that (1) projected federal revenues (as a portion of GDP) in 2020 will exceed those in 2000 by one tenth of a percentage point, and (2) makes the following statement: “Revenues would also rise considerably under current law; by the 2020s, they would reach higher levels relative to the size of the economy than ever recorded in the nation’s history.” [Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>]
  • An Excel file containing the data and calculations is available upon request.

[597] Transcript: “Inside the Dot.Com Crash.” CNN Moneyline, December 26, 2000. <transcripts.cnn.com>

“One year ago at this time, Internet stocks were in the midst of an astonishing rally, and their future seemed limitless. But since then, investors have been facing a brutal reality check, watching their shares fall 70, 80, 90 percent from their highs and in some cases disappear completely.”

[598] Textbook: Financial Markets and Institutions (Abridged 9th edition). By Jeff Madura. South-Western Cengage Learning, 2011.

Page 248: “The Wilshire 5000 Total Market Index was created in 1974 to reflect the values of 5,000 U.S. stocks. … It represents the broadest index of the U.S. stock market. It is widely quoted in financial media and closely monitored by the Federal Reserve and many financial institutions.”

[599] Webpage: “Dow Jones Wilshire 5000 Composite Index.” Accessed October 9, 2008 at <www.wilshire.com>

Dow Jones Wilshire 5000 Index

[600] Calculated with data from the webpage: “History of The NASDAQ Composite Index.” FedPrimeRate.com. Accessed September 29, 2012 at <www.fedprimerate.com>

“December 31, 1999 [=] 4,069.31 … December 31, 2000 [=] 2,470.52”

CALCULATION: (4,069.31 – 2,470.52) / 4,069.31 = 39.3%

[601] Calculated with the dataset: “Table 1.14: Gross Value Added of Domestic Corporate Business in Current Dollars and Gross Value Added of Nonfinancial Domestic Corporate Business in Current and Chained Dollars.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

Line 37: “Nonfinancial corporate business: Profits before tax (without IVA [inventory valuation adjustment] and CCAdj [capital consumption adjustment]).”

Domestic Nonfinancial Corporation Profits

NOTE: An Excel file containing the data and calculations is available upon request.

[602] Dataset: “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product, [Percent] Seasonally Adjusted at Annual Rates.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 29, 2021. <apps.bea.gov>

“Gross domestic product … 2001 Q1 [=] –1.1%”

[603] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] March 2001 (I) … Trough [=] November 2001 (IV)”

[604] Webpage: “The 54th Presidential Inauguration.” Joint Congressional Committee on Inaugural Ceremonies. Accessed August 27, 2018 at <www.inaugural.senate.gov>

“George W. Bush … January 20, 2001”

[605] Article: “$1.35 Trillion Tax Cut Becomes Law.” By Kelly Wallace. CNN, June 7, 2001. <edition.cnn.com>

“President George W. Bush signed into law Thursday the first major piece of legislation of his presidency, a $1.35 trillion tax cut over 10 years.”

[606] Report: “The Budget and Economic Outlook: An Update.” Congressional Budget Office, August 2011. <www.cbo.gov>

Page 85:

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): This legislation (Public Law 107-16) significantly reduced tax liabilities (the amount of tax owed) between 2001 and 2010 by cutting individual income tax rates, increasing the child tax credit, repealing estate taxes, raising deductions for married couples who file joint returns, increasing tax benefits for pensions and individual retirement accounts, and creating additional tax benefits for education. EGTRRA phased in many of those changes, including some that did not become fully effective until 2010. For legislation that modified or extended provisions of EGTRRA, see Jobs and Growth Tax Relief Reconciliation Act of 2003 and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Page 87:

Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA): This legislation (Public Law 108-27) reduced taxes by advancing to 2003 the effective date of several tax reductions previously enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001. JGTRRA also increased the exemption amount for the individual alternative minimum tax, reduced the tax rates for income from dividends and capital gains, and expanded the portion of capital purchases that businesses could immediately deduct through 2004. Those tax provisions were set to expire on various dates. (The law also provided roughly $20 billion for fiscal relief to states.)

[607] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <digital.library.unt.edu>

Pages 9–10:

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) provided a substantial tax cut that it scheduled to be phased in over the 10 years following its enactment. However, to comply with a Senate procedural rule for legislation affecting the budget (the “Byrd rule”), the act contained language “sunsetting” its provisions after calendar year 2010. Thus, all of EGTRRA’s tax cuts expire at the end of 2010.

The most prominent provisions EGTRRA scheduled for phase-in were

• reduction in statutory individual income tax rates;

• creation of a new 10% tax bracket;

• an increase in the per-child tax credit;

• tax cuts for married couples designed to alleviate the “marriage tax penalty”; and

• repeal of the estate tax.

In addition, EGTRRA provided for a temporary reduction in the individual alternative minimum tax (AMT) by increasing the AMT’s exemption amount, but scheduled the AMT relief to expire at the end of 2004.

Page 18:

Congress has enacted tax cuts in the recent past partly to provide a fiscal stimulus. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) was enacted partly as a means of boosting an economy that entered recession in March 2001. EGTRRA contained a broad range of tax cuts, but was designed partly to deliver an immediate stimulus, and thus included a rate-reduction tax credit that was mailed to individuals in 2001 as checks from the U.S. Treasury.53

53 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 107th Congress, committee print, 107th Cong., 2nd sess. (Washington: GPO, 2003), p. 8. For an explanation of the credit, see CRS Report RS21171, The Rate Reduction Tax Credit—“The Tax Rebate”—in the Economic Growth and Tax Relief Reconciliation Act of 2001: A Brief Explanation, by Steven Maguire.

Page 26:

Following the September 11, 2001, attacks and in the midst of increased certainty that the economy was in recession, Congress considered additional fiscal stimulus proposals that initially included a tax rebate for individuals. The final stimulus package that was adopted (the Job Creation and Worker Assistance Act of 2002; P.L. 107-147), however, did not contain a rebate. The act did include temporary “bonus” accelerated depreciation that was aimed at boosting business investment as well as a temporary extension of net operating loss (NOL) carrybacks for businesses.

Pages 19–20:

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA; P.L. 108-27) provided for the “acceleration” of most of EGTRRA’s scheduled tax cuts—that is, it moved up the effective dates of most of the tax cuts EGTRRA had scheduled to phase-in gradually, generally making them effective in 2003. (The phased-in repeal of the estate tax was not accelerated by JGTRRA.) Many of JGTRRA’s accelerations, however, were themselves temporary and were scheduled to expire at the end of 2004. Also, JGTRRA temporarily implemented a reduction in the maximum tax rate on dividends and capital gains, reducing the rates to 15% (5% for individuals in the 10% and 15% marginal income tax brackets). The reduction was initially scheduled to expire at the end of 2008.

In 2004, Congress thus faced two “expiration” issues related to EGTRRA and JGTRRA. One was a question for the longer term: the scheduled expiration of EGTRRA’s tax cuts at the end of 2010. The second was the expiration of JGTRRA’s accelerations at the end of 2004. In September, Congress addressed the second of these with enactment of the Working Families Tax Relief Act (WFTRA; P.L. 108-311). WFTRA generally extended JGTRRA’s accelerations of EGTRRA’s tax cuts through 2010—that is, up to the point at which EGTRRA’s cuts are scheduled to expire. WFTRA also extended EGTRRA’s increased AMT exemption for one year.

In 2005, TIPRA [Tax Increase Prevention and Reconciliation Act ] extended JGTRRA’s dividend and capitals gains rate cuts along with its AMT reduction. The dividend and capital gains cuts were extended through 2010; the increased AMT exemption through 2006.

Notwithstanding the various extensions and accelerations, the issue of EGTRRA’s scheduled expiration at the end of 2010 remains and was debated in Congress throughout 2008. The debate over extension of the tax cuts has centered on three broad issues: its likely impact on the federal budget deficit, its possible effect on long-term economic growth, and its results for the fairness of the tax system.

[608] Calculated with data from:

a) Vote 149: “Economic Growth and Tax Relief Reconciliation Act.” U.S. House of Representatives, May 26, 2001. <clerk.house.gov>

b) Vote 170: “Economic Growth and Tax Relief Reconciliation Act of 2001.” U.S. Senate, May 26, 2001. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

257

95%

2

1%

12

4%

Democrat

40

15%

184

71%

36

14%

Independent

1

50%

1

50%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[609] Calculated with data from:

a) Vote 52: “Job Creation and Worker Assistance Act of 2002.” U.S. House of Representatives, March 7, 2002. <clerk.house.gov>

b) Vote 44: “Job Creation and Worker Assistance Act of 2002.” U.S. Senate, March 8, 2002. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

265

98%

1

0%

5

2%

Democrat

234

90%

11

4%

16

6%

Independent

3

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[610] Calculated with data from:

a) Vote 225: “Jobs and Growth Reconciliation Tax Act.” U.S. House of Representatives, May 23, 2003. <clerk.house.gov>

b) Vote 196: “Jobs and Growth Reconciliation Tax Act.” U.S. Senate, May 23, 2003. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

272

97%

4

1%

4

1%

Democrat

9

4%

244

96%

0

0%

Independent

0

0%

2

100%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[611] Report: “Filibusters and Cloture in the Senate.” By Richard S. Beth & Stanley Bach. Congressional Research Service. Updated March 28, 2003. <www.everycrsreport.com>

Page 2 (of PDF):

The filibuster is widely viewed as one of the Senate’s most characteristic procedural features. Filibustering includes any use of dilatory or obstructive tactics to block a measure by preventing it from coming to a vote. The possibility of filibusters exists because Senate rules place few limits on Senators’ rights and opportunities in the legislative process. …

Senate Rule XXII, however, known as the “cloture rule,” enables Senators to end a filibuster on any debatable matter the Senate is considering. Sixteen Senators initiate this process by presenting a motion to end the debate. The Senate does not vote on this cloture motion until the second day after the motion is made. Then it usually requires the votes of at least three-fifths of all Senators (normally 60 votes) to invoke cloture. Invoking cloture on a proposal to amend the Senate’s standing rules requires the support of two-thirds of the Senators present and voting.

Page CRS-10:

Invoking cloture usually requires a three-fifths vote of the entire Senate—“three-fifths of the Senators duly chosen and sworn.” If there are no vacancies, therefore, 60 Senators must vote to invoke cloture. In contrast, most other votes require only a simple majority (that is, 51%) of the Senators present and voting, assuming that those Senators constitute a quorum. In the case of a cloture vote, the key is the number of Senators voting for cloture, not the number voting against. Failing to vote on a cloture motion has the same effect as voting against the motion: it deprives the motion of one of the 60 votes needed to agree to it.

[612] Statement of U.S. Senator Phil Gramm (Republican, Texas). Congressional Record, June 12, 2002. <www.gpo.gov>

The Senator complains that the tax cut is temporary. Why? Because we did not have 60 votes; because the Democrats opposed the President’s tax cut in overwhelming numbers. They had the ability to filibuster. The only way we could get the tax cut adopted was to use a procedure that required that the tax cut expire after 10 years. Now the Senator from North Dakota is attacking us for a provision that exists because the Democrats would have filibustered the tax cut.

NOTE: A video clip of this statement is available at <www.c-spanvideo.org>.

[613] Report: “Committee on the Budget, United States Senate, 1974–2006.” United States Senate Committee on the Budget, 2006. <www.budget.senate.gov>

Page 10:

Economic Growth and Tax Relief Reconciliation Act of 2001

P.L. 107–16 (June 7, 2001) Public Law 107–16 was signed by President George W. Bush and reduced revenues significantly; revenue reductions, together with outlay increases for refundable tax credits, reduced the projected surplus by $1.349 trillion over FY2001–FY2011. The tax cuts in the Act were scheduled to sunset in no more than 10 years in order to comply with the Senate’s “Byrd rule” against extraneous matter in reconciliation legislation (Section 313 of the Congressional Budget Act of 1974).

[614] Report: “The Budget Reconciliation Process: The Senate’s ‘Byrd Rule.’ ” By Bill Heniff, Jr. Congressional Research Service, September 13, 2010. <democrats.budget.house.gov>

Page 12:

In 2001, no actions under the Byrd rule were taken during consideration of a significant revenue reduction measure, the Economic Growth and Tax Relief Reconciliation Act of 2001. The potential application of the Byrd rule to the measures was averted by the inclusion of “sunset” provisions that limited the duration of the tax cuts, thereby preventing deficit increases beyond the applicable budget window.

[615] Report: “Overview of the Federal Tax System.” By David L. Brumbaugh and others. Congressional Research Service, March 10, 2005. <www.policyarchive.org>

Pages 16–17:

Legislation in 2001, 2003, and 2004, addressed marriage tax penalties by increasing the standard deduction for couples to twice that of singles and broadening the 15% tax bracket to twice the width of singles’ bracket.6 (These changes also increase the marriage tax bonuses experienced by many married couples. Because of procedural rules in the Senate, however, these changes are scheduled to sunset after 2010.)

[616] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Page 4:

In part, the fluctuations [in federal receipts] were a result of the business cycle; the long economic boom of the 1990s helped push receipts to their record level in FY [fiscal year] 2000, while the ensuing recession and sluggish recovery helped reduce the level of revenues in subsequent years. However, policy changes, too, were responsible: significant tax cuts in 2001, 2002, and 2003 each contributed to the decline in taxes.

[617] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

“Contractions (recessions) start at the peak of a business cycle and end at the trough. … Peak [=] March 2001 (I) … Trough [=] November 2001 (IV)”

[618] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Page 2: “Prior to the recent downturns, the economy performed relatively strongly through the first half of 2007, yielding 22 consecutive quarters of real growth.”

NOTE: The federal government often revises its official figures for GDP. Per the next footnote, real GDP [gross domestic product] growth was positive for 25 consecutive quarters from 2001 Q4 through 2007 Q4. This however, may change with future revisions.

[619] Calculated with the dataset: “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product, [Percent] Seasonally Adjusted at Annual Rates.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[620] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Page 2:

As 2007 progressed, however, signs of economic weakness surfaced in a number of areas. One prominent area was housing, where prices stopped rising after years of growth and drops occurred in house sales and residential investment. Second, financial markets came under strain as investor concerns about the credit quality of mortgages (especially “subprime mortgages”) had a damping effect on credit flows. Further, banks began reporting large losses resulting from declines in the market value of mortgages and other assets, leading them to become more restrictive in their lending to firms and households.3 The Federal Reserve Board responded by taking actions to ease monetary policy beginning in the second part of 2007. Additional interest rate cuts continued in March, April, and October 2008.

[621] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[622] Dataset: “Unemployment Rate, Civilian Labor Force, LNS14000000.” Bureau of Labor Statistics, U.S. Department of Labor. Accessed September 10, 2018 at <data.bls.gov>

“2008 … January [=] 5.0% … 2009 … December [=] 9.9%”

[623] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Pages 23–24:

As noted above (see “The State of the Economy”), developments in late 2007 led prominent economic policymakers to call for legislation that would provide an economic stimulus. Support for a stimulus package came from both the Administration and Congress. In addition, in testimony before Congress, Federal Reserve Board chairman Ben Bernanke stated that legislation providing fiscal stimulus (i.e., tax cuts or spending increases) would be helpful if implemented quickly and did not compromise “fiscal discipline in the longer term.”48

On February 7, both the House and Senate approved a version of the stimulus plan that had been passed earlier in the House. The final bill’s main elements were a tax rebate in the form of a two-part credit, and an increased expensing tax benefit and enhanced depreciation for business investment in 2008. The bill is estimated to reduce tax revenue by $151.7 billion in FY [fiscal year] 2008 and by $134.0 billion over FY2008–FY2013. The smaller revenue loss over the five year period compared to the first year is due to the shifting of tax deductions into the present from depreciation.

The tax rebates were equal to a “basic” tax credit plus a per-child tax credit. The credits were refundable. Under the basic credit, individuals received a tax credit equal to the greater of two amounts that depended, respectively, on their pre-credit tax liability and their earned income. First, a taxpayer could claim a credit equal to their income tax liability, but not to exceed $600 ($1,200 for a joint return). For the earned income amount, a taxpayer could claim a $300 tax credit ($600 for a joint return) if the individual has at least $3,000 in qualified income (generally, income from salaries and wages, plus Social Security and veterans’ disability payments) or an income tax liability of at least $1 and gross income exceeding the sum of the applicable standard deduction and one personal exemption (two, for joint returns). The child tax credit was $300 for each qualifying child.

The tax credit was ultimately based on individuals’ 2008 tax and income, and was issued from the U.S. Treasury during the 2008 calendar year, with the Treasury basing its distributions on individuals’ 2007 tax returns. When filing their 2008 tax returns (in 2009), individuals will recalculate the credit based on 2008 information, and can claim an additional credit if the 2008 information increases the amount of the credit. If the 2008 credit is less than that actually received, individuals will not be required to pay the difference. According to the Treasury Department, the checks began to be issued in May, 2008.49

The plan phased out the combined child and basic credit for individuals earning a threshold amount of more than $75,000 ($150,000 for joint returns). It reduced the credit by 5% of the individual’s income in excess of the threshold phase-out threshold.

Business Tax Benefits

Under current law, businesses are allowed to “expense” (i.e., deduct immediately) the acquisition cost of a limited amount of new investment in machines and equipment rather than depreciating it over a period of years. Expensing thus provides a postponement (deferral) of taxes which constitutes a tax benefit because of the economic principle of discounting—the idea that a given amount of funds is worth more, the sooner it is received. Prior to the stimulus act, for 2008 firms were permitted to expense up to $128,000 of investment; the allowance was gradually reduced (“phased out”) for firms whose investment exceeds a $510,000 threshold. The $128,000 amount was a temporary increase over a permanent cap of $25,000 that is set to apply in 2011 and thereafter. (The permanent phase-out threshold is $200,000.) The stimulus bill provided a one-year (for 2008) additional increase in the expensing cap and threshold, to $250,000 and $800,000, respectively.

When not eligible for expensing, outlays for tangible business property—that is, machines and equipment and commercial structures—are required to be deducted gradually (i.e., depreciated) over a number of years. For 2008, the stimulus plan provided temporarily more generous depreciation rules for machines and equipment under which 50% of the asset’s cost could be deducted in its first year. Like expensing, this provision provided a tax benefit in the form of a deferral, although it was not as large.

[624] Calculated with data from:

a) Dataset: Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of Dollars].” U.S. Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[625] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] March 2001 (I) … Trough [=] November 2001 (IV)”

[626] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <digital.library.unt.edu>

Page 18:

Congress has enacted tax cuts in the recent past partly to provide a fiscal stimulus. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) was enacted partly as a means of boosting an economy that entered recession in March 2001. EGTRRA contained a broad range of tax cuts, but was designed partly to deliver an immediate stimulus, and thus included a rate-reduction tax credit that was mailed to individuals in 2001 as checks from the U.S. Treasury.53

53 U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 107th Congress, committee print, 107th Cong., 2nd sess. (Washington: GPO, 2003), p. 8. For an explanation of the credit, see CRS Report RS21171, The Rate Reduction Tax Credit—“The Tax Rebate”—in the Economic Growth and Tax Relief Reconciliation Act of 2001: A Brief Explanation, by Steven Maguire.

Page 26:

Following the September 11, 2001, attacks and in the midst of increased certainty that the economy was in recession, Congress considered additional fiscal stimulus proposals that initially included a tax rebate for individuals. The final stimulus package that was adopted (the Job Creation and Worker Assistance Act of 2002; P.L. 107-147), however, did not contain a rebate. The act did include temporary “bonus” accelerated depreciation that was aimed at boosting business investment as well as a temporary extension of net operating loss (NOL) carrybacks for businesses.

Pages 19–20:

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA; P.L. 108-27) provided for the “acceleration” of most of EGTRRA’s scheduled tax cuts—that is, it moved up the effective dates of most of the tax cuts EGTRRA had scheduled to phase-in gradually, generally making them effective in 2003. (The phased-in repeal of the estate tax was not accelerated by JGTRRA.)

