Total Tax Burden, 1966--1985: Pechman

Introduction

This page summarizes Joseph A. Pechman's Who Paid the Taxes, 1966--1985? (reference [3]), which attempts to answer two questions:

• How high is the total tax burden (federal, state, and local)?
• How does the burden vary with income?

The U.S. tax system is either moderately progressive or slightly regressive, depending on the incidence assumptions for the major taxes. If the corporation income tax and property tax are assumed to be borne by capital, the very rich pay higher average effective tax rates than does the average family. If these taxes are assumed to be shifted to consumers to a considerable degree, the very rich pay lower effective tax rates than the average family.

The tax system has relatively little effect on the distribution of income. In contrast, the transfer system has a significant equalizing effect.

The tax system became less progressive between 1966 and 1985, primarily because the corporation income tax and the property tax declined in importance while more emphasis was placed on the payroll tax.

The transfer system includes all transfer payments such as Social Security benefits, Medicare, and Medicaid.

The effective tax rates described here consist of the total tax burden of a family, divided by the family's income. To investigate how progressive or regressive taxes in the US are, families are ranked by their annual income. It is important to note that

• The tax burden on a family is more than the taxes directly paid by the family, because of the phenomenon of tax shifting.
• The income imputed to a family is calculated using a broad economic definition and hence is possibly considerably larger than the family's perception of its own income.

The book provides tax rates for 1966, 1970, 1975, 1980, and 1985. The results for 1980 and 1985 involve suitably projecting the data for 1975.

Because any distributional analysis of tax burdens must make certain assumptions, the figures arrived at in [3] most likely differ from other such tables, though it is possible that the overall patterns and trends would be similar.

Who Paid the Taxes, 1966--1985? is essentially a sequel to reference [2].

Definitions and Assumptions

Taxpaying units

Families, rather than individuals or households, are the fundamental unit of analysis. (That is, effective tax rates are families' tax burdens divided by their incomes.)

Income

Income is defined more broadly here as "adjusted family income," in an attempt to mirror a common economic definition of income.^<1> It includes:

• wages, interest, dividends, rents, business profits
• capital gains (both realized and unrealized)
• net imputed rent on owner-occupied dwellings^<2>
• employer pension contributions (from private and public sector employers)
• employer contributions to health plans
• government transfer payments (Social Security benefits, Medicare, Medicaid, food stamps, etc.)
• indirect business taxes, apportioned between families based on the incidence assumptions used (see below)

• gifts and bequests^<3>
• distributions from private pension plans and annuities^<4>
• distributions from government employee retirement plans not financed by payroll taxes

It must be emphasized that family income as defined here can be considerably larger than what is usually perceived as income.

Taxes

Taxes considered include those raised by the federal, state, and local governments. They include taxes of the following types:

• personal income tax
• corporate income tax
• sales and excise taxes
• property taxes (on land and improvements)
• payroll taxes (remitted by both the employee and employer)

• customs duties, estate and gift taxes^<5>
• nontax receipts such as public university tuition, fees charged by public hospitals, etc.

This study portrays the distribution of tax burdens, not government benefits. Hence, transfer payments, while considered part of family income, are not "taxes." (For example, Social Security payments are not counted as negative tax liabilities.)

Tax incidence

The incidence of a particular tax refers to the ultimate bearer of the burden of the tax. This may not be identical to the person or business who actually remits the tax to the government because of the phenomenon of tax shifting. Tax shifting, while an important object of study, is often hard to verify and account for.

Consider, for example, payroll taxes, some of which are remitted by the employee (meaning the taxes are taken out of the paycheck), and some by the employer. Almost all economists agree that the employee share of payroll taxes is born by the employee. However, economists also almost uniformly agree that the employer share of payroll taxes falls not on the employing business, but rather on the employee: the employer shifts the burden to the employee by lowering her paycheck a corresponding amount. (This shifting may not be conscious; rather, it reflects supply and demand in the labor market.)

The assignment of tax incidence can be a controversial subject.

One virtue of Who Paid the Taxes, 1966--1985? is that computations are made using eight different sets of incidence assumptions, spanning most of the range of views of economists. All eight sets make the following three assmptions:

• The burden of personal income taxes falls on the taxpayer.
• The burden of a sales or excise tax falls on the consumer.
• The burden of payroll taxes remitted by employees (i.e., taken directly out of paychecks from gross wages and salaries) falls on the employee.

Table 1: Differing incidence assumptions

The largest differences in the results stem from differences in assumptions of the incidence of the corporate income taxes and property taxes on land and improvements.

Some Caveats

One limitation of the study is that incomes are considered only over a single year, since this is not necessarily the best measure of a family's well-being, and family incomes can oscillate from year to year. One effect of this drawback is that the tax burden can appear highly regressive at the very bottom of the income distribution.

Tax Burden Distributional Tables: Graphs

The graphs and table using progressive assumptions use the overall most progressive set of incidence assumptions (see above). Similarly, the graphs and tables using regressive assumptions use the overall most regressive set of incidence assumptions.

In the graphs below, actual data values only exist for each income group (first decile, second decile, ..., top 1%). Instead of plotting points only, the points are connected by straight lines to make reading the graph easier, but the reader should understand that there is no actual underlying data there.

Graph 1: Tax burdens, 1966--1985, using progressive assumptions

Notes

• The first decile includes only the 6th to 9th percentiles.
• Averages over all deciles include families with negative incomes that are not shown in the breakdown by decile.

Data source

The data for Graph 1 were taken from Tables 4-10 and A-1 through A-4 of [3].

Graph 2: Tax burdens, 1966--1985, using regressive assumptions

Notes

• The first decile includes only the 6th to 9th percentiles.
• Averages over all deciles include families with negative incomes that are not shown in the breakdown by decile.

Data source

The data for Graph 2 were taken from Tables 4-10 and A-1 through A-4 of [3].

Table 2: Adjusted family income by lower limits of population deciles, 1980

This table shows lists the lowest adjusted family income in each income grouping in Graphs 1 and 2 above. The income depends on the tax incidence assumptions used.

Decile (or percentile)	Adjusted family income (1980 dollars)
	Using progressive assumptions	Using regressive assumptions
First	0	0
Second	7,300	7,400
Third	11,750	12,000
Fourth	16,533	16,850
Fifth	21,200	21,655
Sixth	26,100	26,650
Seventh	31,100	31,750
Eighth	36,850	37,650
Ninth	44,850	45,700
Tenth	60,000	60,900
Top 5 percent	80,000	80,500
Top 1 percent	175,000	175,000

Notes

• The lower limit of the first decile is actually negative.
• Reference [3] provides this data for 1980 only.

Data source

The data for Table 2 were taken from Table 4-5 of [3].

Footnotes

References

[1]	Julie-Anne Cronin, U.S. Treasury Distributional Analysis Methodology, Office of Tax Analysis, OTA Paper 85 (September 1999)
[2]	Joseph A. Pechman and Benjamin A. Okner, Who Bears the Tax Burden? (1974)
[3]	Joseph A. Pechman, Who Paid the Taxes: 1966--1985? (1985)