INDIVIDUAL INCOME TAXATION SINCE 1948

National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 INDIVIDUAL INCOME TAXATION JON BAKIJA* AND EUGENE ABSTRACT Still the largest and most important source of government revenues in the United States, the individual income tax has been altered significantly over time by legislation, inflation, the maturation of retirement systems, and other factors. This article provides an historical analysis of many aspects of this tax over the postwar era: revenues collected, the size of the tax base and the role of exclusions, deductions, exemptions and credits in defining that base, tax-exempt levels of income, and the overall progressivity of the rate structure. Many postwar trends are found to halt or reverse themselves in the 1980s. ERHAPS no tax receives as much atP tention from both taxpayers and legislators as the individual income tax. For several decades, the federal individual income tax has been the largest source of federal revenues, while state individual income taxes have grown rapidly in importance. Partly because taxpayers file an individual income tax return at the end of the year, they appear to be more aware of this burden than any other. As one consequence, the federal individual income tax trades places often with the property tax for a position as the most unpopular.' Legislators have found it almost impossible not to tinker constantly with this important revenue source and the "tax expenditures" and incentives hidden within its framework.' Since the mid1970s, few years have passed without the enactment of one or more major bills that contained changes in individual income taxes. On occasion, individual income taxes have dominated the domestic agenda. The largest component of the precedent-setting Kennedy round of tax reductions was the cut in individual income taxes enacted in 1964, which was sold largely as a Keynesian stimulus to demand. The in*The Urban Institute@ Washington, DC 20037. 451 SINCE 1948** STEUERLE* dividual rate cuts in the Economic Recovery Tax Act of 1981 (sold mainly as a supply-side stimulus) and the individual rate cuts and the base changes in the Tax Reform Act of 1986 (promoted as tax reform) each involved shifts of hundreds of billions of dollars annually and made most other domestic enactments pale in comparison. Legislated changes are only part of the story. The tax system interacts in important ways with economic forces and taxpayer behavior. Inflation and real economic growth historically have exerted a strong influence on both the marginal and average income tax rates faced by taxpayers. Shifts in the distribution of labor compensation between taxable and nontaxable sources, along with changes in the allocation of expenditures among various excludable, deductible, and taxable items, not only affect the breadth of the tax base but are themselves influenced by incentives created through the tax code. Interest rates, the performance of the stock market, demographic trends, and the maturation of social institutions such as Social Security and private pensions also have a major impact on the income tax system. This paper examines post-World War 11 changes in the burden, base, and rate structure of the federal individual income tax, in the context of long-term historical trends, its role relative to other taxes, and its interaction with economic and behavioral forces.' Special focus here is given to 4 recent changes. Changes in the Tax Burden and the Role of the Individual Income Tax Federal individual income tax receipts have remained relatively steady as a percentage of personal income since the early 1950s, with a few temporary spikes due to war or high rates of inflation (see Figure 1 or, for more detail, Appendix Table A. 1).5 This effective rate shrank moder- National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 NATIONAL TAX JOURNAL 452 [Vol. XLIV FIGURE 1 TAXES AS A PERCENTAGE OF PERSONAL 35 - INCOME Total Federal, State & Local Taxes -35 30- -30 25- -25 20- -20 15 - 15 10- 10 5 - o-i 1948 F7 -5 0 1954 1960 Fed. Individual Income Tax Odier F--]Federal 1966 M 1972 Social Security Tax Taxes ately just after World War II, bottoming out at 7.5 percent of personal income in 1949, but still remained well above prewar levels. The rate rebounded quickly to 11.0 percent by 1952, in response to the Korean War. This marked the beginning of a long period of relative stability in the portion of personal income consumed by the federal individual income tax. Between 