[627] Report: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, September 20, 2010. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[628] Dataset: “Unemployment Rate, Civilian Labor Force, LNS14000000.” Bureau of Labor Statistics, U.S. Department of Labor. Accessed May 13, 2015 at <data.bls.gov>

“2008 … January [=] 5.0% … 2009 … December [=] 9.9%”

[629] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Page 2:

As 2007 progressed, however, signs of economic weakness surfaced in a number of areas. One prominent area was housing, where prices stopped rising after years of growth and drops occurred in house sales and residential investment. Second, financial markets came under strain as investor concerns about the credit quality of mortgages (especially “subprime mortgages”) had a damping effect on credit flows. Further, banks began reporting large losses resulting from declines in the market value of mortgages and other assets, leading them to become more restrictive in their lending to firms and households.3 The Federal Reserve Board responded by taking actions to ease monetary policy beginning in the second part of 2007. Additional interest rate cuts continued in March, April, and October 2008.

[630] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[631] Dataset: “Unemployment Rate, Civilian Labor Force, LNS14000000.” Bureau of Labor Statistics, U.S. Department of Labor. Accessed May 13, 2015 at <data.bls.gov>

“2008 … January [=] 5.0% … 2009 … December [=] 9.9%”

[632] Webpage: “The 56th Presidential Inauguration.” Joint Congressional Committee on Inaugural Ceremonies. Accessed August 27, 2018 at <www.inaugural.senate.gov>

“Barack H. Obama … A New Birth of Freedom … January 20, 2009”

[633] Transcript: “Obama’s Remarks at Stimulus Bill Signing.” Washington Post, February 17, 2009. <www.washingtonpost.com>

“The American Recovery and Reinvestment Act that I will sign today, a plan that meets the principles I laid out in January, is the most sweeping economic recovery package in our history.”

[634] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Pages 16–17:

In response to deteriorating economic conditions, Congress enacted a second stimulus bill in February 2009, the American Recovery and Reinvestment Act of 2009, P.L. 111-5. This package cost $787 billion, and included spending programs, but about 40% of the cost was tax cuts. The elements include the following:

• Temporary income tax cuts for individuals, including $116.2 billion for a 6.2% credit for earnings with a maximum of $400 for singles and $800 for couples, phased out for taxpayers with incomes over $75,000 ($150,000 for joint returns); $4.7 billion for a temporary increase in the earned income credit, $14.8 to increase refundability of the child credit, $13.9 billion to expend tuition tax credits and make them 40% refundable (the refundability feature accounts for $3.9 billion). These provisions are effective for 2009 and 2010, though the associated revenue loss extends over FY [fiscal year] 2009–FY2011. For 2009 there is also an exclusion for $2,400 of unemployment benefits costing $4.7 billion, a sales tax deduction for new auto purchases at $1.7 billion and an extension of the AMT “patch”, mainly a temporary increase in the AMT [alternative minimum tax] exemption, at a cost of $70.1 billion. An extension and revision of the first time homebuyers credit has revenue consequences over a longer period, costing $6.6 billion over FY2009–2019. Overall, the individual income tax cuts were $230 billion.

• Tax provisions for business, which lose revenue in FY2009–FY2010 and gain revenue thereafter, including $37.8 billion for extending bonus depreciation, $12.9 billion for the deferral and exclusion of income from the discharge of indebtedness, $4.1 billion for a temporary five year loss carryback for 2008 and 2009 for small business, and $1.1 billion for extending small business expensing. Along with a few other minor provisions, there is a revenue gain from enacting legislation to restrict the carryover of losses with an ownership change, reversing a Treasury ruling from 2007. Because these are largely timing provisions the overall revenue loss for FY2009–FY2010 is $6.2 billion.

• A series of provisions relating to tax exempt bonds aimed at aiding State and local governments, which cost $3.8 billion for FY2009–2010, and $30.0 billion from FY2009–FY2019. Almost half the revenue loss arises from allowing a taxable bond options which would make bonds attractive to tax exempt investors. Other major provisions measured by dollar cost are qualified school construction bonds, recovery zone bonds, and provisions allowing financial institutes more freedom to buy tax exempt bonds.

• A one-year delay in the 3% withholding for government contractors, which costs $5.8 billion in FY2011, gains most of the revenue in the next year, and costs $0.3 billion for FY2009–2019.

• Energy provisions, some permanent and some temporary, totaling $3.4 billion in FY2009–FY2011 and $20.0 billion in FY2009–2019. There is also a provision substituting grants for credits for certain energy projects which shifts benefits to the present.

• The proposal also includes a substitution of grants for the low-income housing credit, which shifts benefits to FY2009 ($3 billion), with a negligible effect over the long term. The plan also includes a much smaller provision to substitute grants for certain energy credits.

• A minor provision ($231 million for FY2009–2019) would provide incentives for hiring unemployed veterans and disconnected youth.

[635] Calculated with data from:

a) Vote 70: “American Recovery and Reinvestment Act of 2009.” U.S. House of Representatives, February 13, 2009. <clerk.house.gov>

b) Vote 64: “American Recovery and Reinvestment Act of 2009.” U.S. Senate, February 13, 2009. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

3

1%

214

98%

2

1%

Democrat

301

97%

7

2%

3

1%

Independent

2

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[636] Report: “The Budget and Economic Outlook: An Update.” Congressional Budget Office, August 2011. <www.cbo.gov>

Page 91:

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 tax act, Public Law 111-312): This law temporarily extended through 2012 provisions set to expire in 2010 that were initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009. Those extensions affected individual income tax rates, credits, and deductions. The act also increased the exemption amount for the alternative minimum tax, reduced the employee’s contribution for the Social Security payroll tax, modified other tax provisions, and extended benefits for long-term unemployed workers.

[637] Report: “The Budget and Economic Outlook: Fiscal Years 2011 to 2021.” Congressional Budget Office, January 2011. <www.cbo.gov>

Pages 8–9:

In December 2010, lawmakers enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312, referred to in this report as the 2010 tax act). That legislation temporarily extended several tax provisions that affect individual income tax rates, credits, and deductions and the alternative minimum tax (AMT). It also reduced the employee’s share of the Social Security payroll tax, modified other tax provisions, and extended benefits for long-term unemployed workers. The Congressional Budget Office (CBO) estimates that the act will increase the deficit by $390 billion in 2011, by $407 billion in 2012, and by $120 billion in 2013, and that it will reduce deficits by $59 billion between 2014 and 2020.1

Several provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) have been extended:

• The 10 percent tax bracket, which otherwise would have reverted to 15 percent, and the lower statutory tax rates of 25, 28, 33, and 35 percent for the highest four tax brackets, which would have otherwise risen to 28, 31, 36, and 39.6 percent;

• The expanded 15 percent tax bracket and the standard deduction for married couples, which was set to contract to less than twice the deduction for single taxpayers;

• The 15 percent top tax rate on long-term capital gains realizations and dividends, which would have reverted to 20 percent for capital gains and 39.6 percent for dividends;

• The postponement of the phaseout of itemized deductions and personal exemptions for higher-income taxpayers;

• The $1,000 tax credit per child (maintained rather than dropping to $500) and the expanded availability of that credit to taxpayers without tax liability; and

• The American Opportunity Credit (for certain postsecondary education expenses) and an expansion of the earned income tax credit.

Those extensions will increase deficits by $403 billion between 2011 and 2014, according to estimates by CBO and the staff of the Joint Committee on Taxation.

EGTRRA began to reduce the estate tax in 2001 and eliminated it entirely in 2010. It also reduced tax rates on gifts through December 2010. Tax rates and effective exemption amounts for estate and gift taxes were to return to previously scheduled levels (a maximum rate of 55 percent and an exemption amount of $1 million) on January 1, 2011. The 2010 tax act set the rates and effective exemption amounts for 2011 and 2012 at 35 percent and $5 million (adjusted for inflation), lowering revenues, on net, by $68 billion over the 2011–2020 period. Those lower rates and higher exemption amounts will expire on December 31, 2012.

The “AMT patch,” which increased the exemption amounts, was first enacted in 2001 to hold down the number of taxpayers affected. That provision expired most recently at the end of December 2009. The new tax legislation extended the patch through December 2011, at a cost of $86 billion in fiscal year 2011 and $68 billion in 2012. Because of effects on the timing of tax payments, the new provision is estimated to increase revenue by $17 billion in 2013.

The employee’s portion of the payroll tax for Social Security was reduced by 2 percentage points for calendar year 2011, reducing revenues by $84 billion in 2011 and by $28 billion in 2012, CBO estimates.

As a result of the 2010 tax act, rather than deducting all such costs over several years, businesses were able to immediately deduct the full costs of their investment in business equipment beginning late in 2010 and continuing for all of 2011; half of the cost of such investments may be deducted in 2012. In all, the provision will reduce revenues by about $55 billion in each of the next two years and increase revenues by nearly $90 billion between 2013 and 2020. (Because it will allow companies to take depreciation deductions earlier, fewer deductions will be available for later years, thus increasing taxable income and raising businesses’ income taxes.)

[638] Public Law 112-078: “Temporary Payroll Tax Cut Continuation Act of 2011.” 111th U.S. Congress. Signed into law by Barack Obama on December 23, 2011. <www.gpo.gov>

Sec. 101. Extension of Payroll Tax Holiday.

(a) In General.—Subsection (c) of section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (26 U.S.C. 1401 note) is amended to read as follows: “(c) Payroll Tax Holiday Period.—The term ‘payroll tax holiday period’ means—

“(1) in the case of the tax described in subsection (a)(1), calendar years 2011 and 2012, and

“(2) in the case of the taxes described in subsection (a)(2), the period beginning January 1, 2011, and ending February 29, 2012.”

[639] Public Law 112-96: “Middle Class Tax Relief and Job Creation Act of 2012.” 112th U.S. Congress. Signed into law by Barack Obama on February 22, 2012. <www.gpo.gov>

Sec. 1001. Extension of Payroll Tax Reduction.

(a) In General.—Subsection (c) of section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (26 U.S.C. 1401 note) is amended to read as follows:

“(c) Payroll Tax Holiday Period.—The term ‘payroll tax holiday period’ means calendar years 2011 and 2012.”

[640] Report: “The ‘Fiscal Cliff’ and the American Taxpayer Relief Act of 2012.” By Mindy R. Levit and others. Congressional Research Service, January 4, 2013. <www.fas.org>

Page 1: “On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA; H.R. 8 as enacted), which prevented many—but not all—of the fiscal cliff policies from going into effect.”

Pages 3–6:

ATRA addressed several revenue provisions that had been set to expire at the end of 2012. These included the “Bush-era tax cuts,” provisions related to the estate tax, certain tax provisions enacted or expanded as part of the American Recovery and Reinvestment Act of 2009, the Alternative Minimum Tax (AMT), and a number of temporary tax provisions (also known as “tax extenders”). …

The Bush-era tax cuts included provisions—initially enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27)8—which reduced income tax liabilities from 2002 to 2010. These tax cuts were extended for 2011 and 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The Bush-era tax cuts lowered income taxes in a variety of ways, including by reducing marginal tax rates on ordinary income; reducing tax rates on long-term capital gains and dividends; reduced and ultimately repealed limitations for personal exemptions (PEP) and itemized deductions (Pease);9 and expanded certain tax credits, including the Earned Income Tax Credit (EITC),10 child tax credit,11 adoption tax credit,12 and dependent care tax credit.13 The Bush-era tax cuts also contained provisions to reduce the marriage tax penalty,14 as well as modifying and expanding various education-related tax incentives.

ATRA made a variety of changes to these tax provisions. The law permanently extended and in certain cases modified tax provisions originally included in EGTRRA and JGTRRA. Specifically, ATRA permanently extended the reduced tax rates on both ordinary income and capital gains and dividends for taxpayers with taxable income15 below $400,000 ($450,000 for married taxpayers filing jointly).16 For taxpayers with taxable income above these thresholds, the marginal tax rate on ordinary income rose from 35% to 39.6% on the portion of their income above these thresholds, and the top tax rate on long term capital gains and dividends rose from 15% to 20%. ATRA also reinstated PEP and Pease for taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for married couples filing jointly), allowing these limitations on personal exemptions and overall itemized deductions to expire for those with AGI below these thresholds. ATRA also permanently extended the tax changes to a variety of tax credits, the marriage penalty and education-related tax incentives. …

Estate and Gift Tax

EGTRRA enacted provisions to phase out the estate tax18 over a 10-year period. In 2010, there was no federal estate tax. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reinstated, through 2012, the estate tax. As reinstated, the top rate for the estate tax was lower than it had been in 2009 (35%, as opposed to 45%). The exemption amount, as reinstated, was also higher than it had been in 2009 ($5.0 million, as opposed to $3.5 million). Absent legislative action, after 2012 the estate tax would have returned to pre-EGGTRA rules, with a top rate of 55% and a $1 million exemption level per decedent. ATRA permanently extended the estate tax rules established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,19 except for the top tax rate which was increased from 35% to 40%. Hence, under ATRA, $5 million of a decedent’s estate would be exempt from the estate tax (this threshold is indexed for inflation occurring after 2011 and was $5.12 million per decedent in 2012), and the top rate on estates over this threshold would be 40%. …

19 Thus, ATRA also extends the gift tax levels of a $5.12 million ($5 million indexed for inflation after 2011) exemption and a 40% top rate. In addition, it extends portability rules related to the passing of an exemption amount onto a surviving spouse.

Alternative Minimum Tax (AMT) Patch

The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax.21 …

Crucially, prior to the enactment of H.R. 8, key parts of the AMT—including the exemption amount—were not indexed for inflation. This meant that additional taxpayers—an estimated 27 million in 2012—would be subject to the AMT due to the rise of their nominal income levels over time.22 Over the past decade, Congress had regularly enacted temporary increases of the AMT exemption amount to adjust for inflation and allowed nonrefundable personal tax credits to reduce AMT tax liability (these policies are often known as the AMT “patch”). ATRA permanently adjusts the AMT exemption amount for inflation,23 ending the need for temporary “patches,” and permanently allows nonrefundable personal tax credits to offset AMT liability.

Pages 11–12:

Payroll Tax Reduction

In an effort to stimulate the economy, Congress, in December 2010, temporarily reduced the employee and self-employed shares of the Social Security payroll tax by two percentage points (4.2% for employees and 10.4% for the self-employed). Social Security trust funds were “made whole” by a transfer of general revenue, so that Social Security did not lose revenues as a result of the payroll tax rate reduction. The temporary reduction was scheduled to expire at the end of 2011, but the reduction was extended for two months as part of the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). Congress later extended the payroll tax rate reduction through the remainder of 2012 as part of the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96). ATRA did not extend the payroll tax reduction past its current expiration date of December 31, 2012 and it has therefore reverted back to the original rates (6.2% for employees and 12.4% for the self-employed). Thus, the employee share of Social security payroll taxes is again 6.2% on the first $113,700 of wages in 2013.45

[641] Report: “The 2013 Long-Term Budget Outlook.” By Joyce Manchester and others. Congressional Budget Office, September 2013. <www.cbo.gov>

Pages 66–67:

The American Taxpayer Relief Act of 2012 (Public Law 112-240), which was enacted in early January 2013, permanently extended some lower tax rates and other tax provisions that expired at the end of calendar year 2012. In addition, it modified the alternative minimum tax (AMT) to permanently limit its reach and temporarily extended other tax provisions.1 The staff of the Joint Committee on Taxation and the Congressional Budget Office (CBO) estimated that, relative to laws in place at the end of 2012, enactment of the American Taxpayer Relief Act would reduce revenues by $3.6 trillion over the 2013–2022 period. The reduction in 2022 amounted to $496 billion, or about 10 percent of the revenues CBO had previously projected. With some modifications affecting high-income taxpayers, the new law made permanent several major tax provisions, originally enacted in 2001 and 2003, that expired on December 31, 2012.2 Those provisions include the following:

• Lower tax rates on ordinary income (generally all income except capital gains and dividends);

• An expanded 15 percent tax bracket and an increase in the standard deduction for married couples;

• The child tax credit of $1,000 per child;

• The 15 percent tax rate on long-term capital gains realizations and dividends; and

• The estate and gift tax rules in effect in 2012, with some modifications.

Under prior law, at the end of 2012, tax rates on ordinary income were slated to rise from the lower rates in effect that year (10, 15, 25, 28, 33, and 35 percent) to the rates in effect before 2001 (15, 28, 31, 36, and 39.6 percent). The American Taxpayer Relief Act permanently extended the lower rates, with the following exception: The top tax rate for single taxpayers with income above $400,000 and for married taxpayers who file jointly and have income above $450,000 is now set at 39.6 percent, the same top rate that had been scheduled to take effect in 2013 before the law was enacted.

The new law permanently extended the increase in the child tax credit from $500 to $1,000 per child; it also permanently extended provisions (enacted in 2001) that made the credit refundable for more families. (Before 2001, the credit was refundable only for families with three or more children.) In addition, the law extended, through 2017, a lower earned income threshold for the refundability of the child tax credit, expansions of the earned income credit, and the American Opportunity Tax Credit (a refundable credit for postsecondary education expenses)—all of which were enacted in 2009.

Before the enactment of the American Taxpayer Relief Act, the tax rate on capital gains was scheduled to rise to 20 percent, and the tax rate on dividends was scheduled to equal the taxpayer’s rate on other income in 2013. The new law kept the 15 percent limit on those rates for most taxpayers and raised the top rate on dividends and capital gains to 20 percent for high-income taxpayers. Separately, the law permanently extended the estate and gift tax rules in effect in 2012, although with a higher top tax rate of 40 percent, and indexed the unified credit under that tax for inflation. The law also increased the AMT’s exemption amount (the higher amount had expired at the end of 2011) and indexed that amount (and other parameters of the tax) for inflation, beginning in 2013.

Several tax provisions extended by the new law through calendar year 2013 had expired at the end of calendar year 2011. Some of those, including the research and experimentation tax credit, have routinely been extended in the past. The law also extended for one year a tax provision that allows businesses to immediately deduct 50 percent of new investments in equipment.

[642] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Page 3:

The budget data indicate that the increase in the deficit was a result of both a growth in outlays and a decline in revenues as a percentage of GDP [gross domestic product]. The decline in revenues was more pronounced, although not by a wide margin. Revenues have declined from 20.9% of GDP in FY [fiscal year] 2000 to 17.7% in FY2008, a drop of 3.2 percentage points. Outlays have increased by 2.5 percentage points over the same period, to 20.9% of GDP in FY2008. The decline in revenues had four main sources: the recession of 2001 and subsequent sluggish economic growth, enacted tax cuts, the economic stimulus payments (tax rebates), and the current economic slowdown.

[643] Report: “The Federal Budget: Issues for FY [fiscal year] 2011, FY2012, and Beyond.” By Mindy R. Levit. Congressional Research Service, October 13, 2011. <digital.library.unt.edu>

Page 1: “Recent economic turmoil has strained the federal budget as a result of declining revenues and increasing spending levels.”

Page 6:

In FY2000, revenues equaled 20.6% of GDP [gross domestic product]. In FY2010, federal revenue collection totaled 14.9% of GDP or its lowest level since FY1950. Revenue collection has remained depressed over the last few fiscal years as the result of the economic downturn and the tax relief provision in ARRA [American Recovery and Reinvestment Act]. Revenues remained depressed in FY2011.

Page 9: “The federal government responded to financial turmoil with an extraordinary set of measures in 2008 and 2009, including two major economic stimulus measures and a variety of programs within the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC).”

Page 10:

Another effort to jump-start economic growth came in the form of a second stimulus package signed into law by President Obama on February 17, 2009. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) included provisions that are now estimated to total $821 billion in increased discretionary and mandatory spending and reduced tax revenue over the FY2009–FY2019 period.

Page 17: “The economy is still recovering from the most recent recession, which lasted from December 2007 to June 2009. … During this period, the budget deficit grew largely as a result of government actions taken to combat the economic downturn as well as significantly lower revenue and higher spending levels directly attributable to the economic conditions.”

[644] Webpage: “Quantitative Easing.” Bank of England. Last updated November 5, 2020. <www.bankofengland.co.uk>

Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called “QE” or “asset purchases”—these are the same thing.

The aim of QE is simple: by creating this “new” money, we aim to boost spending and investment in the economy.

[645] Speech: “The Crisis and the Policy Response.” By Ben S. Bernanke. Board of Governors of the Federal Reserve System, January 13, 2009. <www.federalreserve.gov>

For almost a year and a half the global financial system has been under extraordinary stress—stress that has now decisively spilled over to the global economy more broadly. The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.

