A recent report by the Congressional Budget Office (CBO) belies the Bush Administration's claim that the tax cuts enacted in 2001 were needed to offset a significant increase in federal tax burdens over the previous six years. What the CBO data show is that when households are ranked by income, federal taxes have declined as a share of household income over the past 20 years for the first 80 percent of households (Figure 1). This includes all federal income, payroll, and excise taxes.
Combined federal taxes were about the same share of household income in 2000 as in 1979 for the 20 percent of households with the highest incomes, but a modestly higher share than at the end of the 1980’s. While some of the increase in the federal tax share of income is attributable to the tax increases enacted in 1990 and 1993, the overwhelming reason for the increase was the rapid growth in inflation-adjusted income among higher income households, especially among the one percent of households with the very highest income. With a progressive federal income tax, strong income growth in excess of the rate of inflation will push more income into higher tax brackets and increase the ratio of taxes to income.
After adjusting for inflation, average income for the twenty percent of households with the highest income was nearly 70 percent higher in 2000 than for comparable households in 1979 (Figure 2). This is even after subtracting all federal income, payroll, and excise taxes. In contrast, average after-tax income for the next 20 percent of households was 24 percent higher over the same period, while after-tax income for the poorest 20 percent of households was only 8 percent higher.