1952 and 1990, receipts remained in a fairly narrow range between 9.0 and M 1978 1984 1990 Corporate POIFed. Profits Tax State &Local Taxes 11.8 percent of personal income; the mean during this period was 10.2 percent, and the standard deviation was only 0.6 percent. From 1954 to 1963, federal individual income taxes generally hovered in the vicinity of 10 percent of personal income. The Kennedy tax cuts resulted in a dip to 9.0 percent in 1964. A temporary spike was caused by the Vietnam War and a related surtax, pushing receipts to an all-time high National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME TAXATION of 11.8 percent of personal income in 1969. After gradually declining again to 9.2 percent by 1975, income tax receipts entered an unusual period of rapid peacetime growth and climbed to 11.6 percent of personal income by 1981. This increase occurred largely because inflation and real wage growth were pushing taxpayers into higher tax rate brackets, a phenomenon popularly known as "bracket creep." Bracket creep, which had exerted a small degree of upward pressure on effective income tax rates in the past, was unusually powerful during this period because of extremely high inflation rates; as measured by the implicit price deflator for gross national product, inflation averaged 8.0 percent annually between 1975 and 1981, well above the average of 3.5 percent between 1948 and 1975.r' As in earlier periods, some modest tax cuts were enacted, but they were insufricient to offset the effects of soaring inflation during the late 1970s. The Economic Recovery Tax Act of 1981 instituted a 23 percent across-the-board cut in marginal rates, phased in gradually between 1981 and 1984 .7 It also in dexed brackets, personal exemptions, and standard deductions for inflation beginning in 1985. Despite some persisting inflationary bracket creep, federal income tax receipts had declined to 9.8 percent of personal income by 1984, a level typical of most peacetime periods since World War ii. Over the rest of the decade, the tax code continued to change dramatically, but individual income tax receipts exhibited little variation, rising slightly and then oscillating in a narrow range between 10.0 percent and 10.5 percent of personal income. While some upward pressure was exerted by congressional deficit-reduction efforts and a small degree of bracket creep due to real wage growth, this was largely offset by the decision in the 1986 Tax Reform Act to reduce modestly individual income tax receipts in exchange for slightly higher corporate receipts. Sharp cuts in marginal individual rates in the 1986 Act had little effect on receipt levels, however, as they were balanced mostly by base-broadening measures. After all the changes in the 1980s, fed- 453 eral individual income tax receipts stood at a level that was average by historical standards; they absorbed 10.3 percent of personal income in 1990, which was roughly equal to the mean over the preceding 40 years. Compared to the relative peak reached in 1981, on the other hand, the 1990 ratio was lower by 1.3 percent of personal income. Revenues from other federal taxes have changed more dramatically relative to personal income than those Provided by the federal individual income tax over most of the postwar era. Social Security payroll taxes increased more than Sevenfold as a percentage of personal income between 1948 and 1990, from 1.1 percent to 7.9 percent. Federal corporate profts tax receipts declined steadily from a peak of 8.5 percent of personal income in 1951 to a postwar low of 1.8 percent in the recession year of 1982, and, despite Corporate tax increases in the Tax Reform Act of 1986, were only 2.3 percent of personal income in 1990. Other federal taxes chiefly excises, also declined precipitousl' from 4.4 percent of personal inco in e in 1948 to 1.8 percent in 1979, rose to 2.5 percent in 1981 mainly because of a ternporary windfall profits tax on oil, and then fell back to 1.6 percent by the late 19808. State and local tax receipts grew strongly from a low of 7.2 percent of personal income in 1948 to a peak of 12.4 percent in 1972, and then remained near 12.0 percent until the late 1970s. A nationwide revolt against property taxes helped reduce them to 10.8 percent of per. sonal income by 1981. They regained some ground over the rest of the decade, settling at 11.4 percent of personal income by 1990. Considered together, total federal, state, and local tax receipts display a fair degree of constancy