The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and write-downs and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. …

… A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. …

… Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt. Indeed, the destructive effects of financial instability on jobs and growth are already evident worldwide.

[646] Working paper: “The Macroeconomic Effects of the Federal Reserve’s Unconventional Monetary Policies.” By Eric M. Engen, Thomas Laubach, and David Reifschneider. Board of Governors of the Federal Reserve System, Division of Research & Statistics and Monetary Affairs, January 14, 2015. <www.federalreserve.gov>

Page 4:

The FOMC’s [Federal Open Market Committee] QE [quantitative easing] programs were mostly comprised of large-scale asset purchases (LSAPs) of longer-term Treasury and agency mortgage-backed securities (MBS), but also included the maturity extension program (MEP)…. Cumulatively, the Federal Reserve’s holdings of Treasury notes and bonds along with agency MBS and agency debt rose from around $500 billion prior to the financial crisis to over $4 trillion when the most-recent LSAP program concluded in October 2014.

[647] Article: “The Road to Normal: New Directions in Monetary Policy.” By Stephen Williamson. Federal Reserve Bank of St. Louis Annual Report 2015, April 8, 2016. Pages 6–23. <www.stlouisfed.org>

Page 10 :

Quantitative easing … involves the purchase of long-term assets (for example, 30-year Treasury bonds, which mature 30 years from the date of issue), and those assets need not be government-issued securities. …

… QE1 [the first quantitative easing program] involved the purchase of long-term Treasury securities, agency securities and mortgage-backed securities. MBS [mortgage-backed securities] are tradeable securities, backed by underlying private mortgages. 

[648] “95th Annual Report, 2008.” Board of Governors of the Federal Reserve System, June 2009. <www.federalreserve.gov>

Pages 55–56:

To help reduce the cost and increase the availability of residential mortgage credit, the Federal Reserve announced on November 25 a program to purchase up to $100 billion in direct obligations of housing-related government-sponsored enterprises (GSEs) and up to $500 billion in MBS [mortgage-backed securities] backed by Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and Ginnie Mae. Purchases of agency debt obligations began in December, and purchases of MBS began in January.

The program to purchase GSE direct obligations has initially focused on fixed-rate, noncallable, senior benchmark securities issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

[649] Calculated with the dataset: “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product, [Percent] Seasonally Adjusted at Annual Rates.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[650] Calculated with data from:

a) Dataset: Dataset: “Table 1.1.5. Gross Domestic Product.” United States Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of Dollars].” U.S. Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[651] Report: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, September 20, 2010. <www.nber.org>

Page 1: “Contractions (recessions) start at the peak of a business cycle and end at the trough.”

Page 2: “Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[652] Report: “Major Tax Issues in the 111th Congress.” By James M. Bickley and Andrew Hanna. Congressional Research Service, December 11, 2009. <www.everycrsreport.com>

Pages 16–17:

In response to deteriorating economic conditions, Congress enacted a second stimulus bill in February 2009, the American Recovery and Reinvestment Act of 2009, P.L. 111-5. This package cost $787 billion, and included spending programs, but about 40% of the cost was tax cuts. The elements include the following:

• Temporary income tax cuts for individuals, including $116.2 billion for a 6.2% credit for earnings with a maximum of $400 for singles and $800 for couples, phased out for taxpayers with incomes over $75,000 ($150,000 for joint returns); $4.7 billion for a temporary increase in the earned income credit, $14.8 to increase refundability of the child credit, $13.9 billion to expend tuition tax credits and make them 40% refundable (the refundability feature accounts for $3.9 billion). These provisions are effective for 2009 and 2010, though the associated revenue loss extends over FY [fiscal year] 2009–FY2011. For 2009 there is also an exclusion for $2,400 of unemployment benefits costing $4.7 billion, a sales tax deduction for new auto purchases at $1.7 billion and an extension of the AMT “patch”, mainly a temporary increase in the AMT [alternative minimum tax] exemption, at a cost of $70.1 billion. An extension and revision of the first time homebuyers credit has revenue consequences over a longer period, costing $6.6 billion over FY2009–2019. Overall, the individual income tax cuts were $230 billion.

• Tax provisions for business, which lose revenue in FY2009–FY2010 and gain revenue thereafter, including $37.8 billion for extending bonus depreciation, $12.9 billion for the deferral and exclusion of income from the discharge of indebtedness, $4.1 billion for a temporary five year loss carryback for 2008 and 2009 for small business, and $1.1 billion for extending small business expensing. Along with a few other minor provisions, there is a revenue gain from enacting legislation to restrict the carryover of losses with an ownership change, reversing a Treasury ruling from 2007. Because these are largely timing provisions the overall revenue loss for FY2009–FY2010 is $6.2 billion.

• A series of provisions relating to tax exempt bonds aimed at aiding State and local governments, which cost $3.8 billion for FY2009–2010, and $30.0 billion from FY2009–FY2019. Almost half the revenue loss arises from allowing a taxable bond options which would make bonds attractive to tax exempt investors. Other major provisions measured by dollar cost are qualified school construction bonds, recovery zone bonds, and provisions allowing financial institutes more freedom to buy tax exempt bonds.

• A one-year delay in the 3% withholding for government contractors, which costs $5.8 billion in FY2011, gains most of the revenue in the next year, and costs $0.3 billion for FY2009–2019.

• Energy provisions, some permanent and some temporary, totaling $3.4 billion in FY2009–FY2011 and $20.0 billion in FY2009–2019. There is also a provision substituting grants for credits for certain energy projects which shifts benefits to the present.

• The proposal also includes a substitution of grants for the low-income housing credit, which shifts benefits to FY2009 ($3 billion), with a negligible effect over the long term. The plan also includes a much smaller provision to substitute grants for certain energy credits.

• A minor provision ($231 million for FY2009–2019) would provide incentives for hiring unemployed veterans and disconnected youth.

[653] Report: “The Budget and Economic Outlook: Fiscal Years 2011 to 2021.” Congressional Budget Office, January 2011. <www.cbo.gov>

Pages 8–9: “In December 2010, lawmakers enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.… The employee’s portion of the payroll tax for Social Security was reduced by 2 percentage points for calendar year 2011….”

[654] Dataset: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, June 8, 2020. <www.nber.org>

“Contractions (recessions) start at the peak of a business cycle and end at the trough. … Peak Month (Peak Quarter) [=] December 2007 (2007Q4) … Trough Month (Trough Quarter) [=] June 2009 (2009Q2)”

[655] Public Law 112-96: “Middle Class Tax Relief and Job Creation Act of 2012.” 112th U.S. Congress. Signed into law by Barack Obama on February 22, 2012. <www.gpo.gov>

Sec. 1001. Extension of Payroll Tax Reduction.

(a) In General.—Subsection (c) of section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (26 U.S.C. 1401 note) is amended to read as follows:

“(c) Payroll Tax Holiday Period.—The term ‘payroll tax holiday period’ means calendar years 2011 and 2012.”

[656] Transcript: “Remarks in Dover, New Hampshire.” Barack Obama, September 12, 2008. <www.presidency.ucsb.edu>

“And I can make a firm pledge: under my plan, no family making less than $250,000 will see their taxes increase—not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes.”

NOTE: A video of the comments is available at <www.youtube.com>

[657] Webpage: “The 56th Presidential Inauguration.” Joint Congressional Committee on Inaugural Ceremonies. Accessed August 27, 2018 at <www.inaugural.senate.gov>

“Barack H. Obama … A New Birth of Freedom … January 20, 2009”

[658] Public Law 111-003: “Children’s Health Insurance Program Reauthorization Act of 2009.” Signed into law by Barack Obama on February 4, 2009. <www.congress.gov>

Page 100 (of PDF):

Title VII—Revenue Provisions

Sec. 701. Increase in Excise Tax Rate on Tobacco Products.

(a) Cigars.—Section 5701(a) of the Internal Revenue Code of 1986 is amended—

(1) by striking “$1.828 cents per thousand ($1.594 cents per thousand on cigars removed during 2000 or 2001)” in paragraph (1) and inserting “$50.33 per thousand”,

(2) by striking “20.719 percent (18.063 percent on cigars removed during 2000 or 2001)” in paragraph (2) and inserting “52.75 percent”, and

(3) by striking “$48.75 per thousand ($42.50 per thousand on cigars removed during 2000 or 2001)” in paragraph (2) and inserting “40.26 cents per cigar”.

(b) Cigarettes.—Section 5701(b) of such Code is amended—

(1) by striking “$19.50 per thousand ($17 per thousand on cigarettes removed during 2000 or 2001)” in paragraph (1) and inserting “$50.33 per thousand”, and

(2) by striking “$40.95 per thousand ($35.70 per thousand on cigarettes removed during 2000 or 2001)” in paragraph (2) and inserting “$105.69 per thousand”.

(c) Cigarette Papers.—Section 5701(c) of such Code is amended by striking “1.22 cents (1.06 cents on cigarette papers removed during 2000 or 2001)” and inserting “3.15 cents”.

(d) Cigarette Tubes.—Section 5701(d) of such Code is amended by striking “2.44 cents (2.13 cents on cigarette tubes removed during 2000 or 2001)” and inserting “6.30 cents”.

(e) Smokeless Tobacco. …

[659] Webpage: “Federal Excise Tax Increase and Related Provisions.” U.S. Treasury, Alcohol and Tobacco Tax Trade Bureau. Page last reviewed September 4, 2012. <www.ttb.gov>

The Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA, Public Law 111–3) (“the Act”), was signed into law on February 4, 2009. The Act increases the Federal excise taxes on tobacco products, imposes a floor stocks tax, imposes new requirements on manufacturers and importers of processed tobacco, expands the definition of roll-your-own tobacco, and changes the basis for denial, suspension, or revocation of permits. …

… The tax rates in effect on April 1, 2009, and just previous to the increase, as well as the floor stocks tax, are shown in the table below. …

[660] Calculated with data from:

a) Vote 50: “Children’s Health Insurance Program Reauthorization Act of 2009.” U.S. House of Representatives, February 4, 2009. <clerk.house.gov>

b) Vote 31: “Children’s Health Insurance Program Reauthorization Act of 2009.” U.S. Senate, January 29, 2009. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

49

22%

165

75%

5

2%

Democrat

305

98%

2

1%

4

1%

Independent

2

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[661] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 9: “The effect of federal excise taxes, relative to income, is greatest for lower-income households, who tend to spend a large share of their income on such goods as gasoline, alcohol, and tobacco, which are subject to such taxes.”

[662] Calculated with data from:

a) Vote 165: “Patient Protection and Affordable Care Act.” U.S. House of Representatives, March 21, 2010. <clerk.house.gov>

b) Vote 396: “Patient Protection and Affordable Care Act.” U.S. Senate, December 24, 2009. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

0

0%

217

100%

1

0%

Democrat

277

89%

34

11%

0

0%

Independent

2

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[663] Calculated with data from:

a) Vote 194: “Health Care and Education Reconciliation Act of 2010.” U.S. House of Representatives, March 25, 2010. <clerk.house.gov>

b) Vote 105: “Health Care and Education Reconciliation Act of 2010.” U.S. Senate, March 25, 2010. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

0

0%

215

99%

3

1%

Democrat

274

88%

35

11%

1

0%

Independent

1

100%

0

0%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[664] Determined with data from:

a) Report: “Estimated Revenue Effects Of The Amendment In The Nature Of A Substitute To H.R. 4872, The ‘Reconciliation Act Of 2010,’ As Amended, In Combination With The Revenue Effects Of H.R. 3590, The ‘Patient Protection And Affordable Care Act (“PPACA”),’ As Passed By The Senate, And Scheduled For Consideration By The House Committee On Rules On March 20, 2010.” United States Congress, Joint Committee on Taxation, March 20, 2010. <www.jct.gov>

NOTES:

  • Revenue provision # 6 (Require information reporting on payments to corporations) has been repealed and is thus subtracted from the total. [Article: “President Signs Repeal of Expanded 1099 Requirements.” Journal of Accountancy, April 14, 2011. <www.journalofaccountancy.com>]
  • Not included in the table below are provisions with a “Negligible Revenue Effect” or a gain or loss of less than $50 million.

b) Report: “Prescription for Change ‘Filled’: Tax Provisions in the Patient Protection and Affordable Care Act, Updated to Reflect Changes Approved in the Reconciliation Act of 2010.” By Clint Stretch and others. Deloitte, March 30, 2010. <www2.deloitte.com>

NOTE: This report contains plain-language explanations of each provision, which Just Facts used to determine the tax category of each provision. (For example, is a provision considered a tax increase or the elimination of a targeted tax deduction?) There is room for subjectivity in making some of these determinations.

Provision

Becomes Effective

Revenue FY 2010–19 (Billions)

Deloitte Explanation (Page #)

40% excise tax on health coverage in excess of $10,200/$27,500 …

2018

$32.00

9

Increase in additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20%

2011

$1.40

21

Impose annual fee on manufacturers and importers of branded drugs …

2010

$27.00

11

Impose 2.3% excise tax on manufacturers and importers of certain medical devices

2013

$20.00

12

Impose annual fee on health insurance providers

2014

$60.10

10

$500,000 deduction limitation on taxable year remuneration to officers, employees, directors, and service providers of covered health insurance providers

2012

$0.60

14

Broaden Medicare Hospital Insurance Tax Base for High-Income Taxpayers…

2013

$210.20

5–7

Impose 10% excise tax on indoor tanning services

2010

$2.70

12

Codify economic substance doctrine and impose penalties for underpayments

2010

$4.50

18

Impose Fee on Insured and Self-Insured Health Plans; Patient-Centered Outcomes Research Trust Fund

2013–2019

$2.60

12

TOTAL

$361.10

[665] Report: “Prescription for Change ‘Filled’: Tax Provisions in the Patient Protection and Affordable Care Act, Updated to Reflect Changes Approved in the Reconciliation Act of 2010.” By Clint Stretch and others. Deloitte, March 30, 2010. <www2.deloitte.com>

Page 7:

The Act includes a proposal offered by President Obama for an unearned income Medicare contribution levied on income from interest, dividends, capital gains, annuities, royalties, and rents, other than such income that is derived in the ordinary course of a trade or business and not treated as a passive activity. The Act taxes this income at a rate of 3.8 percent (up from 2.9 percent in the president’s plan). … These thresholds are set at $200,000 for singles and $250,000 for joint filers. …

The new unearned income Medicare contribution applies to taxable years beginning after December 31, 2012.

[666] “2018 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, June 5, 2018. <www.cms.gov>

Page 22:

The ACA [Affordable Care Act] also specifies that individuals with incomes greater than $200,000 per year and couples above $250,000 pay an additional Medicare contribution of 3.8 percent on some or all of their non-work income (such as investment earnings). However, the revenues from this tax are not allocated to the Medicare trust funds.

[667] Report: “Prescription for Change ‘Filled’: Tax Provisions in the Patient Protection and Affordable Care Act, Updated to Reflect Changes Approved in the Reconciliation Act of 2010.” By Clint Stretch and others. Deloitte, March 30, 2010. <www2.deloitte.com>

Pages 5–6:

Beginning in 2013, the Act imposes an additional 0.9 percent Medicare Hospital Insurance tax (HI tax) on self-employed individuals and employees with respect to earnings and wages received during the year above specified thresholds. This additional tax applies to earnings of self-employed individuals or wages of an employee received in excess of $200,000. If an individual or employee files a joint return, then the tax applies to all earnings and wages in excess of $250,000 on that return. The Act does not change the employer HI tax.

Effective date – The additional HI tax applies to wages received and taxable years beginning after December 31, 2012.

[668] “2018 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, June 5, 2018. <www.cms.gov>

Page 11: “Starting in 2013, high-income workers pay an additional 0.9 percent tax on their earnings above an unindexed threshold ($200,000 for single taxpayers and $250,000 for married couples).”

[669] Report: “Excise Tax on High-Cost Employer-Sponsored Health Coverage: In Brief.” By Annie L. Mach. Congressional Research Service, March 24, 2016. <www.fas.org>

Page 1:

The Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) includes a 40% excise tax on high-cost employer-sponsored health insurance coverage, often referred to as the Cadillac tax.1 The 40% excise tax is assessed on the aggregate cost of employer-sponsored health coverage that exceeds a dollar limit. If a tax is owed, it is levied on the entity providing the coverage (e.g., the health insurance issuer or the employer). Under the ACA, the excise tax was to go into effect in 2018; however, the Consolidated Appropriations Act of 2016 (CAA of 2016; P.L. 114-113) delays implementation until 2020.

The excise tax is included in the ACA to raise revenue to offset the cost of other ACA provisions (e.g., the financial subsidies available through the health insurance exchanges). The most current publicly available cost estimate from the Congressional Budget Office (CBO) indicates that the excise tax was expected to increase federal revenues by $87 billion between 2016 and 2025, based on 2018 implementation.2

1 26 U.S.C. §4890I.

2 Congressional Budget Office (CBO), Insurance Coverage Provisions of the Affordable Care Act – CBO’s March 2015 Baseline, March 9, 2015. As of the date of this report, CBO has not issued a cost estimate that reflects the 2020 implementation date.

Page 5:

The excise tax is assessed on the excess benefit—the portion of an employee’s applicable coverage that exceeds a dollar limit. Under the ACA, the dollar limits for 2018 were to be $10,200 for single coverage and $27,500 for non-single coverage (e.g., family coverage),19 as adjusted by the health cost adjustment percentage.20 For 2019, the limits were to be the 2018 limits adjusted by the Consumer Price Index for all Urban Consumers (CPI-U), plus 1%.21 For 2020 and beyond, the limits were to be the previous year’s limits adjusted by the CPI-U.

The CAA of 2016 … did not change the 2018 dollar limits or modify how the 2018 dollar limits were to be adjusted. The Department of the Treasury has not yet issued the 2020 limits, but the Congressional Research Service estimates they will be about $10,800 for single coverage and $29,100 for non-single coverage.22

19 Any coverage provided under a multiemployer plan (as defined in IRC §414(f)) is treated as coverage other than single coverage. In other words, coverage provided under a multiemployer plan is always subject to the non-single coverage threshold.

20 The health cost adjustment percentage is a one-time upward adjustment based on premium growth in the Blue Cross Blue Shield (BCBS) Standard plan under the Federal Employee Health Benefit (FEHB) program. The 2018 dollar limits will be adjusted upward if premium growth in the BCBS Standard plan is more than 55% between 2010 and 2018. Currently, it seems unlikely that premium growth in the BCBS Standard plan will exceed 55% between 2010 and 2018, as premium growth between 2010 and 2015 was about 20% for both the single and family coverage options. Premium growth for 2016 through 2018 would have to be significantly higher than in recent years for growth over the whole period to exceed 55%.

21 The Consumer Price Index for All Urban Consumers (CPI-U) is a measure of inflation published by the U.S. Bureau of Labor Statistics.

22 The estimates were created using CBO’s projected annualized CPI-U of 2.3% for 2019 and 2020 from CBO’s 10-Year Economic Projections from January 2016….

[670] Public Law 116-94: “Further Consolidated Appropriations Act of 2020.” 116th U.S. Congress. Signed into law by Donald Trump December 20, 2019. <www.congress.gov>

Division N, Title I, Subtitle E:

SEC. 503. REPEAL OF EXCISE TAX ON HIGH COST EMPLOYER-SPONSORED HEALTH COVERAGE.

(a) IN GENERAL.—Chapter 43 of the Internal Revenue Code of 1986 is amended by striking section 4980I.

(b) CONFORMING AMENDMENTS.—

(1) Section 6051 of such Code is amended— (A) by striking ‘‘section 4980I(d)(1)’’ in subsection (a)(14) and inserting ‘‘subsection (g)’’, and (B) by adding at the end the following new subsection:

‘‘(g) APPLICABLE EMPLOYER-SPONSORED COVERAGE.—For purposes of subsection (a)(14)—

‘‘(1) IN GENERAL.—The term ‘applicable employer-sponsored coverage’ means, with respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under section 106, or would be so excludable if it were employer-provided coverage (within the meaning of such section 106).

