As the debate over tax reform unfolds over the coming months, much analysis and discussion will surround trying to determine who the winners and losers are under various proposals. A centerpiece of this debate will be tax distribution tables produced by the Joint Committee on Taxation and a plethora of outside think tanks and interest groups.
While these tax distribution tables are one analysis tool, they often produce results that may mislead readers to wrong or incomplete conclusions.
Using the average (mean) taxpayer in each income group may be the least representative value, overstating or understating the tax liability of taxpayers in the group by many times.
In the most extreme example, the average only represents 1.1% of taxpayers in the second quintile of income – not even remotely representative of the group. The closest example is in the fourth quintile of income where the average represents 32% of taxpayers – a very poor representation, still.
Basing tax distribution tables on income rather than tax liability is wildly unrepresentative.
For example, in the third quintile of income over 4.3 million taxpayers pay more in federal income taxes than 9.6 million taxpayers in the higher fourth quintile. Nearly 6.2 million taxpayers in the top fifth income quintile pay less in federal income taxes than 3.9 million taxpayers in the fourth quintile.
Using the average creates a misleading view since taxpayers within the same income quintile have very little in common when it comes to what they owe the Treasury in taxes.
There is a stark 433% difference between the average federal income tax liability a quintile and the median tax liability of the same quintile. In other words, many tax filers in one income group can have more in common with tax filers in another income group than with their own.
Tax distribution tables often ignore the growing proportion of tax filers with zero or negative tax liability – which has increased over the past 50 years.
Tax distribution tables often ignore the mobility of taxpayers.
For example, nearly 60% of households in the lowest quintile moved upward into a higher income group from 1999 to 2007. And nearly as many households move up as move down. Almost 40% of households in the higher quintile of income fell at least one quintile over the same nine year period.
Tables often ignore the decreasing share of taxes paid by the bottom 50% of taxpayers and the increasing taxes paid by the upper 1%.
Since 1980 the taxes paid as a share of the total federal income tax burden for the bottom 50% of taxpayers fell from 7.1% to 2.4%. Conversely, the share of the top 1% nearly doubled from 19.1% to 37.4%.
See the entire study attached in pdf format below