over the period since the Korean War, and particularly during the last two decades. Since 1970, they have hovered in a narrow range between 32.5 and 34.4 percent of personal income. Eve,, many legislative changes and two tax revolts-against the property tax in the late 1970s and against the federal income tax in the early 1980s-had only a modest and transient net effect on the overall tax National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 454 NATIONAL TAX JOURNAL burden. In 1990, total taxes absorbed 33.6 percent of personal income. This was slightly higher than the average of 32.8 percent since 1952, and only 0.6 percent lower than in 1981. Often one tax decrease was offset by a tax increase elsewhere. For example, between 1981 and 1990 Social Security tax receipts rose by 1.2 percent of personal income, almost exactly as much as federal individual income tax receipts declined. Perhaps the most important change in individual income tax receipts was one that received only minimal attention in the revolts and debates of the postwar era. State and local individual income taxes rose fairly steadily from 0.3 percent of personal income in 1948 to about 2.3 percent in 1990. The share of total state and local tax receipts contributed by income taxes rose from 4.0 percent to 20.1 percent over this period. Some state income tax reform followed upon federal income tax reform in the late 1980s and contributed to a levelling out of effective state income tax rates.8 Nonetheless, the rise by then had been quite significant. Largely because of the growth in state and local income taxes, the individual income tax has recently come to play a somewhat greater role in overall government revenue-raising than was characteristic of the past (see Figure 2). The federal individual income tax has accounted INDIVIDUAL INCOME [Vol. XLIV for a little less than a third of total federal, state, and local tax receipts over most of the period since the early 1950S. Taken together, individual income taxes at all levels of government reached an all-time peak of 40.0 percent of total tax receipts in 1982. Despite the significant federal cuts enacted in 1981, they remained at 37.6 percent of total receipts by 1990, which was lower than at the beginning of the 1980s but still higher than in any year between 1948 and 1978. The Tax Base The federal income tax base is defined here to be that portion of personal income subject to federal income tax at a positive rate. A large share of personal income (historically, the majority) is left out of the tax base due to exemptions, exclusions, deductions, credits, and failure of some taxpayers to report income and, in some cases, to file a return. The amounts and kinds of income excused from taxation can have important economic and distributional effects, both positive and negative. Exclusions, deductions, and credits can distort economic decision-making by creating differential tax rates for different types of income and expenditure. They often amount to transfers or subsidies that have the same effect as direct government expenditures. By narrowing the tax FIGURE 2 TAXES AS A PERCENTAGE OF TOTAL FEDERAL, STATE 50- & LOCAL TAXES 50 45- -45 Combined FederaL State, & Imal Individual Income Taxes 40- -40 35 - -35 30- 30 Federal Individual Income Tax 25201949 1954 1960 1966 25 1972 1978 1984 -20 1990 National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME TAXATION base, they require higher marginal and average rates on taxable income to raise a given level of revenues. Higher marginal rates in turn adversely affect marginal decisions to work, save, or investand then feed back to increase the value of and distortions caused by many exclusions and deductions. Tax preferences that apply unevenly to taxpayers with equal economic resources often conflict with the principle of horizontal equity, i.e., "equal treatment of equals." By the same token, reductions in the tax base may serve useful social purposes or appropriately adjust taxable income according to ability to pay. For example, personal exemptions and the standard deduction add significantly to the progressivity and simplicity of the tax system by exempting many low income persons from income taxation. The postwar era has witnessed only moderate changes in the net tax base, but dramatic changes in the various exemptions, deductions, exclusions, and credits that determine what types of income will be taxed and what types of consumption will be preferred. During the first