‘‘(2) EXCEPTIONS.—The term ‘applicable employer-sponsored coverage’ shall not include—‘‘(A) any coverage (whether through insurance or otherwise) described in section 9832(c)(1) (other than subparagraph (G) thereof) or for long-term care, ‘‘(B) any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye, or ‘‘(C) any coverage described in section 9832(c)(3) the payment for which is not excludable from gross income and for which a deduction under section 162(l) is not allowable.

‘‘(3) COVERAGE INCLUDES EMPLOYEE PAID PORTION.—Coverage shall be treated as applicable employer-sponsored coverage without regard to whether the employer or employee pays for the coverage.

‘‘(4) GOVERNMENTAL PLANS INCLUDED.—Applicable employer-sponsored coverage shall include coverage under any group health plan established and maintained primarily for its civilian employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any such government.’’. (2) Section 9831(d)(1) of such Code is amended by striking ‘‘except as provided in section 4980I(f)(4)’’. (3) The table of sections for chapter 43 of such Code is amended by striking the item relating to section 4980I.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2019.

[671] Report: “The Budget and Economic Outlook: Fiscal Years 2016 to 2026.” Congressional Budget Office, January 25, 2016. <www.cbo.gov>

Page 100:

Tax on Health Insurance Providers. Under the Affordable Care Act, health insurers are subject to an excise tax. The law specifies the total amount of tax to be assessed, and that total is divided among insurers according to their share of total premiums charged. However, several categories of health insurers—such as self-insured plans, federal and state governments, and tax-exempt providers—are fully or partially exempt from the tax. Revenues from the tax, which began to be collected in 2014, are projected to total $11 billion in 2016 but fall to about $1 billion in 2017 as a result of recent legislation that placed a one-year moratorium on that tax for calendar year 2017. Receipts from the tax, under current law, would reach about $13 billion in 2018 and rise steadily thereafter to about $21 billion by 2026, CBO estimates.

[672] Public Law 116-94: “Further Consolidated Appropriations Act of 2020.” 116th U.S. Congress. Signed into law by Donald Trump December 20, 2019. <www.congress.gov>

Division N, Title I, Subtitle E:

SEC. 502. REPEAL OF ANNUAL FEE ON HEALTH INSURANCE PROVIDERS.

(a) IN GENERAL.—Subtitle A of title IX of the Patient Protection and Affordable Care Act is amended by striking section 9010.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to calendar years beginning after December 31, 2020.

[673] Webpage: “Annual Fee on Branded Prescription Drug Manufacturers and Importers.” Internal Revenue Service. Last reviewed or updated February 20, 2018. <www.irs.gov>

Section 9008 of the Patient Protection and Affordable Care Act (ACA), Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 1404 of the Health Care and Education Reconciliation Act of 2010 (HCERA), Public Law 111-152 (124 Stat. 1029 (2010)), imposes an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs, to be paid not later than September 30th of each year. … The fee applies to calendar years beginning after December 31, 2010.

[674] Rule: “Taxable Medial Devices.” Internal Revenue Service, December 7, 2012. <www.federalregister.gov>

Page 1:

SUMMARY: This document contains final regulations that provide guidance on the excise tax imposed on the sale of certain medical devices, enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act. The final regulations affect manufacturers, importers, and producers of taxable medical devices. …

Applicability date: These regulations are applicable to sales of taxable medical devices after December 31, 2012.

Page 41: “Tax is imposed on the sale of a taxable medical device at the rate of 2.3 percent of the price for which the device is sold.”

[675] Public Law 116-94: “Further Consolidated Appropriations Act of 2020.” 116th U.S. Congress. Signed into law by Donald Trump December 20, 2019. <www.congress.gov>

Division N, Title I, Subtitle E:

SEC. 501. REPEAL OF MEDICAL DEVICE EXCISE TAX.

(a) IN GENERAL.—Chapter 32 of the Internal Revenue Code of 1986 is amended by striking subchapter E.

(b) CONFORMING AMENDMENTS.—

(1) Subsection (a) of section 4221 of the Internal Revenue Code of 1986 is amended by striking the last sentence.

(2) Paragraph (2) of section 6416(b) of such Code is amended by striking the last sentence.

(c) CLERICAL AMENDMENT.—The table of subchapters for chapter 32 of the Internal Revenue Code of 1986 is amended by striking the item relating to subchapter E.

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to sales after December 31, 2019.

[676] Webpage: “Affordable Care Act Tax Provisions.” Internal Revenue Service. Last updated January 22, 2021. <www.irs.gov>

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums.

[677] Webpage: “Questions and Answers on the Premium Tax Credit.” Internal Revenue Service. Last updated November 24, 2020. <www.irs.gov>

In general, individuals and families may be eligible for the premium tax credit if their household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for their family size. … The Department of Health and Human Services (HHS) determines the federal poverty guideline amounts annually. For residents of one of the 48 contiguous states or Washington, D.C., the following illustrates when household income would be at least 100 percent but no more than 400 percent of the federal poverty line in computing your premium tax credit for 2017:

• $12,060 (100%) up to $48,240 (400%) for one individual

• $16,240 (100%) up to $64,960 (400%) for a family of two

• $24,600 (100%) up to $98,400 (400%) for a family of four

[678] Calculated with data from the webpage: “Poverty Guidelines.” U.S. Department of Health & Human Services, January 15, 2021. <aspe.hhs.gov>

“2021 Poverty Guidelines for the 48 Contiguous States and the District of Columbia … Persons in Family/Household [=] 4 … Poverty Guideline [=] $26,500”

CALCULATION: $25,000 x 400% = $106,000

[679] Determined with data from:

a) Report: “Estimated Revenue Effects of the Amendment in the Nature of a Substitute to H.R. 4872, the Reconciliation Act of 2010, as Amended, in Combination with the Revenue Effects of H.R. 3590, the Patient Protection and Affordable Care Act (‘PPACA’), as Passed by the Senate, and Scheduled for Consideration by the House Committee on Rules on March 20, 2010.” United States Congress, Joint Committee on Taxation, March 20, 2010. <www.jct.gov>

NOTES:

  • Revenue provision # 6 (Require information reporting on payments to corporations) has been repealed and is thus subtracted from the total. [Article: “President Signs Repeal of Expanded 1099 Requirements.” Journal of Accountancy, April 14, 2011. <www.journalofaccountancy.com>]
  • Not included in the table below are provisions with a “Negligible Revenue Effect” or a gain or loss of less than $50 million.

b) Report: “Prescription for Change ‘Filled’: Tax Provisions in the Patient Protection and Affordable Care Act, Updated to Reflect Changes Approved in the Reconciliation Act of 2010.” By Clint Stretch and others. Deloitte, March 30, 2010. <www2.deloitte.com>

NOTE: This report contains plain-language explanations of each provision, which Just Facts used to determine the tax category of each provision. (For example, is a provision considered a tax increase or the elimination of a targeted tax deduction?) There is room for subjectivity in making some of these determinations.

Provision

Effective

Revenue FYs 2010–19 (Billions $)

Deloitte Explanation (Page #)

Conform the definition of medical expenses for health savings accounts … to the definition of the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician)

2011

$5.00

20

Limit health flexible spending arrangements in cafeteria plans to $2,500; indexed to CPI-U [Consumer Price Index, used to measure inflation] after 2013

2013

$13.00

20

Eliminate deduction for expenses allocable to Medicare Part D subsidy

2013

$4.50

13

Raise 7.5% AGI [adjusted gross income] floor on medical expenses deduction to 10% …

2013

$15.20

21

Modification of section 833 treatment of certain health organizations

2010

$0.40

17

Exclusion of unprocessed fuels from the cellulosic biofuel producer credit

2010

$23.60

17

TOTAL

$61.7

[680] Determined with the sources cited in the footnote above:

Provision

Effective

Revenue FYs 2010–19 (billions $)

Deloitte explanation (page #)

Qualifying therapeutic discovery project credit

2010

–$0.9

16

Exclusion for assistance provided to participants in State student loan repayment programs for certain health professionals

2009

–$0.1

21

Make the adoption credit refundable; increase qualifying expenses threshold, and extend the adoption credit through 2011

2010

–$1.2

21

TOTAL

–$2.2

[681] Webpage: “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act.” Internal Revenue Service. Last updated September 24, 2020. <www.irs.gov>

1. What are the employer shared responsibility provisions?

The employer shared responsibility provisions were added under section 4980H of the Internal Revenue Code by the Affordable Care Act. Under these provisions, certain employers (called applicable large employers or ALEs) must either offer health coverage that is “affordable” and that provides “minimum value” to their full-time employees (and offer coverage to the full-time employees’ dependents), or potentially make an employer shared responsibility payment to the IRS, if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage on a Health Insurance Marketplace (Marketplace), also called the Exchange.

Whether an employer is an ALE and is therefore subject to the employer shared responsibility provisions depends on the size of its workforce. In general, employers employing at least a certain threshold number of employees (generally 50 full-time employees including full-time equivalent employees, which means a combination of part-time employees that count as one or more full-time employees) are ALEs. The vast majority of employers fall below the ALE size threshold and therefore are not subject to the employer shared responsibility provisions.

2. When do the employer shared responsibility provisions go into effect?

The employer shared responsibility provisions generally were first effective in 2015 but several forms of transition relief were available for 2015. Several forms of transition relief also were available to some employers for 2016. No transition relief is available for 2017 and future years. …

39. When is coverage offered by an employer considered affordable for purposes of the employer shared responsibility provisions?

Employer-provided coverage is considered affordable for an employee if the employee required contribution is no more than 9.5 percent (as adjusted) of that employee’s household income. In general, the employee required contribution is the employee’s cost of enrolling in the least expensive coverage offered by the employer that provides minimum value. The employee required contribution includes amounts paid through salary reduction or otherwise, and takes into account the effects of employer arrangements such as health reimbursement arrangements (HRAs), wellness incentives, flex credits, and opt-out payments.

In addition, because ALEs generally do not know their employees’ household incomes, there are three affordability safe harbors employers can take advantage of that are based on information the employer does have available, such as the employee’s Form W-2 wages or the employee’s rate of pay. If an ALE’s offer of coverage is affordable using any of these safe harbors—that is, the employee’s required contribution is no more than 9.5 percent (as adjusted) of the baseline in the applicable safe harbor—then, the offer of coverage is deemed affordable for purposes of the employer shared responsibility provisions regardless of whether it was affordable based on the employee’s household income (which is the test that applies for purposes of the premium tax credit).

The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. …

42. When does coverage offered by an employer provide minimum value?

A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan and provides substantial coverage of inpatient hospitalization services and physician services. On May 3, 2013, Treasury and the IRS issued proposed regulations regarding how to determine minimum value and on September 1, 2015, Treasury and IRS issued proposed regulations on the requirement to provide substantial coverage of inpatient hospitalization and physician services.

43. Under what circumstances will an employer owe an employer shared responsibility payment?

There are two different circumstances in which an ALE may owe an employer shared responsibility payment. An ALE is liable for an employer shared responsibility payment only if:

(a) The ALE does not offer coverage or offers coverage to less than 95 percent of its full-time employees (and their dependents), and at least one of the full-time employee receives a premium tax credit to help pay for coverage through a Marketplace;

OR

(b) The ALE offers coverage to at least 95 percent of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace, which may occur because the employer did not offer coverage to that particular employee or because the coverage the employer offered that employee was either unaffordable or did not provide minimum value.

However, under a special rule, if an ALE offered coverage to all but five of its full-time employees (and their dependents), and five is greater than 5 percent of the employer’s full-time employees, the employer will not owe the employer shared responsibility payment that would otherwise apply under the rule for an employer that offers coverage to less than 95 percent of its full-time employees (and their dependents).

Also, see Limited Transition Relief in 2016 for information about related transition relief.

If an employer is part of an aggregated ALE group, liability under the employer shared responsibility provisions, including the rules described in this section Liability for the Employer Shared Responsibility Payment, apply separately for each ALE member in the aggregated ALE group. …

53. If an employer that does not offer coverage or that offers coverage to less than 95 percent of its full-time employees (and their dependents) owes an employer shared responsibility payment, how is the amount of the payment calculated?

If an ALE does not offer coverage or offers coverage to less than 95 percent of its full-time employees (and their dependents) for an entire calendar year, and at least one of its full-time employees receives a premium tax credit, the ALE owes an employer shared responsibility payment equal to the number of full-time employees the ALE employed for the calendar year (minus up to 30) multiplied by $2,000 (as adjusted).

For an ALE that offers coverage to at least 95 percent of its full-time employees (and their dependents) for some months but not others during the calendar year, the payment is computed separately for each month it does not offer coverage to at least 95 percent of its full-time employees (and their dependents). The amount of the payment for each month equals the number of full-time employees the ALE employed for the month (minus up to 30) multiplied by 1/12 of $2,000 (as adjusted). If the ALE is related to other ALE members in an aggregated ALE group (see Employers Subject to the Employer Shared Responsibility Provisions above), the 30-employee reduction is allocated among all the ALE members in the aggregated ALE group in proportion to the number of full-time employees each ALE member has. And if the employer is part of an aggregated ALE group, the payment is calculated based only on the number of full-time employees of the particular ALE member.

Part-time employees and full-time equivalent employees are not counted for this calculation. Also, certain full-time employees are not included in this payment calculation, for example, very generally, a full-time employee in a waiting period. …

55. Does the per-employee amount of the employer shared responsibility payment increase over time?

Yes. The employer shared responsibility provisions provide for an inflation adjustment beginning in calendar years after 2014.

In the case of any calendar year after 2014, the applicable per-employee dollar amounts of $2,000 and $3,000 are increased based on the premium adjustment percentage (as defined in section 1302(c)(4) of the Affordable Care Act) for the year, rounded to the next lowest multiple of $10.

[682] Webpage: “Questions and Answers on the Individual Shared Responsibility Provision.” Internal Revenue Service. Last updated December 28, 2020. <www.irs.gov>

2. What is the individual shared responsibility provision?

Under the Affordable Care Act, the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States. The individual shared responsibility provision requires each individual to have qualifying health care coverage (known as minimum essential coverage) for each month. Through tax year 2018, taxpayers were also required to report health care coverage, qualify for an exemption from coverage, or make a shared responsibility payment for months without coverage or coverage exemption when filing his or her federal income tax return. …

3. Who is subject to the individual shared responsibility provision?

The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption. …

5. What are the statutory exemptions from the requirement to have minimum essential coverage?

• Religious conscience. You are a member of a religious sect that is recognized as conscientiously opposed to accepting any insurance benefits. The Social Security Administration administers the process for recognizing these sects according to the criteria in the law.

• Health care sharing ministry. You are a member of a health care sharing ministry.

• Indian tribes. You are (1) a member of a federally recognized Indian tribe or (2) an individual eligible for services through an Indian care provider.

• Income below the income tax return filing requirement. Your income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on your filing status, age and types and amounts of income. To find out if you are required to file a federal tax return, use the IRS Interactive Tax Assistant (ITA).

• Short coverage gap. You went without coverage for less than three consecutive months during the year. For more information, see question 22.

• Hardship. You have suffered a hardship that makes you unable to obtain coverage, as defined in final regulations issued by the Department of Health and Human Services. See question 21 for more information on claiming hardship exemptions.

• Affordability. You can’t afford coverage because the minimum amount you must pay for the premiums is more than a certain percentage of your household income.

• Incarceration. You are in a jail, prison, or similar penal institution or correctional facility after the disposition of charges against you.

• Not lawfully present. You are not lawfully present in the U.S. and are not a U.S. citizen, or U.S. national.

[683] Webpage: “The Individual Shared Responsibility Payment – An Overview.” U.S. Internal Revenue Service, March 20, 2014. <www.irs.gov>

“Starting January 2014, you and your family must either have health insurance coverage throughout the year, qualify for an exemption from coverage, or make a payment when you file your 2014 federal income tax return in 2015.”

[684] Report: “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended.” By Richard S. Foster. U.S. Department of Health & Human Services, Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010. <www.cms.gov>

Page 6: “The penalty amounts for noncovered individuals will be indexed over time by the CPI [inflation] (or, in certain instances, by growth in income) and would normally increase more slowly than health care costs.”

Page 8:

For the estimated 23 million people who would remain uninsured in 2019, roughly 5 million are undocumented aliens who would be ineligible for Medicaid or the Exchange coverage subsidies under the health reform legislation. The balance of 18 million would choose not to be insured and to pay the penalty (if applicable) associated with the individual mandate. For the most part, these would be individuals with relatively low health care expenses for whom the individual or family insurance premium would be significantly in excess of any penalty and their anticipated health benefit value. In other instances, as happens currently, some people would not enroll in their employer plans or take advantage of the Exchange opportunities even though it would be in their best financial interest to do so.

[685] Webpage: “If You Don’t Have Health Insurance: How Much You’ll Pay.” U.S. Centers for Medicare & Medicaid Services. Accessed September 6, 2018 at <www.healthcare.gov>

If you can afford health insurance but choose not to buy it, you may pay a fee called the individual shared responsibility payment. (The fee is sometimes called the “penalty,” “fine,” or “individual mandate.”) …

The 2017 Fee for Not Having Health Insurance

The penalty rises yearly with inflation. For the 2017 plan year, the fee is calculated 2 different ways—as a percentage of your yearly household income, and per person. You’ll pay whichever is higher.

Percentage of income

• 2.5% of yearly household income

• Maximum: Total yearly premium for the national average price of a Bronze plan sold through the Marketplace

Per person per year

• $695 per adult

• $347.50 per child under 18

• Maximum: $2,085 per household

[686] Webpage: “Questions and Answers on the Individual Shared Responsibility Provision.” Internal Revenue Service. Last updated December 28, 2020. <www.irs.gov>

1. What changes did the Tax Cuts and Jobs Act make to the individual shared responsibility payment?

Through tax year 2018, if anyone in the taxpayer’s tax household did not have minimum essential coverage, and did not qualify for a coverage exemption, the taxpayer needed to make an individual shared responsibility payment when filing a federal income tax return.

Enacted in December 2017, the Tax Cuts and Jobs Act (TCJA) reduced the shared responsibility payment to zero for tax year 2019 and all subsequent years. For January 1, 2019 and beyond, taxpayers are still required by law to have minimum essential coverage or qualify for a coverage exemption. However, under the TCJA, you no longer need to make a shared responsibility payment or file Form 8965 with your tax return if you don’t have minimum essential coverage for part or all of 2019.

[687] Public Law 115-97: “Tax Cuts and Jobs Act.” 115th Congress. Signed into law by Donald Trump on December 22, 2017. <www.congress.gov>

Part VIII—Individual Mandate

Sec. 11081. Elimination of Shared Responsibility Payment for Individuals Failing to Maintain Minimum Essential Coverage.

(a) In General.—Section 5000A(c) is amended—

(1) in paragraph (2)(B)(iii), by striking “2.5 percent” and inserting “Zero percent”, and

(2) in paragraph (3)—

(A) by striking “$695” in subparagraph (A) and inserting “$0”, and

(B) by striking subparagraph (D).

(b) Effective Date.—The amendments made by this section shall apply to months beginning after December 31, 2018.

[688] U.S. Code Title 26, Subtitle D, Chapter 48, Section 5000A: “Requirement to Maintain Minimum Essential Coverage.” Accessed January 20, 2018 at <www.law.cornell.edu>

26 U.S. Code §5000A – Requirement to maintain minimum essential coverage

(a) Requirement to maintain minimum essential coverage

An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.

(b) Shared responsibility payment

(1) In general

If a taxpayer who is an applicable individual, or an applicable individual for whom the taxpayer is liable under paragraph (3), fails to meet the requirement of subsection (a) for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the taxpayer a penalty with respect to such failures in the amount determined under subsection (c).

(2) Inclusion with return

Any penalty imposed by this section with respect to any month shall be included with a taxpayer’s return under chapter 1 for the taxable year which includes such month.

(3) Payment of penalty

If an individual with respect to whom a penalty is imposed by this section for any month-

(A) is a dependent (as defined in section 152) of another taxpayer for the other taxpayer’s taxable year including such month, such other taxpayer shall be liable for such penalty, or

(B) files a joint return for the taxable year including such month, such individual and the spouse of such individual shall be jointly liable for such penalty.

