Data recently released by the Internal Revenue Service for the 2004 tax year show all income groups–including lower- and middle-income taxpayers– have seen their effective federal income tax rates fall.
The accompanying table shows how the tax picture has changed for each income group (as defined by adjusted gross income, AGI) from 2000 to 2004 when all tax returns within each group are included.
Lower Incomes, Bigger Break
The table shows effective tax rates have fallen for every income group. Those in the bottom and middle income groups, as well as millionaires, have seen their tax rates fall. The percentage decrease in tax burden was greatest for those in the lowest income groups between 2000 and 2004.
For example, in 2000 a taxpayer with an AGI of $35,000 who paid 8.5 percent of his income in federal income taxes would pay $2,959 in federal income taxes after credits. Following the tax cuts that pushed his effective rate down to 5.1 percent, he paid $1,792 in taxes. That amounts to a 39.4 percent decrease in tax burden.
At the other end of the income spectrum, a taxpayer making $1.75 million saw his effective tax rate fall from 29.3 percent to 25 percent. Before the tax cuts, he paid $513,625 in federal income taxes after credits. Following the tax cuts, he paid $437,500. That amounts to a 14.8 percent reduction in tax burden.
Second, even though their effective tax rates have fallen, taxpayers in the $75,000-$500,000 AGI range are shouldering a larger burden of the total taxes paid. For example, the $100,000-$200,000 income group paid 19.4 percent of all federal income taxes in 2000, and 22.5 percent in 2004.
There are two reasons for this increase: (1) This income group’s fraction of the total AGI has increased; and (2) taxpayers in these groups are most likely to be hit by the Alternative Minimum Tax (AMT), which has been changed very little since 2000.
More People Pay Nothing
Third, as shown by the “percent of returns that are taxable” column, the tax cuts have taken many taxpayers in the low-income groups off the tax rolls entirely.
In 2000, approximately 29 million tax returns had no income tax due. By 2004, that number had risen to around 43 million returns. That is largely due to expansion of the Child Tax Credit and establishment of the 10 percent tax bracket.
Finally, in 2004 much more money was given to low-income earners than in 2000, through the tax code via programs such as the Earned Income Tax Credit (EITC) and the Refundable Child Tax Credit.
The table shows that among lower- and middle-income groups, many taxpayers receive more back from the IRS than they actually pay in federal income taxes. Every AGI group up to $25,000 actually receives more back from the IRS in the aggregate than it pays in federal income taxes.
All Groups Shoulder Less
Ever since the Bush tax cuts were enacted in 2001 and 2003, much of the political debate has centered on the often-repeated claim that the benefits of the tax cuts accrued only to high-income taxpayers. While the wealthy will save a higher dollar amount from any across-the-board tax cut merely because they pay more in taxes and earn higher incomes, all income groups have had their current tax burdens reduced by the tax cuts.
Gerald Prante ([email protected]) is a staff economist at the Tax Foundation in Washington, DC. A version of this article appeared in the Tax Foundation’s Fiscal Fact No. 64, published September 20. Used by permission.