decades after World War II, several persistent trends developed. The portion of personal income excluded from Adjusted Gross Income (AGI) steadily increased, as did the value of itemized deductions. Meanwhile, the value of personal exemptions eroded dramatically because of a combination of inflation, income growth, and legislative inattention. The 1980s were something of a watershed for the federal income tax base, as many of these postwar trends were temporarily, perhaps permanently, halted or reversed. Net Exclusions from Adjusted Gross Income A significant share of personal income is not required to be reported as adjusted gross income (AGI) on tax returns. That is, it is "excluded" from even being counted as income by individuals. The largest sources of exclusions are nontaxable government transfers and nontaxable labor related income-chiefly pensions and health insurance, both public and private. In calculating the net value of ex- 455 clusions, care must be taken to avoid double counting. For example, if contributions to pension plans and earnings on plans are treated as income, then pension disbursements are nothing more than returns of capital derived from income already counted. If the former is not taxed, but the latter sometimes is, then the net value of the exclusion equals excluded contributions and earnings less taxed distributions.9 Between the end of World War 11 and the early 1980s, net exclusions from AGI grew tremendously, to nearly a quarter of personal income (see Figure 3 and, for greater detail, Appendix Table A.2). Then the confluence of several legislative and economic factors significantly reversed this trend during the mid-to-late 1980S. Total net exclusions fell dramatically from a peak of 23.3 percent of personal income in 1983 to 15.2 percent in 1988. Net nontaxable public transfers provided one major source of growth in exclusions from AGI. As a percentage of personal income, they more than doubled between 1948 and 1983, rising from 4.7 percent to 9.7 percent (see Table 1). The growth itself was due mainly to increases in retirement transfers, primarily Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare, which together jumped from negative 0.1 percent of personal income to positive 4.4 percent over this period. "Other nontaxable transfers," which include unemployment compensation, veterans' benefits, food stamps, and other welfare benefits, were somewhat more stable, ranging narrowly between 3.5 percent and 4.3 percent from 1951 to 1969, rising during the early 1970s to a peak of 7.0 percent in 1975, and then settling into the mid-5 percent range until the early 1980s. During the growth period, food stamps and other welfare payments were increasing, while veterans' benefits were declining. After 1983, exclusions due to nontaxable government transfers began to shrink rapidly, dropping by about a third to 6.4 percent of personal income by 1988. One reason for this decline was an unprecedented decrease in net nontaxable OASDI and Railroad Retirement transfers, which National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 [Vol. XLIV NATIONAL TAX JOURNAL 456 FROM PERSONAL FIGURE 3 INCOME TO THE TAX BASE Percent of Personal Income 100 100 90- -90 80- 80 The Tax Base 70- -70 Income Offset by Credits 60 v -60 50 50 ons Iteniizations 40 40 30 30 Smdard Deductions Nontaxable & Nonreported AGI 20 20 10 10 Net 0 0 1948 1956 1964 fell from a peak of 3.2 percent of personal income in 1983 to 1.7 percent in 1988. Table 2 shows that while taxable employee OASDI contributions continued to grow strongly during the 1980s, total benefit payments grew more slowly than in the past and actually declined modestly relative to personal income in the latter half of the decade. The Social Security amendments in 1977 and 1983 were partly responsible, by requiring a buildup of surplus in the Social Security trust ftmds and a slight paring of benefits. Meanwhile, the percentage of the population that was eligible for benefits temporarily stabi- 1972 1980 1988 lized.10 In addition, the 1983 amendments subjected a portion of OASDI benefits to taxation for the first time. Up to one-half of benefits were made taxable for those with combined AGI, tax-free interest income, and benefits above certain thresholds. This had only a small effect initially, but since the thresholds are not indexed for inflation, a greater share of benefits would become taxable over time. Also contributing to the decline in net nontaxable government transfers was a drop in "other nontaxable transfers" from 5.3 percent to 3.6 percent of personal income between 1983 and 1988. Unemploy- National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 INDIVIDUAL No. 4, Part 21 PERSONAL INCOME TAXATION TABLE 1 INCOME EXCLUDED FROM ADJUSTED GROSS INCOME (As a Percentage ofpersonal Income) Net Nontaxable Labor-Rebftd Inconic NetNonMable Goveninvnt Tnmf@n Ym OASDI& b("Railroad cam Reumt. 