(c) Amount of penalty

(1) In general

The amount of the penalty imposed by this section on any taxpayer for any taxable year with respect to failures described in subsection (b)(1) shall be equal to the lesser of—

(A) the sum of the monthly penalty amounts determined under paragraph (2) for months in the taxable year during which 1 or more such failures occurred, or

(B) an amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.

(2) Monthly penalty amounts

For purposes of paragraph (1)(A), the monthly penalty amount with respect to any taxpayer for any month during which any failure described in subsection (b)(1) occurred is an amount equal to 1/12 of the greater of the following amounts:

(A) Flat dollar amount

An amount equal to the lesser of-

(i) the sum of the applicable dollar amounts for all individuals with respect to whom such failure occurred during such month, or

(ii) 300 percent of the applicable dollar amount (determined without regard to paragraph (3)(C)) for the calendar year with or within which the taxable year ends.

(B) Percentage of income

An amount equal to the following percentage of the excess of the taxpayer’s household income for the taxable year over the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer for the taxable year:

(i) 1.0 percent for taxable years beginning in 2014.

(ii) 2.0 percent for taxable years beginning in 2015.

(iii) 2.5 percent for taxable years beginning after 2015.

(3) Applicable dollar amount

For purposes of paragraph (1)-

(A) In general

Except as provided in subparagraphs (B) and (C), the applicable dollar amount is $695.

(B) Phase in

The applicable dollar amount is $95 for 2014 and $325 for 2015.

(C) Special rule for individuals under age 18

If an applicable individual has not attained the age of 18 as of the beginning of a month, the applicable dollar amount with respect to such individual for the month shall be equal to one-half of the applicable dollar amount for the calendar year in which the month occurs.

(D) Indexing of amount

In the case of any calendar year beginning after 2016, the applicable dollar amount shall be equal to $695, increased by an amount equal to-

(i) $695, multiplied by

(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2015” for “calendar year 1992” in subparagraph (B) thereof.

If the amount of any increase under clause (i) is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.

[689] “This Week Transcript with President Barack Obama.” ABC News, September 20, 2009. <abcnews.go.com>

STEPHANOPOULOS: You were against the individual mandate…

OBAMA: Yes.

STEPHANOPOULOS: …during the campaign. Under this mandate, the government is forcing people to spend money, fining you if you don’t. How is that not a tax? …

OBAMA: No, but—but, George, you—you can’t just make up that language and decide that that’s called a tax increase. Any…

STEPHANOPOULOS: Here’s the…

OBAMA: What—what—if I—if I say that right now your premiums are going to be going up by 5 or 8 or 10 percent next year and you say well, that’s not a tax increase; but, on the other hand, if I say that I don’t want to have to pay for you not carrying coverage even after I give you tax credits that make it affordable, then…

STEPHANOPOULOS: I—I don’t think I’m making it up. Merriam Webster’s Dictionary: Tax—“a charge, usually of money, imposed by authority on persons or property for public purposes.”

OBAMA: George, the fact that you looked up Merriam’s Dictionary, the definition of tax increase, indicates to me that you’re stretching a little bit right now. Otherwise, you wouldn’t have gone to the dictionary to check on the definition. I mean what…

STEPHANOPOULOS: Well, no, but…

OBAMA: …what you’re saying is…

STEPHANOPOULOS: I wanted to check for myself. But your critics say it is a tax increase.

OBAMA: My critics say everything is a tax increase. My critics say that I’m taking over every sector of the economy. You know that.

Look, we can have a legitimate debate about whether or not we’re going to have an individual mandate or not, but…

STEPHANOPOULOS: But you reject that it’s a tax increase?

OBAMA: I absolutely reject that notion.

NOTE: A video of the exchange can see been at <www.youtube.com>.

[690] Article: “How Verrilli May Have Won Over Roberts.” By Domenico Montanaro. NBC News, June 29, 2012. <firstread.nbcnews.com>

General Verrilli: It is justifiable under its tax power. …

General Verrilli: … It would be one thing if Congress explicitly disavowed an exercise of the tax power. But given that it hasn’t done so, it seems to me that it’s—not only is it fair to read this as an exercise of the tax power, but this Court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis.

[691] Ruling: National Federation of Independent Business v. Sebelius. U.S. Supreme Court, June 28, 2012. Decided 5–4. Majority: Roberts, Ginsburg, Breyer, Sotomayor, Kagan. Dissenting: Scalia, Kennedy, Thomas, Alito. <caselaw.findlaw.com>

Majority: “The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Minority:

For all these reasons, to say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it. Judicial tax-writing is particularly troubling. Taxes have never been popular … and in part for that reason, the Constitution requires tax increases to originate in the House of Representatives. … That is to say, they must originate in the legislative body most accountable to the people, where legislators must weigh the need for the tax against the terrible price they might pay at their next election, which is never more than two years off. The Federalist No. 58 “defend[ed] the decision to give the origination power to the House on the ground that the Chamber that is more accountable to the people should have the primary role in raising revenue.” … We have no doubt that Congress knew precisely what it was doing when it rejected an earlier version of this legislation that imposed a tax instead of a requirement-with-penalty. … Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry.

[692] Report: “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2017.” White House Office of Management and Budget, 2016. <www.gpo.gov>

Pages 155–200, Chapter 12: “Government Receipts.”

[693] Report: “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2017.” White House Office of Management and Budget, 2016. <www.gpo.gov>

Page 169:

Under current law, U.S. multinational companies do not pay U.S. tax on the profits earned by their CFCs [controlled foreign corporations] until those profits are repatriated, subject to a limited exception under subpart F for passive and other highly mobile income. Under the Administration’s proposal for companies to pay a minimum tax on foreign income, no U.S. tax would be imposed on a CFC’s payment of a dividend to a U.S. shareholder. Therefore, the Administration proposes to impose a onetime 14-percent tax on the accumulated earnings of CFCs that were not previously subject to U.S. tax. A credit would be allowed for the amount of foreign income taxes associated with such earnings, multiplied by the ratio of the one-time tax rate to the otherwise applicable U.S. corporate tax rate. The earnings subject to the one-time tax could then be repatriated without any further U.S. tax.

[694] Report: “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2017.” White House Office of Management and Budget, 2016. <www.gpo.gov>

Pages 184–185: “Under this proposal, the 20-percent capital gains tax rate would be increased to 24.2 percent (for a total of 28 percent for gains also subject to the net investment income tax). This would also increase the tax rate on qualified dividends, which would be taxed at the same rate as capital gains.”

[695] Report: “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2017.” White House Office of Management and Budget, 2016. <www.gpo.gov>

Page 185:

Implement the Buffett Rule by imposing a new “Fair Share Tax”.—The Administration proposes a new minimum tax, called the Fair Share Tax (FST), for high-income taxpayers. The tentative FST equals 30 percent of AGI [adjusted gross income] less a charitable credit. The charitable credit equals 28 percent of itemized charitable contributions allowed after the overall limitation on itemized deductions (Pease). The final FST is the excess, if any, of the tentative FST over the sum of the taxpayer’s: (1) regular income tax (after certain credits) including the 3.8 percent net investment income tax, (2) the AMT [alternative minimum tax], and (3) the employee portion of payroll taxes. The set of certain credits subtracted from regular income tax excludes the foreign tax credit, the credit for tax withheld on wages, and the credit for certain uses of gasoline and special fuels. The tax is phased in linearly starting at $1 million of AGI ($500,000 in the case of a married individual filing a separate return). The tax is fully phased in at $2 million of AGI ($1 million in the case of a married individual filing a separate return). The threshold is indexed for inflation beginning after 2017. The proposal would be effective for taxable years beginning after December 31, 2016.

[696] Report: “Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2017.” White House Office of Management and Budget, 2016. <www.gpo.gov>

Pages 201–206:

Table 12-2. Effect of Budget Proposals (In millions of dollars) …

Elements of the Business Tax Reform: …

Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas …

Modify sections 338(h)(16) and 902 to limit credits when non-double taxation exists …

Expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance 2 …

Enhance and simplify research incentives …

Extend and modify certain employment tax credits, including incentives for hiring veterans …

Provide new Manufacturing Communities tax credit …

Provide Community College Partnership tax credit …

Designate Promise Zones 2 …

Modify and permanently extend renewable electricity production tax credit and investment tax credit 2 …

Provide a carbon dioxide investment and sequestration tax credit 2 …

Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project …

Extend the tax credit for second generation biofuel production …

Provide a tax credit for the production of advanced technology vehicles …

Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles …

Modify and extend the tax credit for the construction of energy-efficient new homes …

Modify and permanently extend the New Markets tax credit …

Reform and expand the Low-Income Housing tax credit …

Provide for automatic enrollment in IRAs [individual retirement accounts], including a small employer tax credit, increase the tax credit for small employer plan start-up costs, and provide an additional tax credit for small employer plans newly offering auto-enrollment …

Expand the EITC [Earned Income Tax Credit] for workers without qualifying children 2 …

Simplify the rules for claiming the EITC for workers without qualifying children 2 …

Provide a second-earner tax credit 2 …

Modify adoption credit to allow tribal determination of special needs

[697] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Page 134: “The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions.”

[698] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Pages 134–135:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions. As a consequence, many of the same aspects of the tax system that reduce economic efficiency also increase complexity. Complexity also arises from efforts to achieve certain equity goals.

[699] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 28–29:

A simpler income tax system would reduce the resource costs of individuals and businesses to comply with the tax, and would reduce the revenue needs for government administration and enforcement efforts. While the tax code has become much more complex since the last major simplification of the code in the Tax Reform Act of 1986, some argue that the complexity is necessary to achieve other worthwhile objectives. Others believe that the existence of tax preparation software has made tax code complexity less of a concern. However, an overly complex code may undermine the effect of tax preferences intended to provide incentives for certain activities if the complexity makes it difficult to determine one’s eligibility for the preference and, if eligible, what the magnitude of the tax benefit is. Additionally, the complexity of the code may undermine voluntary compliance if it undermines respect for the code.

[700] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 27:

Policymakers are not concerned only with efficiency issues in designing a tax system, but are also concerned with establishing an “equitable” tax code with respect to the distribution of the tax burden. Whether a tax system is viewed as equitable is in the eye of the beholder, and economic analysis cannot define an equitable tax. In general, most individuals and policymakers require that an equitable income tax system would tax individuals with equal ability-to-pay equally, and would tax individuals with a greater ability to pay in greater amounts. However, there is no agreement on the appropriate standard by which to judge a taxpayer’s ability to pay. Many also view the progressive rate structure as an equitable feature of the code, wherein individuals with greater ability to pay do not simply pay more tax, but experience an increasing average tax rate as income rises. Many who view a progressive tax structure as equitable would also view excessively high marginal tax rates as inequitable.

[701] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 25: “Economists have shown that the efficiency loss from taxation increases as the marginal tax rate increases. That is, a one percentage point increase in a marginal tax rate from 40 percent to 41 percent creates a greater efficiency loss per dollar of additional tax revenue than a one percentage point increase in a marginal tax rate from 20 percent to 21 percent.”

[702] Report: “Federal Tax Treatment Of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Pages 24–25:

In analyzing tax systems, economists often emphasize the importance of marginal tax rates because, they argue, it is marginal tax rates that affect incentives for taxpayers to work, to save, or to take advantage of various tax preferences.24 These incentives may distort taxpayer choice, which in turn may promote an inefficient allocation of society’s labor and capital resources. A less efficient allocation of labor and capital resources leaves society with a lower level of output of goods and services than it would otherwise enjoy in the absence of tax-system induced economic distortions.

[703] Report: “Reducing the Deficit: Spending and Revenue Options.” Congressional Budget Office, March 2011. <www.cbo.gov>

Pages 134–135:

The complexity of the tax system partly results from tax expenditures that are designed to affect behavior by taxing some endeavors more or less than others. Those tax expenditures include tax exemptions for some activities, deductions for various preferred items, and credits for undertaking certain actions. As a consequence, many of the same aspects of the tax system that reduce economic efficiency also increase complexity. Complexity also arises from efforts to achieve certain equity goals.

[704] Report: “Federal Tax Treatment of Individuals.” U.S. Congress, Joint Committee on Taxation September 12, 2011. <www.jct.gov>

Page 28:

In general, the goals of equity and efficiency are in conflict. In order to keep rates low for efficiency reasons, the progressivity of the rate schedule should be minimized, but this conflicts with the desire to have more progressive rates for equity reasons. Similarly, a broad base of tax will allow lower rates for an efficiency gain, but broadening the base by eliminating personal exemptions, standard deductions, deductions for medical expenses, etc.,37 tends to conflict with the desire to measure ability to pay accurately for equity reasons. Policymakers must weigh tradeoffs between these two goals in designing tax systems.

[705] Webpage: “The 58th Presidential Inauguration.” Joint Congressional Committee on Inaugural Ceremonies. Accessed September 10, 2018 at <www.inaugural.senate.gov>

“Donald J. Trump … January 20, 2017”

[706] Webpage: “Actions Overview H.R.1: An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018.” U.S. House of Representatives, 115th Congress (2017–2018). Accessed September 10, 2018 at <www.congress.gov>

Date

Actions Overview

12/22/2017

Became Public Law No: 115-97.

12/22/2017

Signed by President.

12/21/2017

Presented to President.

[707] Report: “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law.” By Molly F. Sherlock and Donald J. Marples. Congressional Research Service, February 6, 2018. <fas.org>

Page 1:

P.L. [Public Law] 115-97 was signed into law by President Trump on December 22, 2017. The act substantively changes the federal tax system. Broadly, for individuals, the act temporarily modifies income tax rates. Some deductions, credits, and exemptions for individuals are eliminated, while others are substantively modified, with these changes generally being temporary. For businesses, pass-through entities experience a reduction in effective tax rates via a new deduction, which is also temporary. The statutory corporate tax rate is permanently reduced. Many deductions, credits, and other provisions for businesses are also modified. The act also substantively changes the international tax system, generally moving the U.S. tax system towards a territorial system.

Pages 8–19:

Individual Income Tax Brackets

2017 Tax Law … Seven individual income tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Top rate of 39.6% applies to taxable income over $480,050 for married joint filers, $453,350 for head of household filers, or $426,700 for single filers in 2018. …

IRC [Internal Revenue Code] Section 1

P.L. 115-97 … Seven individual income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Top rate of 37% applies to taxable income over $600,000 for married joint filers, or $500,000 for single and head of household filers. …

Provision expires 12/31/25

(Section 11001 of P.L. 115-97) …

Standard Deduction

2017 Tax Law … To calculate taxable income, taxpayers subtract from their adjusted gross income (AGI) the appropriate number of personal exemptions and, if the taxpayer does not itemize their deductions, the standard deduction.

The standard deduction is the sum of the basic standard deduction and, if applicable, the additional standard deduction for the blind or elderly. The basic standard deduction amount varies by the taxpayer’s filing status and is adjusted annually for inflation. Before passage of P.L. 115-97, the basic standard deduction amounts for 2018 would have been $6,500 for single filers, $9,550 for heads of household filers, and $13,000 for married taxpayers filing jointly.

IRC Section 63

P.L. 115-97 … Increases the dollar amounts of the basic standard deduction. Specifically, for 2018, the basic standard deduction amounts are $12,000 for single individuals, $18,000 for heads of household; and $24,000 for married individuals filing jointly. After 2018, these amounts are adjusted for inflation using the chained-CPI [Consumer Price Index]. The additional standard deduction for the blind and elderly is unchanged by P.L. 115-97.

Provision expires 12/31/25

(Section 11021 of P.L. 115-97)

Child Tax Credit

2017 Tax Law … The child tax credit allows a taxpayer to reduce their federal income tax liability by up to $1,000 per qualifying child. …

IRC Section 24

P.L. 115-97 … Increases the child credit to $2,000 per qualifying child and increases the ACTC [additional child tax credit] to $1,400 per qualifying child. …

Provision expires 12/31/25

(Section 11022 of P.L. 115-97) …

Charitable Contributions Deduction

2017 Tax Law … Taxpayers who itemize their deductions can deduct charitable donations of cash or property to certain organizations including public charities; federal, state, local and Indian governments; private foundations; and other less common types of qualifying organizations.

There are limitations on the total dollar amount that can be deducted by a taxpayer in a given tax year. The limitations are defined as a percentage of the taxpayer’s adjusted gross income, or AGI. Most cash contributions are generally limited to 50% of the taxpayer’s AGI. (The limit is generally 30% of AGI for cash contributions to non-operating private foundations.)

IRC Section 170

P.L. 115-97 … Increases the percentage limit for charitable contributions of cash to public charities and other qualifying organizations to 60% of AGI. The 30% AGI limitation of cash donations to private non-operating foundations is unchanged.

Provision expires 12/31/25

(Sections 11023 of P.L. 115-97) …

State and Local Tax Deduction

2017 Tax Law … State and local (and foreign) income and property taxes are deductible as an itemized deduction. State and local sales taxes paid may be deducted in lieu of income taxes.

IRC Section 164

P.L. 115-97 … Limits itemized deductions for state and local income, sales, and property taxes to $10,000. No deduction is allowed for foreign real property taxes. Property taxes associated with carrying on a trade or business are fully deductible.

Provision expires 12/31/25

(Section 11042 of P.L. 115-97)

Mortgage Interest Deduction

2017 Tax Law … Mortgage interest is deductible on the first $1 million of combined (first and second home) acquisition debt, plus interest on $100,000 of home equity debt.

IRC Section 163(h)

P.L. 115-97 … Limits the amount of mortgage interest that may be deducted to the interest paid on the first $750,000 of mortgage debt. The limitation applies to new loans incurred after December 15, 2017. Mortgage debt that is the result of a refinance on or before December 15, 2017, is exempt from the reduction to the extent that the new mortgage does not exceed the amount refinanced. No interest deduction for new or existing home equity debt.

Provision expires 12/31/25

(Section 11043 of the P.L. 115-97) …

Corporate Rate

2017 Tax Law … Corporate taxable income is subject to a graduated rate structure. The top corporate rate of 35% generally applies to taxable income above $10 million. If taxable income is not over $50,000, the tax rate is 15%. If taxable income is over $50,000 but not over $75,000, the tax rate is 25%. If taxable income is over $75,000 but not over $10 million, the tax rate is 34%.

The corporate tax rate increases above 35% for two income brackets. Corporations with taxable income between $100,000 and $335,000 are subject to a 39% tax rate, and corporations with income between $15,000,000 and $18,333,333 are subject to a 38% tax rate. These “bubble” brackets increase the effective tax rate for higher-income corporations by offsetting any tax savings they would realize from having the first $75,000 in income taxed at lower rates.

Personal service corporations pay the 35% rate on all taxable income.

IRC Section 11

P.L. 115-97 … Corporate taxable income is taxed at a flat rate of 21%. Special rules are provided for certain taxpayers, such as public utilities.

(Section 13001 of P.L. 115-97)

[708] Calculated with data from:

a) Vote 699: “Tax Cuts and Jobs Act.” U.S. House of Representatives, December 20, 2017. <clerk.house.gov>

b) Vote 323: “Tax Cuts and Jobs Act.” U.S. Senate, December 20, 2017. <www.senate.gov>

Party

Voted “Yes”

Voted “No”

Voted “Present” or Did Not Vote †

Number

Portion

Number

Portion

Number

Portion

Republican

275

95%

12

4%

4

1%

Democrat

0

0%

235

98%

4

2%

Independent

0

0%

2

100%

0

0%

NOTE: † Voting “Present” is effectively the same as not voting.

[709] Report: “Filibusters and Cloture in the Senate.” Congressional Research Service, April 7, 2017. <www.everycrsreport.com>

Page 2 (of PDF):

The filibuster is widely viewed as one of the Senate’s most characteristic procedural features. Filibustering includes any use of dilatory or obstructive tactics to block a measure by preventing it from coming to a vote. The possibility of filibusters exists because Senate rules place few limits on Senators’ rights and opportunities in the legislative process. …

Senate Rule XXII, however, known as the “cloture rule,” enables Senators to end a filibuster on any debatable matter the Senate is considering. Sixteen Senators initiate this process by presenting a motion to end the debate. The Senate does not vote on this cloture motion until the second day after the motion is made. Then it usually requires the votes of at least three-fifths of all Senators (normally 60 votes) to invoke cloture. Invoking cloture on a proposal to amend the Senate’s standing rules requires the support of two-thirds of the Senators present and voting.