457 other Total PwAon & Profit Sharing lmd, IUS. wmce Other Total Other Statutory Exclusiom Other Diffettims (Net) Total Exdusions from AGI 1948 -0.1 0.0 4.8 4.7 0.5 0.2 0.5 1.2 1.6 4.2 11.8 1960 1.3 0.0 3.9 5.2 1.1 0.8 0.7 2.6 1.3 4.8 13.9 1970 1.8 0.4 4.7 6.9 1.3 1.5 0.8 3.6 1.9 3.7 16.1 1975 2.7 0,6 7.0 10.3 1.8 1.9 0.9 4.6 1.9 3.4 20.2 1980 1981 1982 1983 1984 2.8 2.9 3.2 3.2 2.6 0.9 0.9 1.1 1.2 1.1 5.7 5.5 5.3 5.3 4.3 9.4 9.3 9.6 9.7 7.9 2.4 2.3 2.2 1.9 1.6 2.6 2.7 3.0 3.1 3.1 1.0 0.9 0.9 0.9 0.8 6.0 6.0 6.1 5.9 5.6 1.8 2.2 3.3 3,8 4.0 2.7 3.6 3.9 4.0 5.1 20.0 21.1 2Z9 23.3 22.6 1985 1986 1987 1988 2.3 2.2 2.0 1.7 1.2 1.2 1.2 1.1 4.1 4.1 3.7 3.6 7.6 7.4 6.9 6.4 1.0 0.4 -0.1 -0.5 3.0 3.1 3.1 3.2 0.9 0.9 1.0 1.0 4.9 4.4 4.0 3.8 3.9 4.1 1.7 1.6 5.3 4.1 5.0 3.4 21.7 19.9 17.6 15.2 See Appendix Table A.2 for dewh and notes. ment rates fell during recovery from the 1981-82 recession, while unemployment benefits moved from nontaxability to full taxability in three enactments between 1979 and 1987. Benefit levels also fell in a number of welfare Programs. Meanwhile, net Medicare transfers stabilized a bit, although the effect may only be transitory. The second major component in the postwar expansion of net exclusions was the growth in nontaxable labor compensation such as pensions, health insurnace, and life insurance. While pension benefits are usually taxable, employer contributions for various fringe benefits are not taxable, nor are interest and other income built up within pension funds. Net exclusions due to all nontaxable forms of labor compensation grew from 1.2 percent of personal income in 1948 to an all-time high of 6.1 percent in 1982 (see Table 1.) Employer contributions to group health insurance were the largest component of this growth, increasing from 0.2 percent to 3.0 percent of personal income over this period. Net pension and profit sharing exclusions grew from 0.5 percent in 1948 to a peak of 2.4 percent of personal income in 1980, while other forms of nontaxable labor compensation (mainly life insurance) also grew from 0.5 percent to 1.0 percent during those years. Part of the growth, of course, was due to the tax incentives themselves. During the mid-1980s, net nontaxable labor-related income abruptly ended its long upward trend and began to decline rapidly, falling from 6.1 percent to 3.8 percent of personal income between 1982 and 1988. The turnaround was caused al. most entirely by a dramatic change in net nontaxable pension and profit sharing income, which fell from a peak of 2.4 percent of personal income in 1980 to neptive 0.5 percent by 1988 (see Table 2). For National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 NATIONAL TAX JOURNAL 458 [Vol. XLIV TABLE2 NET NONTAXABLE RETIREMENT AND DISABILITY TRANSFERS AND PENSION INCOME (As a Percentage of Personal Income) - OASDI and Rglroad Year Benc@fiis Redremnt Personal Taxable ContriBone@- butions fit, B c Private Pensions Not Exclusions A-B-C mW Profit Shafiq Ermloyer Contrib. utions to Peadons InVuted Intmst on Pensions Tviable Private Pension D B p Net Exclusions Incom D+B-P 1948 0.4 0.0 0.4 0.0 0.6 0.1 0.1 0.5 1960 2.9 0.0 1.5 1.4 1.2 0.3 0.3 1.1 1970 4.0 0.0 2.1 1.8 1.6 0.5 0.8 1.3 1975 5.3 0.0 2.5 2.7 2.1 0.7 1.0 1.8 1980 1981 1982 1983 1984 5.5 5.7 6.0 6.0 5.8 0.0 0.0 0.0 0.0 0.3 2.7 2.8 2.8 2.8 2.8 2.8 2.9 3.2 3.2 2.6 2.4 2.2 2.1 2.0 1.8 1.3 1.5 1.6 1.6 1.7 1.3 1.4 1.6 1.7 1.9 2.4 2.3 2.2 1.9 1.6 1985 1986 1987 1988 5.7 5.7 5.5 5.4 0.4 0.4 0.4 0.4 3.0 3.1 3.1 3.2 2.3 2.2 2.0 1.8 1.6 1.5 1.4 1.2 1.6 1.5 1.5 1.5 2.2 2.7 2.9 3.1 1.0 0.4 -0.1 -0.5 See Appendix Table A.2 for doWU and notm. the first time, taxable pension benefits paid to current retirees exceeded nontaxable employer contributions plus imputed net interest of pension funds. The maturation of the pension system and a stock market boom explain this shift. Many new pension plans were adopted and grew in the first decades following the Depression, particularly during World War II, when wage and price controls made fringe benefits the only possible way of raising employee compensation." More complete