Page 9:

Invoking cloture usually requires a three-fifths vote of the entire Senate—“three-fifths of the Senators duly chosen and sworn.” Thus, if there is no more than one vacancy, 60 Senators must vote to invoke cloture. In contrast, most other votes require only a simple majority (that is, 51%) of the Senators present and voting, assuming that those Senators constitute a quorum. In the case of a cloture vote, the key is the number of Senators voting for cloture, not the number voting against. Failing to vote on a cloture motion has the same effect as voting against the motion: it deprives the motion of one of the 60 votes needed to agree to it.

[710] Tax Policy Center Briefing Book. Urban-Brookings Tax Policy Center. Updated May 2020. <www.taxpolicycenter.org>

Page 26 (of PDF):

Reconciliation legislation is passed through an expedited process. First, Congress passes a budget resolution containing “reconciliation instructions” telling congressional committees how much they need to change revenue and mandatory spending to conform to a new budget resolution. The committees’ responses are then bundled by the House and Senate budget committees into a single reconciliation bill for consideration in each chamber.

Reconciliation bills are subject to special rules in the Senate. Debate on reconciliation bills is limited to 20 hours. If the law is free of points of order, it can be passed in the Senate by a simple majority; the 60 votes necessary to shut off a filibuster are not required. Any member, however, can raise a point of order against a reconciliation bill if it violates the spending and revenue targets in the budget resolution or other budget rules and laws. Sixty votes are needed to overcome a point of order. The House can set procedural rules on any legislation, including reconciliation bills, by adopting a special “rule” determined by the House Rules Committee. Debate is limited in the House to whatever time the Rules Committee allows.

The George W. Bush tax cuts of 2001–03, a substantial portion of Barack Obama’s health reform, and Donald Trump’s more recent tax cut and reform bill of 2017 were passed using reconciliation procedures. The content of reconciliation laws is limited in the Senate by the Byrd rule, which generally disallows items that do not affect outlays or revenue. The Byrd rule also prohibits initiatives that would increase the deficit beyond the fiscal years covered by the budget resolution.

… Reconciliation was also used to pass the tax cut and reform bill of 2017. Many provisions of the bill were made temporary to avoid violating the Byrd rule.

[711] Report: “Overview of the Federal Tax System in 2020.” Congressional Research Service. Updated November 10, 2020. <crsreports.congress.gov>

Page 1:

At the end of 2017, President Trump signed into law P.L. 115-97, which substantially changed the U.S. federal tax system. Consequently, the federal tax system in effect for 2020 differs from what was in effect for 2017.1 Most of the changes to the individual income tax system in P.L. 115-97 are temporary and scheduled to expire at the end of 2025. Thus, under current law, after 2025, the individual income tax system is slated to look like the system that was in effect for 2017.

[712] Report: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

Pages 66–67:

Real Bracket Creep and Related Factors The next most significant factor increasing taxes relative to income arises from the way certain parameters of the tax system are scheduled to change over time in relation to growth in income (which reflects the effects of both real economic activity and inflation). The most important component of that effect, real bracket creep, occurs because the income tax brackets are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, more income is pushed into higher tax brackets. In addition to the income thresholds for tax brackets, many other parameters of the tax system are indexed only to inflation, including the amounts of the standard deduction and of certain tax credits, such as the earned income tax credit. Still other parameters of the tax system, including the amount of the child tax credit, are fixed in nominal dollars and are not adjusted for inflation.

[713] Calculated with:

a) Dataset: “2018 Long-Term Budget Outlook.” Congressional Budget Office, June 26, 2018. <www.cbo.gov>

Tab: “1. Summary Data for the Extended Baseline”

b) Report: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

Pages 146–147: “Table E-2. Revenues, by Major Source, Since 1968”

[714] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Pages 16–18:

In previous reports, CBO [Congressional Budget Office] allocated the entire economic burden of the corporate income tax to owners of capital in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it allocates 75 percent of the federal corporate income tax to capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. In the very short term, corporate shareholders are likely to bear most of the economic burden of the tax; but over the longer term, as capital markets adjust to bring the after-tax returns on different types of capital in line with each other, some portion of the economic burden of the tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. That reduction in investment probably occurs in part through a reduction in U.S. saving and in part through decisions to invest more savings outside the United States (relative to what would occur in the absence of the U.S. corporate income tax); the larger the decline in saving or outflow of capital, the larger the share of the burden of the corporate income tax that is borne by workers.

CBO recently reviewed several studies that use so-called general-equilibrium models of the economy to determine the long-term incidence of the corporate income tax. The results of those studies are sensitive to assumptions about the values of several key parameters, such as the ease with which capital can move between countries. Using assumptions that reflect the central tendency of published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is borne by owners of capital and 40 percent is borne by workers.8

However, standard general-equilibrium models exclude important features of the corporate income tax system that tend to increase the share of the corporate tax borne by corporate shareholders or by capital owners in general.9 For example, standard models generally assume that corporate profits represent the “normal” return on capital (that is, the return that could be obtained from making a risk-free investment). In fact, corporate profits partly represent returns on capital in excess of the normal return, for several reasons: Some corporations possess unique assets such as patents or trademarks; some choose riskier investments that have the potential to provide above-normal returns; and some produce goods or services that face little competition and thereby earn some degree of monopoly profits. Some estimates indicate that less than half of the corporate tax is a tax on the normal return on capital and that the remainder is a tax on such excess returns.10 Taxes on excess returns are probably borne by the owners of the capital that produced those excess returns. Standard models also generally fail to incorporate tax policies that affect corporate finances, such as the preferences afforded to corporate debt under the corporate income tax. Increases in the corporate tax will increase the subsidy afforded to domestic debt, increasing the relative return on debt-financed investment in the United States and drawing new investment from overseas, thus reducing the net amount of capital that flows out of the country. In addition, standard models generally do not account for corporate income taxes in other countries; those taxes also reduce the amount of capital that flows out of this country because of the U.S. corporate income tax.

Those factors imply that workers bear less of the burden of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the magnitude of the impact of the factors is difficult.

[715] Report: “List of Tax Reform Good News.” Americans for Tax Reform, August 17, 2020. <www.atr.org>

1,200 Examples of Pay Raises, Charitable Donations, Special Bonuses, 401(K) Match Hikes, Business Expansions, Benefit Increases, and Utility Rate Reductions Attributed to the Tax Cuts and Jobs Act …

This list and all 50 state lists are constantly updated – please access this national list and all 50 state lists at <www.atr.org>

1A Auto, Inc. (Westford, Massachusetts) – Bonuses for all full-time employees:

Massachusetts based online auto parts retailer 1A Auto announced across the board cash bonuses for all full-time employees. CEO Rick Green says that the decision was based on recent changes to tax policy. In a company meeting Wednesday, Green told employees, “Ultimately the tax savings will be passed to our customers in the form of lower prices, but we want to also share some of the savings with you, our hard-working employees.” Jan. 25, 2018 1A Auto, Inc. press release …

[716] Article: “Snip!, Snip!, Snip!” By Howard Fineman and Rich Thomas. Newsweek, February 19, 2001. Pages 18–22.

[717] Report: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Page 1: “This report shows average tax rates for various income categories for the four largest sources of federal revenue—individual income taxes, social insurance (or payroll) taxes, corporate income taxes, and excise taxes—and for the four taxes combined.”

Page 24:

Government transfers consist of cash payments from Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans’ programs, workers’ compensation, and state and local government assistance programs. They also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly known as food stamps), school lunches and breakfasts, housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children’s Health Insurance Program. (The value of health insurance is measured on the basis of the Census Bureau’s estimates of the average cost to the government of providing such insurance.)

[718] Calculated with the dataset: “The Distribution of Household Income and Federal Taxes, 2008 and 2009.” Congressional Budget Office, July 10, 2012. <www.cbo.gov>

Tab 3: “Household Income”

Tab 7: “Income Source by Market Income”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • Newsweek used gross income as a measure of income, while CBO [Congressional Budget Office] broke down income sources into various categories that can be summed to make an estimate of gross income. In accord with the IRS’s definition of gross income, Just Facts estimated gross income from the CBO data by summing the following categories of income: cash wages and salaries, employee’s contributions to deferred compensation plans, capital income, capital gains, business income, other market income, and Social Security.

[719] Report: “United States Federal Debt: Answers to Frequently Asked Questions, an Update.” U.S. Government Accountability Office, August 12, 2004. <www.gao.gov>

Page 39:

Over the long term, the costs of federal borrowing will be borne by tomorrow’s workers and taxpayers. Higher saving and investment in the nation’s capital stock—factories, equipment, and technology—increase the nation’s capacity to produce goods and services and generate higher income in the future. Increased economic capacity and rising incomes would allow future generations to more easily bear the burden of the federal government’s debt. Persistent deficits and rising levels of debt, however, reduce funds available for private investment in the United States and abroad. Over time, lower productivity and GDP [gross domestic product] growth ultimately may reduce or slow the growth of the living standards of future generations.

Page 41:

GAO’s [Government Accountability Office’s] long-term simulations show that absent policy actions aimed at deficit reduction, debt burdens of such magnitudes imply a substantial decline in national saving available to finance private investment in the nation’s capital stock. The fiscal paths simulated are ultimately unsustainable and would inevitably result in declining GDP and future living standards. Even before such effects, these debt paths would likely result in rising inflation, higher interest rates, and the unwillingness of foreign investors to invest in a weakening American economy.

[720] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “[I]f the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output.”

[721] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 175: “[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt.”

[722] The consequences of unchecked government debt are addressed in greater detail in Just Facts’ research on the national debt.

[723] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 65: “Governments can also default on domestic public debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970s.”

Page 175:

[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt. … [G]overnments engage in massive monetary expansion, in part because they can thereby gain a seigniorage tax on real money balances (by inflating down the value of citizens’ currency and issuing more to meet demand). But they also want to reduce, or even wipe out, the real value of public debts outstanding.

Page 400: “Seigniorage is simply the real income a government can realize by exercising its monopoly on printing currency. The revenue can be broken down into the quantity of currency needed to meet the growing transactions demand at constant prices and the remaining growth, which causes inflation, thereby lowering the purchasing power of existing currency.”

[724] Article: “Inflation and the Real Value of Debt: A Double-Edged Sword.” By Christopher J. Neely. Federal Reserve Bank of St. Louis, On the Economy, August 1, 2022. <www.stlouisfed.org>

An increase in the price level directly reduces the real value of government debt, as well as the ratio of debt to GDP [gross domestic product], because—holding other things constant—higher prices increase nominal GDP. Thus, surprise inflation transfers wealth from holders of U.S. government debt—who include both Americans and non-Americans—to U.S. taxpayers.3

This transfer is not an unalloyed good even for U.S. taxpayers, however, because unexpected inflation will tend to raise the cost of servicing future U.S. debt—i.e., nominal yields—by increasing the expected rate of inflation and the risk premium associated with inflation.

[725] Book: Is U.S. Government Debt Different? Edited by Franklin Allen and others. Penn Law, Wharton, FIC Press, 2012. <finance.wharton.upenn.edu>

Chapter 5: “Origins of the Fiscal Constitution.” By Michael W. McConnell (Director of the Constitutional Law Center at Stanford Law School). Pages 45–53.

Pages 49–50:

Section Four of the Amendment states: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” This was designed to prevent a southern Democratic majority from repudiating the Civil War debt. … The Supreme Court has interpreted the provision only once, in Perry v. United States2, the so-called Gold Clause Cases. The Court allowed Congress to renege on its contractual agreement to pay the debt in gold; this is when U.S. public debt became denominated in dollars. Effectively, this means that even if Section Four forbids Congress to declare a formal default, it could accomplish much the same thing by inflating the debt away.

[726] Report: “A Citizen’s Guide to the Federal Budget: Fiscal Year 2000.” White House Office of Management and Budget, January 1999. <www.gpo.gov>

Pages 18–19:

• Discretionary spending, which accounts for one-third of all Federal spending, is what the President and Congress must decide to spend for the next year through the 13 annual appropriations bills. It includes money for such activities as the FBI and the Coast Guard, for housing and education, for space exploration and highway construction, and for defense and foreign aid.

• Mandatory spending, which accounts for two-thirds of all spending, is authorized by permanent laws, not by the 13 annual appropriations bills. It includes entitlements—such as Social Security, Medicare, veterans’ benefits, and Food Stamps—through which individuals receive benefits because they are eligible based on their age, income, or other criteria. It also includes interest on the national debt, which the Government pays to individuals and institutions that hold Treasury bonds and other Government securities. The President and Congress can change the law in order to change the spending on entitlements and other mandatory programs—but they don’t have to.

[727] Report: “GAO Strategic Plan [Government Accountability Office], 2007–2012.” U.S. Government Accountability Office, March 2007. <www.gao.gov>

Page 15:

Table 2: Forces Shaping the United States and Its Place in the World

Changing security threats: The world has changed dramatically in overall security, from the conventional threats posed during the Cold War era to more unconventional and asymmetric threats. Providing for people’s safety and security requires attention to threats as diverse as terrorism, violent crime, natural disasters, and infectious diseases. The response to many of these threats depends not only on the action of the U.S. government but also on the cooperation of other nations and multilateral organizations, as well as on state and local governments and the private and independent sectors. Complicating such efforts are a number of failed states allowing the trade of arms, drugs, or other illegal goods; the spread of infectious diseases; and the accommodation of terrorist groups. …

Economic growth and competitiveness: Economic growth and competition are also affected by the skills and behavior of U.S. citizens, the policies of the U.S. government, and the ability of the private and public sectors to innovate and manage change. … Importantly, the saving and investment behavior of U.S. citizens affects the capital available to invest in research, development, and productivity enhancement. …

Global interdependency: Economies as well as governments and societies are becoming increasingly interdependent as more people, information, goods, and capital flow across increasingly porous borders. …

Societal change: The U.S. population is aging and becoming more diverse. As U.S. society ages and the ratio of elderly persons and children to persons of working age increases, the sustainability of social insurance systems will be further threatened. Specifically, according to the 2000 census, the median age of the U.S. population is now the highest it has ever been, and the baby boomer age group—people born from 1946 to 1964, inclusive—was a significant part of the population.

[728] Report: “The Effects of Pandemic-Related Legislation on Output.” Congressional Budget Office, September 2020. <www.cbo.gov>

Page 2 (of PDF):

In March and April of 2020, four major federal laws were enacted to address the public health emergency and the economic distress created by the 2020 coronavirus pandemic. … By increasing debt as a percentage of GDP [gross domestic product], the legislation is expected to raise borrowing costs, lower economic output, and reduce national income in the longer term.

Pages 3–4:

In the longer term, the legislation is projected to increase the ratio of federal debt to GDP. High and rising federal debt makes the economy more vulnerable to rising interest rates and also to rising inflation, depending on how that debt is financed. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it could increase the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.

[729] Blog post: “State Economies Hit Hardest by the Pandemic Are Still Playing Catch-Up.” By Levi Bognar and Thomas Walstrum. Federal Reserve Bank of Chicago, May 12, 2022. <www.chicagofed.org>

The Covid-19 pandemic caused a massive worldwide economic shock. Within the United States, no region was spared. The state with the smallest employment decline at the beginning of the pandemic—Wyoming—still lost 9% of its workers from January through April of 2020. Moreover, there were six states—Hawaii, Michigan, Nevada, New York, Rhode Island, and Vermont—that saw employment drop by over 20% during the same span. While the economic rebound commenced quickly across the U.S., two years later the pandemic’s impact on states’ employment numbers endures. And just as the pandemic-induced declines in employment varied in size across states, so have their jobs recoveries. About a quarter of states had higher employment in March 2022 than they did in January 2020, but others still have sizable holes to refill. …

Because of the continuing significance of the pandemic employment shock for current employment levels, it is natural to ask, what can account for the differences in the sizes of the initial declines? There are a couple of clear predictors of initial decline size, but we must emphasize that they are merely predictors (or correlates) and not necessarily causal channels. The first clear predictor is the relative size of the first national wave of Covid deaths in the state: By July 1, 2020, the states with the highest number of Covid deaths per capita were Connecticut, Massachusetts, New Jersey, New York, and Rhode Island—all states that experienced large initial declines. A second clear predictor is industry mix. Leisure and hospitality experienced the largest employment loss of any industry, and the two states with the highest concentrations of leisure and hospitality employment,3 Hawaii and Nevada, saw some of the largest initial employment declines (although in Florida, another state with a lot of tourism, the decline was relatively small). A third factor that may also have played a role was lockdown stringency during the first Covid wave, which varied by state (see this Philadelphia Fed study for details). Determining the relative importance of these three explanations (and potentially others) remains an active area of research. The task is not simple because the explanations are not independent of each other. For example, states with industry mixes (second factor) that include a large share of essential workers may have had larger outbreaks and more Covid deaths per capita (first factor) because a greater share of the population remained at work in person. Another potential complication in determining the relative importance of the first and third factors is that greater lockdown stringency may have limited outbreak size, while at the same time bigger outbreaks may also have led to stricter lockdowns.

[730] “BillTally Report 113-2: The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Page 2:

During the First Session of the 113th Congress, Representatives authored 496 spending bills and 112 savings bills. Senators drafted 332 increase bills and 56 savings bills. While the number of increases was the lowest seen since the 105th Congress, this is also the first time in several years that there were fewer cut bills introduced compared to the preceding Congress.

[731] Appendix C: “BillTally Methodology Rules.” National Taxpayers Union Foundation. Accessed May 18, 2015 at <www.ntu.org>

Pages i–ii:

In cases where a Member cosponsors the same spending in more than one bill (e.g., cosponsored more than one universal health care bill), the same spending is offset and thus is not counted twice toward the Member’s total. …

Inclusions

In estimating the cost of reauthorization and appropriation bills, NTUF [National Taxpayers Union Foundation] counts only the net increase or decrease in cost over the prior year’s authorization or appropriation.

Page iv:

Sources of Cost Estimates

The estimates contained in the BillTally study are generally obtained from sources outside of NTUF. Where there is more than one estimate available for a given bill, NTUF uses the most credible source. Where NTUF obtains estimates from more than one equally credible source, NTUF uses the least optimistic (largest increase/smallest reduction) estimate. In cases where cost estimates are not readily available from any outside source, NTUF will attempt to calculate an estimate (with the assistance of the sponsor where possible). Generally, these estimates prove to be low compared to the actual cost of the program.

Page vi:

Accuracy

The scope and nature of the BillTally cost survey make total precision impossible. To maximize accuracy and ensure fairness, NTUF provides Members of Congress with a significant review period to comment confidentially on the accuracy of their own reports. In response to these comments, NTUF makes appropriate changes to the BillTally database. To the extent that more up-to-date information comes to light, it will be reflected in subsequent reports. However, the comprehensive nature of the database makes it unlikely that errors with respect to individual bills will alter the general findings of this study.

[732] “BillTally Report 113-2: The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Pages 1–3:

This report summarizes data from NTUF’s [National Taxpayers Union Foundation’s] BillTally accounting software, which computes the cost or savings of all legislation introduced in the First Session of the 113th Congress that affects spending by at least $1 million. Agenda totals for individual lawmakers were developed by cross indexing their sponsorship and cosponsorship records with cost estimates for 608 House bills and 388 Senate bills under BillTally accounting rules that prevent the double counting of overlapping proposals. All sponsorship and cost data in this report were reviewed confidentially by each Congressional office prior to publication. Appendix A lists all Members alphabetically, Appendix B lists members by state delegation, and Appendix C gives a thorough explanation of the BillTally methodology. …

In the House, the average Democrat called for net spending hikes of $396.5 billion—nearly a hundred billion less than in the previous Congress and the lowest since the 107th Congress. This spending would have boosted FY 2013’s total outlays by 11 percent.

During the previous Congress, the typical House Republican proposed, on net, a record level of spending cuts: $130.2 billion. In this current Congress, the amount of cuts receded by over a third, to $82.6 billion. Relative to FY 2013 total outlays, this would have reduced spending by just over 2 percent.

As recently as the 111th Congress (2009), the average Senate Democrat supported legislation that would have increased total spending by $133.7 billion (which would have represented a 4 percent increase in total budgetary outlays for that year). In this Congress their average net agenda amounted to $18.3 billion in new spending, which would grow the budget by one half of a percentage point. This marks the Senate Democrats’ lowest recorded net spending agenda since the 104th Congress.

As in the previous Congress, the average Senate Republican was a net cutter, but called for a smaller level of reductions. The result was a net agenda that went from –$238.7 billion to –$159.1 billion (both net cuts). That amount would have shaved FY 2013 total outlays by 4.6 percent. …

A Senator’s or Representative’s record of authored and sponsored bills can be viewed as his or her legislative “wish list,” free from the pressure of party leaders that normally comes with the voting process. By tabulating the cost and/or savings of each Member’s agenda, taxpayers can gain a better understanding of the policy interests as well as the guiding budgetary philosophies of their elected representatives.

Pages 8–10:

Table 3. House Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions) … Democrats … 113th Congress … Proposed Increases [=] $406,795 … Proposed Cuts [=] ($10,311) … Net Agendas [=] $396,483 … Percent Change in Fiscal Year Budget Outlays [=] 11.48 … Republicans … 113th Congress … Proposed Increases [=] $8,633 … Proposed Cuts [=] ($91,280) … Net Agendas [=] ($82,647) … Percent Change in Fiscal Year Budget Outlays [=] –2.39

Table 4. Senate Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions) … Democrats … 113th Congress … Proposed Increases [=] $21,530 … Proposed Cuts [=] ($3,233) … Net Agendas [=] $18,296 … Percent Change in Fiscal Year Budget Outlays [=] 0.53 … Republicans … 113th Congress … Proposed Increases [=] $5,792 … Proposed Cuts [=] ($164,895) … Net Agendas [=] ($159,103) … Percent Change in Fiscal Year Budget Outlays [=] –4.61

[733] “BillTally Report 113-2: The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Pages 8–10: “Table 3. House Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions)” … “Table 4. Senate Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions)”

[734] “Address of the President to Joint Sessions of Congress.” By President George W. Bush, February 27, 2001. <georgewbush-whitehouse.archives.gov>

Many of you have talked about the need to pay down our national debt. I listened, and I agree. (Applause.) We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. (Applause.) At the end of those 10 years, we will have paid down all the debt that is available to retire. (Applause.) That is more debt, repaid more quickly than has ever been repaid by any nation at any time in history. (Applause.)

[735] Article: “$1.35 Trillion Tax Cut Becomes Law.” By Kelly Wallace. CNN, June 7, 2001. <www.cnn.com>

“President George W. Bush signed into law Thursday the first major piece of legislation of his presidency, a $1.35 trillion tax cut over 10 years.”

[736] Calculated with data from the footnote above and:

a) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed August 29, 2018 at <www.treasurydirect.gov>

“Total Public Debt Outstanding … 06/07/2001 [=] 5,672,373,164,658 … 01/20/2009 [=] 10,626,877,048,913”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

“Gross Domestic Product (billions $) … 2001 Q2 [=] 10,597.8 … 2009 Q1 [=] 14,394.5”

c) Webpage: “Calculate Duration Between Two Dates.” Accessed August 29, 2018 at <www.timeanddate.com>

“From and including: Thursday, June 7, 2001 … To, and including: Tuesday, January 20, 2009 … It is 2785 days from the start date to the end date, end date included”

CALCULATIONS:

  • 2,785 days / 365.25 days per year = 7.63 years
  • $5,672,373,164,658 debt on June 7, 2001 / $10,597,800,000,000 GDP in 2001Q2 = 53.5%
  • $10,626,877,048,913 debt on January 20, 2009 / $14,394,500,000,000 GDP in 2009Q1 = 73.8%
  • (73.8% – 53.5%) / 7.63 years = 2.66% per year

[737] Webpage: “Vetoes by President George W. Bush.” United States Senate. Accessed March 15, 2011 at <www.senate.gov>

Vetoes overridden:

H.R.2419: Food, Conservation, and Energy Act of 2008*

H.R.6124: Food, Conservation, and Energy Act of 2008*

H.R.6331: Medicare Improvement for Patients and Providers Act of 2008

H.R.1495: Water Resources Development Act of 2007

* NOTE: “The House and Senate passed H.R. 2419 over veto, enacting 14 of 15 farm bill titles into law. The trade title (title III) was inadvertently excluded from the enrolled bill. To remedy the situation, both chambers re-passed the farm bill conference agreement (including the trade title) as H.R. 6124, again over veto. H.R. 6124, in section 4, repealed Public Law 110-234 and amendments made by it, effective on the date of that Act’s enactment.” [Webpage: “H.R.2419: Food, Conservation, and Energy Act of 2008.” Library of Congress. Accessed May 18, 2015 at <www.congress.gov>]

[738] Calculated with data from:

a) Cost estimate: “H.R. 2419, Food, Conservation, and Energy Act of 2008.” Congressional Budget Office, May 13, 2008. <www.cbo.gov>

“Relative to CBO’s [Congressional Budget Office] March 2008 baseline projections, we estimate that enacting H.R. 2419 would increase direct spending by about $3.6 billion over the 2008–2018 period, assuming that the legislation would remain in effect throughout that period. JCT [Joint Committee on Taxation] and CBO estimate that revenues would increase under the legislation by $0.7 billion over the same period. On balance, those changes would produce net costs (increases in deficits or reductions in surpluses) of about $2.9 billion over the 11-year period, relative to CBO’s most recent baseline projections.”

b) Cost estimate: “H.R. 6331, Medicare Improvements for Patients and Providers Act of 2008.” Congressional Budget Office, July 23, 2008. <www.cbo.gov>

“CBO estimates that enacting H.R. 6331 will increase direct spending by less than $50 million over the 2008–2013 period and by $0.3 billion over the 2008–2018 period. In addition, the Joint Committee on Taxation (JCT) estimates that the act will increase federal revenues by $0.2 billion over the 2008–2013 period and by $0.4 billion over the 2008–2018 period. In total, CBO estimates that the act will reduce deficits (or increase surpluses) by $0.1 billion over the 2008–2013 period and by less than $50 million over the 2008–2018 period.”

c) Cost estimate: “H.R. 1495: Water Resources Development Act of 2007.” Congressional Budget Office, September 24, 2007. <www.cbo.gov>

“Assuming appropriation of the necessary amounts, including adjustments for increases in anticipated inflation, CBO estimates that implementing this conference agreement for H.R. 1495 would result in discretionary outlays of about $11.2 billion over the 2008–2012 period and an additional $12.0 billion over the 10 years after 2012. (Some construction costs and operations and maintenance would continue or commence after those first 15 years.)”

CALCULATION: $2.9 billion (over 2008–2018 for H.R. 2419) + $0.1 billion (over 2008–2013 for H.R. 6331) + $11.2 billion (over 2008–2012 for H.R. 1495) + $12.0 billion (over 2013–2022) = 26.2 billion over 2008–2022

[739] “Remarks at the Fiscal Responsibility Summit.” By Barack Obama. Government Printing Office, February 23, 2009. <obamawhitehouse.archives.gov>

And that’s why today I’m pledging to cut the deficit we inherited in half by the end of my first term in office. This will not be easy. It will require us to make difficult decisions and face challenges we’ve long neglected. But I refuse to leave our children with a debt that they cannot repay—and that means taking responsibility right now, in this administration, for getting our spending under control.

[740] Transcript: “Obama’s Remarks at Stimulus Bill Signing.” Washington Post, February 17, 2009. <www.washingtonpost.com>

“The American Recovery and Reinvestment Act that I will sign today, a plan that meets the principles I laid out in January, is the most sweeping economic recovery package in our history.”

[741] Calculated with data from the footnote above and:

a) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed April 20, 2018 at <www.treasurydirect.gov>

“Total Public Debt Outstanding … 02/17/2009 [=] 10,789,783,760,341 … 01/20/2017 [=] 19,947,304,555,212”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised January 28, 2021. <apps.bea.gov>

“Gross Domestic Product (billions $) … 2009 Q1 [=]14,394.5 … 2017 Q1 [=] 19,237.4”

c) Webpage: “Calculate Duration Between Two Dates.” Accessed April 20, 2018 at <www.timeanddate.com>

“From and including: Tuesday, February 17, 2009 … To and including: Friday, January 20, 2017 … It is 2895 days from the start date to the end date, end date included”

CALCULATIONS:

  • 2,895 days / 365.25 days per year = 7.92 years
  • $10,789,783,760,341 debt on February 17, 2009 / $14,394,500,000,000 GDP in 2009 Q1 = 75.0%
  • $19,947,304,555,212 debt on January 20, 2017 / $19,237,400,000,000 GDP in 2017 Q1 = 103.7%
  • (103.7% – 75.0%) / 7.92 years = 3.6 percentage points per year

[742] Webpage: “Vetoes by President Barack H. Obama.” United States Senate. Accessed August 29, 2018 at <www.senate.gov>

Vetoes by President Barack H. Obama

President Barack H. Obama vetoed twelve bills. …

114th Congress, 2nd Session (2016)

Bill No.

Subject

Veto Date

Presidential Message

Status

S.2040

Justice Against Sponsors of Terrorism Act

23-Sep

S.Doc 114-16

Veto overridden by the House on Sep 28 by vote No. 564 (348–77).

Veto overridden by the Senate on Sep 28 by vote No. 148 (97–1).

Veto overridden

[743] Cost estimate: “S. 2040: Justice Against Sponsors of Terrorism Act.” Congressional Budget Office, February 16, 2016. <www.cbo.gov>

S. 2040 would narrow the immunity of foreign states and their employees or agents from lawsuits by victims of terrorist acts and grant U.S. district courts jurisdiction over certain terrorism-related cases. CBO [Congressional Budget Office] estimates that implementing S. 2040 would have no significant effect on the federal budget.

Under the bill, district courts might hear additional terrorism-related cases. The Departments of Justice and State often review such cases and issue recommendations to those courts. However, based on information from both departments, CBO estimates that no additional personnel would be required to implement the bill. Thus, CBO estimates that implementing the bill would have no significant discretionary costs over the 2016–2021 period.

Because enacting S. 2040 could increase revenues, pay-as-you-go procedures apply. Enacting the bill would not affect direct spending. The Department of State collects a $2,275 fee when it provides judicial assistance to U.S. citizens in other countries. Based on information from the department, CBO estimates that those increased revenues would not be significant over the 2016–2026 period.

CBO estimates that enacting S. 2040 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.

S. 2040 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would not affect the budgets of state, local, or tribal governments.

[744] Transcript: “Donald Trump Interview with Bob Woodward and Robert Costa.” Washington Post, April 2, 2016. <www.washingtonpost.com>

Trump: “We’ve got to get rid of the $19 trillion in debt.”

Woodward: “How long would that take?”

Trump: “I think I could do it fairly quickly, because of the fact the numbers…”

Woodward: “What’s fairly quickly?”

Trump: “Well, I would say over a period of eight years.”

[745] Article: “Republican-Led Congress Passes Sweeping Tax Bill.” By Benjy Sarlin. NBC News, December 19, 2017. Updated 12/20/2017. <www.nbcnews.com>

“Congress approved a sweeping $1.5 trillion tax bill on Wednesday.… It is the president’s first significant legislative accomplishment and the biggest tax overhaul in a generation.”

[746] “WHO Director-General’s Opening Remarks at the Media Briefing on Covid-19.” World Health Organization, March 11, 2020. <bit.ly>

[Dr. Tedros Adhanom Ghebreyesus:] …

WHO has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction.

We have therefore made the assessment that COVID-19 can be characterized as a pandemic.

[747] Calculated with data from the footnote above and:

a) Webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed February 25, 2021 at <fiscaldata.treasury.gov>

“Total Public Debt Outstanding … 12/20/2017 [=] $20,492,523,558,088 … 3/11/2020 [=] $23,483,045,370,415”

b) Dataset: “Table 1.1.5. Gross Domestic Product [GDP].” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2021. <apps.bea.gov>

“Gross Domestic Product (billions $) … 2017 Q4 [=] 19,918.9 … 2020 Q1 [=] 21,561.1”

c) Webpage: “Days Calculator: Days Between Two Dates.” Accessed February 25, 2021 at <www.timeanddate.com>

“From and including: Wednesday, December 20, 2017 … To and including: Wednesday, March 11, 2020 … It is 813 days from the start date to the end date, end date included”

CALCULATIONS:

  • 813 days / 365.25 days per year = 2.23 years
  • $20,492,523,558,088 debt on December 20, 2017 / $19,918,900,000,000 GDP in 2017 Q4 = 102.9%
  • $23,483,045,370,415 debt on March 11, 2020 / $21,561,100,000,000 GDP in 2020 Q1 = 108.9%
  • (108.9% – 102.9%) / 2.23 years = 2.7% per year

[748] Webpage: “Vetoes by President Donald J. Trump.” United States Senate. Accessed February 24, 2021 at <www.senate.gov>

Vetoes by President Donald J. Trump

President Donald J. Trump has vetoed 10 bills. …

116th Congress, 1st Session (2019)

Bill No.

Subject

Veto Date

Presidential Message

Status

H.J.Res.46

Relating to a national emergency declared by the President on February 15, 2019

Mar 15

H.Doc.116-22

The House sustained the vote on Mar 26 by vote No. 127 (248–181).

S.J.Res.7

Yemen War Powers Resolution

Apr 16

S.Doc.116-4

The Senate sustained the veto on May 2 by vote No. 94 (53–45).

S.J.Res.38

Saudi Arabia and United Kingdom of Great Britain and Northern Ireland arms sales disapproval resolution

Jul 24

S.Doc.116-9

The Senate sustained the veto on July 29 by vote No. 233 (46–41).

S.J.Res.37

UAE arms sales disapproval resolution

Jul 24

S.Doc.116-8

The Senate sustained the veto on July 29 by vote No. 232 (45–39).

S.J.Res.36

Saudi Arabia, United Kingdom of Great Britain and Northern Ireland, Kingdom of Spain, and Italian Republic arms sales disapproval resolution

Jul 24

S.Doc.116-7

The Senate sustained the veto on July 29 by vote No. 231 (45–40).

S.J.Res.54

Relating to a national emergency declared by the President on February 15, 2019

Oct 15

S.Doc.116-11

The Senate sustained the veto on Oct 17 by vote No. 325 (53–36).

[749] “WHO Director-General’s Opening Remarks at the Media Briefing on Covid-19.” World Health Organization, March 11, 2020. <bit.ly>

[Dr. Tedros Adhanom Ghebreyesus:] …

WHO has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction.

We have therefore made the assessment that COVID-19 can be characterized as a pandemic.

[750] Calculated with data from the footnote above and:

a) Webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed February 25, 2021 at <fiscaldata.treasury.gov>

“Total Public Debt Outstanding … 3/11/2020 [=] $23,483,045,370,415 … 12/31/2020 [=] $27,747,797,947,668”

b) Dataset: “Table 1.1.5. Gross Domestic Product [GDP].” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2021. <apps.bea.gov>

“Gross Domestic Product (billions $) … 2020 Q1 [=] 21,561.1 … 2020 Q4 [=] 21,487.9”

c) Webpage: “Days Calculator: Days Between Two Dates.” Accessed February 25, 2021 at <www.timeanddate.com>

“From and including: Wednesday, March 11, 2020 … To and including: Wednesday, December 31, 2020 … It is 296 days from the start date to the end date, end date included”

CALCULATIONS:

  • 296 days / 365.25 days per year = 0.81 years
  • $23,483,045,370,415 debt on March 11, 2020 / $21,561,100,000,000 GDP in 2020 Q1 = 108.9%
  • $27,747,797,947,668 debt on December 31, 2020 / $21,487,900,000,000 GDP in 2020 Q4 = 129.1%
  • (129.1% – 108.9%) / 0.81 years = 24.9% per year

NOTE: GDP data for the first quarter of 2021 was not yet available at the time of this calculation. Thus, Just Facts is using the GDP figure for the fourth quarter of 2020 in the meantime.

[751] Webpage: “Vetoes by President Donald J. Trump.” United States Senate. Accessed February 24, 2021 at <www.senate.gov>

Vetoes by President Donald J. Trump

President Donald J. Trump has vetoed 10 bills. …

116th Congress, 2nd Session (2020)

Bill No.

Subject

Veto Date

Presidential Message

Status

S.J. Res.68

Iran War Powers Resolution

May 06

veto message

The Senate sustained the veto on May 7 by vote No. 84 (49–44).

H.J.Res.76

Borrower Defense Institutional Accountability regulation rule

May 29

H.Doc.116-131

The House sustained the veto on June 26 by vote No. 120 (238–173).

H.R.6395

National Defense Authorization Act for Fiscal Year 2021

Dec 23

H.Doc.116-174

Veto overridden by the House on Dec 28 by vote No. 120 (238–173)

Veto overridden by the Senate on Jan 1, 2021 by vote No. 292 (81–13)

Veto overridden

S.906

Driftnet Modernizationn and Bycatch Reduction Act

Jan 1, 2021

S.Doc.116-29

[752] Cost estimate: “H.R. 6395, the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.” U.S. Congressional Budget Office, November 2, 2020. <www.cbo.gov>

The Congressional Budget Office has completed the enclosed estimate of the direct spending and revenue effects of H.R. 6395, the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, as passed by the House of Representatives on July 21, 2020. Enacting the legislation would increase both direct spending and revenues. The net increase in the deficit would total $21 million over the 2021–2030 period.

[753] Speech: “Remarks By President Biden on the Economy.” By Joseph R. Biden. White House, May 10, 2022. <www.whitehouse.gov>

Finally, let’s do one more comparison. Let’s compare our two plans when it comes to the deficit.

Republicans love to attack me as a big spender, as if that’s the reason why inflation has gone up. Let’s compare the facts.

Under my predecessor, the deficit exploded, raising—rising every single year under the Republicans.

Under my plan, we’re on track to cut the federal deficit by $1.5 trillion this year. Let me say it again: $1.5 trillion by the end of this fiscal year. The biggest one-year decline in all of history for America. And that’s in addition to last year we cut the budget $350 billion—the deficit, not the budget. The deficit: $350 billion.

My Treasury Department is planning to pay down the national debt this quarter, which never happened under my predecessor. Not once. Not once.

Because unlike my predecessor, the deficit has gone down both years I’ve been here. That is not an abstraction. It matters. It matters to families, because reducing the deficit is one of the main ways we can ease inflationary pressures.

Look, the bottom line is this: Americans have a choice right now between two paths, reflecting two very different sets of values.

My plan attacks inflation and grows the economy by lowering costs for working families, giving workers well-deserved raises, reducing the deficit by historic levels, and making big corporations and the very wealthiest Americans pay their fair share.

NOTES:

  • Biden’s claim about the deficit is also misleading. When Biden entered office, the Congressional Budget Office was projecting that deficits would decline by $2.95 trillion in 2021 and 2022 due to the expiration of pandemic spending.† Instead, deficits only fell by $2.11 trillion mainly because Biden and the Democrats increased spending on wide-ranging social welfare programs and bailouts for state/local governments and private union pension funds.‡ § Consequently, their actions increased the deficits by about $840 billion.
  • An Excel file containing the data and calculations is available upon request.

SOURCES:

  • † Report: “The Budget and Economic Outlook: 2021 to 2031.” Congressional Budget Office, February 2021. <www.cbo.gov>

Page 2 (of PDF): “Deficits … have widened significantly as a result of the economic disruption caused by the pandemic and the enactment of legislation in response. … Projected outlays decline relative to GDP [gross domestic product]

for the next few years, as pandemic-related spending wanes and low interest rates persist.”

  • ‡ Webpage: “House Resolution 1319: American Rescue Plan Act of 2021.” U.S. House of Representatives, 117th Congress (2021–2022). Accessed April 22, 2023 at <www.congress.gov>

“This bill provides additional relief to address the continued impact of COVID-19 (i.e., coronavirus disease 2019) on the economy, public health, state and local governments, individuals, and businesses.”

  • § Report: “The Budgetary Effects of Major Laws Enacted in Response to the 2020–2021 Coronavirus Pandemic, December 2020 and March 2021.” Congressional Budget Office, September 2021. <www.cbo.gov>

Page 1: “Estimated Effects on the Budget, 2021–2030 (in Billions of Dollars) … American Rescue Plan Act of 2021 … Increase in the Deficit [=] 1,856”

Pages 3–12: “American Rescue Plan Act of 2021 … Unemployment Benefits … Assistance to Individuals … Assistance to Businesses … Assistance to State, Local, and Tribal Governments … Medicare … Medicaid and CHIP [Children’s Health Insurance Program] … Premium Tax Credits and Other Health Insurance … Other Health and Human Services … Education … Agriculture … Funding for Federal Agencies to Respond to the Pandemic … Miscellaneous … Provides assistance to certain multiemployer defined benefit pension plans and reduces funding requirements for single-employer pension plans”

[754] Webpage: “House Resolution 1319: American Rescue Plan Act of 2021.” U.S. House of Representatives, 117th Congress (2021–2022). Accessed April 22, 2023 at <www.congress.gov>

“Date … 03/10/2021 … Actions Overview … Resolving differences – House actions: On motion that the House agree to the Senate amendment Agreed to by the Yeas and Nays: 220–211….”

[755] Calculated with data from the webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed August 30, 2024 at <fiscaldata.treasury.gov>

“Total Public Debt Outstanding … 03/10/2021 [=] $27,926,627,063,040.16 … 6/28/2024 [=] $34,831,634,431,393.47”

CALCULATION: $34,831,634,431,393.47 – $27,926,627,063,040.16 = $6,905,007,368,353.30

[756] Calculated with data from the webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed August 30, 2024 at <fiscaldata.treasury.gov>

“Total Public Debt Outstanding … 03/10/2021 [=] $27,926,627,063,040.16 … 6/28/2024 [=] $34,831,634,431,393.47”

CALCULATION: ($34,831,634,431,393.47 – $27,926,627,063,040.16) / $27,926,627,063,040.16 = 24.7%

[757] Calculated with the dataset: “CPI—All Urban Consumers (Current Series).” U.S. Department of Labor, Bureau of Labor Statistics. Accessed August 30, 2024 at <data.bls.gov>

“Series Id: CUUR0000SA0; Series Title: All Items in U.S. City Average, All Urban Consumers, Not Seasonally Adjusted; Area: U.S. City Average; Item: All Items; Base Period: 1982–84=100”

“2021 … March [=] 264.877 … 2024 … June [=] 314.175”

CALCULATION: (314.175 – 264.877) / 264.877 = 18.6%

[758] Calculated with data from:

a) Webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed August 30, 2024 at <fiscaldata.treasury.gov>

“Total Public Debt Outstanding … 03/10/2021 [=] $27,926,627,063,040.16 … 6/28/2024 [=] $34,831,634,431,393.47”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised August 29, 2024. <apps.bea.gov>

“[Billions of dollars] Seasonally adjusted at annual rates … Gross domestic product … 2021 Q1 [=] 22,600.2 … 2024 Q2 [=] 28,652.3”

c) Webpage: “Days Calculator: Days Between Two Dates.” Accessed August 30, 2024 at <www.timeanddate.com>

“From and including: Wednesday, March 10, 2021 … To and including: Saturday, June 28, 2024 … It is 1207 days from the start date to the end date, end date included”

CALCULATIONS:

  • 1,207 days / 365.25 days per year = 3.30 years
  • $27,926,627,063,040.16 debt on March 10, 2021 / $22,600,200,000,000 GDP in 2021 Q1 = 123.6%
  • $34,831,634,431,393.47 debt on June 28, 2024 / $28,652,300,000,000 GDP in 2024 Q2 = 121.6%
  • (121.6% – 123.6%) / 3.30 years = –0.6% per year

[759] Webpage: “Vetoes by President Joseph R. Biden Jr.” United States Senate. Accessed April 28, 2023 at <www.senate.gov>

“President Joseph R. Biden Jr. has vetoed 1 bill. … 118th Congress, 1st Session (2023) … H.J.Res.30 … Department of Labor Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights … Mar 20”

[760] Article: “How Many Workers Are Employed in Sectors Directly Affected by Covid-19 Shutdowns, Where Do They Work, and How Much Do They Earn?” By Matthew Dey and Mark A. Loewenstein. U.S. Bureau of Labor Statistics Monthly Labor Review, April 2020. <www.bls.gov>

Page 1:

To reduce the spread of coronavirus disease 2019 (Covid-19), nearly all states have issued stay-at-home orders and shut down establishments deemed nonessential. Answering the following questions is crucial to assessing the potential labor market impacts of the shutdown policy: How many jobs are in the industries that are shut down? Where are these jobs located? What wages do they pay?

[761] Report: “An Unemployment Crisis after the Onset of Covid-19.” By Nicolas Petrosky-Nadeau and Robert G. Valletta. Federal Reserve Bank of San Francisco, May 18, 2020. <www.frbsf.org>

Page 1:

The wave of initial job losses during the coronavirus disease 2019 (COVID-19) pandemic has been massive, with more than 20 million jobs swept away between March and April. This is much larger than losses recorded during similar time frames in any other postwar recession. As a result, the April unemployment rate spiked to the highest level recorded since the Great Depression of the 1930s.

[762] “Monetary Policy Report.” Board of Governors of the Federal Reserve System, February 19, 2021. <www.federalreserve.gov>

Page 1:

The COVID-19 pandemic continues to weigh heavily on economic activity and labor markets in the United States and around the world, even as the ongoing vaccination campaigns offer hope for a return to more normal conditions later this year. While unprecedented fiscal and monetary stimulus and a relaxation of rigorous social-distancing restrictions supported a rapid rebound in the U.S. labor market last summer, the pace of gains has slowed and employment remains well below pre-pandemic levels.

Page 5:

The public health crisis spurred by the spread of COVID-19 weighed on economic activity throughout 2020, and patterns in the labor market reflected the ebb and flow of the virus and the actions taken by households, businesses, and governments to combat its spread. During the initial stage of the pandemic in March and April, payroll employment plunged by 22 million jobs, while the measured unemployment rate jumped to 14.8 percent—its highest level since the Great Depression….2 As cases subsided and early lockdowns were relaxed, payroll employment rebounded rapidly—particularly outside of the service sectors—and the unemployment rate fell back. Beginning late last year, however, the pace of improvement in the labor market slowed markedly amid another large wave of COVID-19 cases. The unemployment rate declined only 0.4 percentage point from November through January, while payroll gains averaged just 29,000 per month, weighed down by a contraction in the leisure and hospitality sector, which is particularly affected by social distancing and government-mandated restrictions.

[763] Report: “U.S. Economic Recovery in the Wake of Covid-19: Successes and Challenges.” By Marc Labonte and Lida R. Weinstock. Congressional Research Service, May 31, 2022. <crsreports.congress.gov>

Introduction:

The Covid-19 pandemic caused an unprecedented disruption to the basic functioning of the economy in spring 2020. According to the National Bureau of Economic Research (NBER), an independent, nonprofit research group, the U.S. economy experienced a two-month recession in March and April of 2020.1 The recession was the deepest since the Great Depression, with gross domestic product (GDP) falling by the largest percentage in one quarter in the history of the data series and unemployment rising to its highest monthly rate in the history of that series. Just as economic activity had declined at a historically fast pace, it also started to recover at a historically fast pace. In May 2020, a new economic expansion began, spurred in large part by the historic nature of both fiscal and monetary stimulus throughout the initial months of the pandemic. The recovery continued throughout 2020 and 2021, bolstered by additional stimulus, the gradual loosening of travel restrictions and stay-at-home orders, and the eventual rollout of Covid-19 vaccines and treatments.2

Fiscal and monetary support continued through 2021, as did the economic recovery. Despite the brevity of the recession and the rapid recovery, most economic indicators—such as output and unemployment—had not fully recovered until the latter part of 2021. To date, in the aggregate, the recovery has been fairly robust, but there are nonetheless frictions in the economy that indicate it has not fully returned to normal yet. As the U.S. economy has rebounded from the disruptions caused by the initial stages of the pandemic, it is now characterized by relatively tight labor markets and inflation higher than the United States has experienced since the 1980s. In addition to high inflation, the key economic policy challenges going forward relate to supply disruptions, a low labor force participation rate, and maintaining financial stability in light of rapid asset price appreciation in 2020 and 2021.

[764] Article: “Inflation and the Real Value of Debt: A Double-Edged Sword.” By Christopher J. Neely (Ph.D., Economics). Federal Reserve Bank of St. Louis, On the Economy, August 1, 2022. <www.stlouisfed.org>

An increase in the price level directly reduces the real value of government debt, as well as the ratio of debt to GDP [gross domestic product], because—holding other things constant—higher prices increase nominal GDP. Thus, surprise inflation transfers wealth from holders of U.S. government debt—who include both Americans and non-Americans—to U.S. taxpayers.3

This transfer is not an unalloyed good even for U.S. taxpayers, however, because unexpected inflation will tend to raise the cost of servicing future U.S. debt—i.e., nominal yields—by increasing the expected rate of inflation and the risk premium associated with inflation.

[765] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 65: “Governments can also default on domestic public debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970s.”

Page 175:

[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt. … [G]overnments engage in massive monetary expansion, in part because they can thereby gain a seigniorage tax on real money balances (by inflating down the value of citizens’ currency and issuing more to meet demand). But they also want to reduce, or even wipe out, the real value of public debts outstanding.

Page 400: “Seigniorage is simply the real income a government can realize by exercising its monopoly on printing currency. The revenue can be broken down into the quantity of currency needed to meet the growing transactions demand at constant prices and the remaining growth, which causes inflation, thereby lowering the purchasing power of existing currency.”

[766] Book: Is U.S. Government Debt Different? Edited by Franklin Allen and others. Penn Law, Wharton, FIC Press, 2012. <finance.wharton.upenn.edu>

Chapter 5: “Origins of the Fiscal Constitution.” By Michael W. McConnell (Director of the Constitutional Law Center at Stanford Law School). Pages 45–53.

Pages 49–50:

Section Four of the Amendment states: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” This was designed to prevent a southern Democratic majority from repudiating the Civil War debt. … The Supreme Court has interpreted the provision only once, in Perry v. United States2, the so-called Gold Clause Cases. The Court allowed Congress to renege on its contractual agreement to pay the debt in gold; this is when U.S. public debt became denominated in dollars. Effectively, this means that even if Section Four forbids Congress to declare a formal default, it could accomplish much the same thing by inflating the debt away.

[767] Constitution of the United States. Signed September 17, 1787. <justfacts.com>

Article I, Section 7:

[Clause 1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

[Clause 2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Article I, Section 8, Clause 1: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States….”

[768] Report: “The Debt Limit: History and Recent Increases.” By D. Andrew Austin. Congressional Research Service, November 2, 2015. <fas.org>

Page 4: “The debt limit also provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending. The debt limit also imposes a form of fiscal accountability that compels Congress and the President to take visible action to allow further federal borrowing when the federal government spends more than it collects in revenues.”

[769] Article: “$5 Trillion Added to National Debt Under Bush.” By Angie Drobnic Holan. PolitiFact, January 22, 2009. <www.politifact.com>

At the end of the Clinton administration, there were several years of budget surpluses. …

When Bush took office, the national debt was $5.73 trillion. When he left, it was $10.7 trillion. …

So even though he [Rahm Emanuel] is off by about 20 percent, the fact that the number has been surging lately supports his point that the debt increased greatly under Bush. So we rate his statement Mostly True.

[770] Calculated with data from:

a) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised July 25, 2024. <apps.bea.gov>

b) Webpage: “Dates of Sessions of the Congress.” Accessed April 7, 2023 at <www.senate.gov>

c) Webpage: “Past Inauguration Ceremonies.” Joint Congressional Committee on Inaugural Ceremonies. Accessed April 7, 2023 at <www.inaugural.senate.gov>

d) Webpage: “Party Divisions of the House of Representatives (1789–Present).” U.S. House of Representatives, Office of the Clerk. Accessed April 7, 2023 at

<history.house.gov>

e) Webpage: “Party Division in the Senate, 1789–Present.” U.S. Senate Historical Office. Accessed April 7, 2023 at

<www.senate.gov>

f) Webpage: “Debt to the Penny.” U.S. Department of the Treasury, Bureau of the Fiscal Service. Accessed April 15, 2022 and April 7, 2023 at <fiscaldata.treasury.gov>

NOTES:

  • Debt/GDP calculations are performed with seasonally adjusted GDP figures from the quarters in which presidential and congressional power shifts occurred.
  • In cases where a congressional and presidential power shift occur in the same quarter, the date of the presidential power shift is used as the milestone for the debt.
  • The facts in this footnote pertain to the misleading nature of linking the national debt solely to the president. Facts regarding the differing accounting criteria that PolitiFact applied to Bush and Clinton are presented here.
  • An Excel file containing the data and calculations is available upon request.

[771] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page 65: “Governments can also default on domestic public debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970s.”

Page 175:

[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt. … [G]overnments engage in massive monetary expansion, in part because they can thereby gain a seigniorage tax on real money balances (by inflating down the value of citizens’ currency and issuing more to meet demand). But they also want to reduce, or even wipe out, the real value of public debts outstanding.

Page 400: “Seigniorage is simply the real income a government can realize by exercising its monopoly on printing currency. The revenue can be broken down into the quantity of currency needed to meet the growing transactions demand at constant prices and the remaining growth, which causes inflation, thereby lowering the purchasing power of existing currency.”

[772] Article: “Inflation and the Real Value of Debt: A Double-Edged Sword.” By Christopher J. Neely. Federal Reserve Bank of St. Louis, On the Economy, August 1, 2022. <www.stlouisfed.org>

An increase in the price level directly reduces the real value of government debt, as well as the ratio of debt to GDP [gross domestic product], because—holding other things constant—higher prices increase nominal GDP. Thus, surprise inflation transfers wealth from holders of U.S. government debt—who include both Americans and non-Americans—to U.S. taxpayers.3

This transfer is not an unalloyed good even for U.S. taxpayers, however, because unexpected inflation will tend to raise the cost of servicing future U.S. debt—i.e., nominal yields—by increasing the expected rate of inflation and the risk premium associated with inflation.

[773] Book: Is U.S. Government Debt Different? Edited by Franklin Allen and others. Penn Law, Wharton, FIC Press, 2012. <finance.wharton.upenn.edu>

Chapter 5: “Origins of the Fiscal Constitution.” By Michael W. McConnell (Director of the Constitutional Law Center at Stanford Law School). Pages 45–53.

Pages 49–50:

Section Four of the Amendment states: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” This was designed to prevent a southern Democratic majority from repudiating the Civil War debt. … The Supreme Court has interpreted the provision only once, in Perry v. United States2, the so-called Gold Clause Cases. The Court allowed Congress to renege on its contractual agreement to pay the debt in gold; this is when U.S. public debt became denominated in dollars. Effectively, this means that even if Section Four forbids Congress to declare a formal default, it could accomplish much the same thing by inflating the debt away.

[774] Report: “A Citizen’s Guide to the Federal Budget: Fiscal Year 2000.” White House Office of Management and Budget, January 1999. <www.gpo.gov>

Pages 18–19:

• Discretionary spending, which accounts for one-third of all Federal spending, is what the President and Congress must decide to spend for the next year through the 13 annual appropriations bills. It includes money for such activities as the FBI and the Coast Guard, for housing and education, for space exploration and highway construction, and for defense and foreign aid.

• Mandatory spending, which accounts for two-thirds of all spending, is authorized by permanent laws, not by the 13 annual appropriations bills. It includes entitlements—such as Social Security, Medicare, veterans’ benefits, and Food Stamps—through which individuals receive benefits because they are eligible based on their age, income, or other criteria. It also includes interest on the national debt, which the Government pays to individuals and institutions that hold Treasury bonds and other Government securities. The President and Congress can change the law in order to change the spending on entitlements and other mandatory programs—but they don’t have to.

[775] Report: “GAO Strategic Plan [Government Accountability Office], 2007–2012.” U.S. Government Accountability Office, March 2007. <www.gao.gov>

Page 15:

Table 2: Forces Shaping the United States and Its Place in the World

Changing security threats: The world has changed dramatically in overall security, from the conventional threats posed during the Cold War era to more unconventional and asymmetric threats. Providing for people’s safety and security requires attention to threats as diverse as terrorism, violent crime, natural disasters, and infectious diseases. The response to many of these threats depends not only on the action of the U.S. government but also on the cooperation of other nations and multilateral organizations, as well as on state and local governments and the private and independent sectors. Complicating such efforts are a number of failed states allowing the trade of arms, drugs, or other illegal goods; the spread of infectious diseases; and the accommodation of terrorist groups. …

Economic growth and competitiveness: Economic growth and competition are also affected by the skills and behavior of U.S. citizens, the policies of the U.S. government, and the ability of the private and public sectors to innovate and manage change. … Importantly, the saving and investment behavior of U.S. citizens affects the capital available to invest in research, development, and productivity enhancement. …

Global interdependency: Economies as well as governments and societies are becoming increasingly interdependent as more people, information, goods, and capital flow across increasingly porous borders. …

Societal change: The U.S. population is aging and becoming more diverse. As U.S. society ages and the ratio of elderly persons and children to persons of working age increases, the sustainability of social insurance systems will be further threatened. Specifically, according to the 2000 census, the median age of the U.S. population is now the highest it has ever been, and the baby boomer age group—people born from 1946 to 1964, inclusive—was a significant part of the population.

[776] Report: “The Effects of Pandemic-Related Legislation on Output.” Congressional Budget Office, September 2020. <www.cbo.gov>

Page 2 (of PDF):

In March and April of 2020, four major federal laws were enacted to address the public health emergency and the economic distress created by the 2020 coronavirus pandemic. … By increasing debt as a percentage of GDP [gross domestic product], the legislation is expected to raise borrowing costs, lower economic output, and reduce national income in the longer term.

Pages 3–4:

In the longer term, the legislation is projected to increase the ratio of federal debt to GDP. High and rising federal debt makes the economy more vulnerable to rising interest rates and also to rising inflation, depending on how that debt is financed. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it could increase the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.

[777] Blog post: “State Economies Hit Hardest by the Pandemic Are Still Playing Catch-Up.” By Levi Bognar and Thomas Walstrum. Federal Reserve Bank of Chicago, May 12, 2022. <www.chicagofed.org>

The Covid-19 pandemic caused a massive worldwide economic shock. Within the United States, no region was spared. The state with the smallest employment decline at the beginning of the pandemic—Wyoming—still lost 9% of its workers from January through April of 2020. Moreover, there were six states—Hawaii, Michigan, Nevada, New York, Rhode Island, and Vermont—that saw employment drop by over 20% during the same span. While the economic rebound commenced quickly across the U.S., two years later the pandemic’s impact on states’ employment numbers endures. And just as the pandemic-induced declines in employment varied in size across states, so have their jobs recoveries. About a quarter of states had higher employment in March 2022 than they did in January 2020, but others still have sizable holes to refill. …

Because of the continuing significance of the pandemic employment shock for current employment levels, it is natural to ask, what can account for the differences in the sizes of the initial declines? There are a couple of clear predictors of initial decline size, but we must emphasize that they are merely predictors (or correlates) and not necessarily causal channels. The first clear predictor is the relative size of the first national wave of Covid deaths in the state: By July 1, 2020, the states with the highest number of Covid deaths per capita were Connecticut, Massachusetts, New Jersey, New York, and Rhode Island—all states that experienced large initial declines. A second clear predictor is industry mix. Leisure and hospitality experienced the largest employment loss of any industry, and the two states with the highest concentrations of leisure and hospitality employment,3 Hawaii and Nevada, saw some of the largest initial employment declines (although in Florida, another state with a lot of tourism, the decline was relatively small). A third factor that may also have played a role was lockdown stringency during the first Covid wave, which varied by state (see this Philadelphia Fed study for details). Determining the relative importance of these three explanations (and potentially others) remains an active area of research. The task is not simple because the explanations are not independent of each other. For example, states with industry mixes (second factor) that include a large share of essential workers may have had larger outbreaks and more Covid deaths per capita (first factor) because a greater share of the population remained at work in person. Another potential complication in determining the relative importance of the first and third factors is that greater lockdown stringency may have limited outbreak size, while at the same time bigger outbreaks may also have led to stricter lockdowns.

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