funding of future pension obligations began to occur in the 1960s and then was accelerated through legal requirements for funding enacted in The Employee Retirement Income Security Act (ERISA) of 1974. By the early 1980s, many pension plans had matured in two different ways: people covered by the plans began to retire in greater numbers, and complete funding was finally achieved by most plans. Increased numbers of beneficiaries, combined with higher benefit levels and income growth among the elderly (which meant that many more elderly were now taxable) led to a rapid increase in taxable pension disbursements during the 1980s. Meanwhile, the stock market surged and interest rates rose, so that by the mid-1980s many pension plans had more than enough fimds to cover future benefits (the plans were "overfunde&'). Many employers were thus temporarily absolved from the need to make significant current contributions, and aggregate pension contribution levels dropped accordingly. Legislative limits on the maximum value of individual pensions, enacted under ERISA and during the early 1980s, also helped constrain National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME pension contribution levels for high-income individuals. The category "other statutory exclusions" includes tax-exempt interest income from sources such as municipal bonds and Individual Retirement Accounts (IRAs) and a variety of items subtracted from gross income to calculate AGI, such as moving expenses. As a percentage of personal income, this category exhibited a mixed trend between the early 1950s and 1980s. It rose rapidly following the Economic Recovery Tax Act of 1981, then fell just as dramatically after the Tax Reform Act of 1986. This cyclical effect in the 1980s was due mainly to the expansion, then contraction, of tax preferences for IRAs, certain interest-bearing deposits, and state and local government sales of private-purpose tax-exempt bonds. A final category of exclusions from AGI, listed as "other differences," contains a potpourri of items and therefore should be interpreted with caution. It includes several miscellaneous exclusions arising from the nontaxation of such forms of income as imputed rent on an owner-occupied home. Moreover, it subtracts a variety of items which are treated as adjusted gross income but not as personal income, such as realized capital gains. Deductions, Exemptions, Credits and Other Nontaxable Adjusted Gross Income Taxpayers not only exclude certain income from being counted in adjusted gross income; they also subtract a number of items from AGI before determining the amount of income actually subject to taxation at a positive rate. Many itemize certain deductions such as medical expenses and charitable contributions. Some take a standard deduction in lieu of itemization. Practically all taxpayers declare personal exemptions for themselves and dependents, while credits serve further to reduce taxes paid. Some individuals are not taxable on their income because of exemptions and other deductions, while others simply do not report their income. Itemized deductions grew robustly from 3.3 percent of personal income in 1948 to TAXATION 459 10.1 percent in 1970 (Table 3 and Appendix Table A.3). This growth resulted partly from an increase in the amount of expenses itemized. For instance, state and local taxes increased relative to income, as did interest rates and household borrowing. Hence deductions for those expenses rose. Also contributing to this growth was a decline in the relative importance of a deduction that could be taken in lieu of itemizing expenses. This deduction had several forms and methods of calculation over the years, but has usually been known by its current title, the "standard deduction."'2 It declined fairly steadily from 4.5 percent of personal income in 1948 to 2.2 percent in 1970. During the 1970s, the standard deduction (also known as the "zero bracket amount" from 1977 to 1986) became a favorite tool of policy makers and was increased significantly, peaking at 7.0 percent of personal income in 1977. Itemized deductions, however, dropped by only a fraction of the increase in the standard deduction over this period, to 8.2 percent of personal income in 1977." Between 1977 and 1986, itemized deductions grew once again, reaching an all-time high of 12.0 percent of personal income. Some of this growth can be attributed to erosion of the zero bracket amount, which fell to 3.7 percent of personal income by 1986. Following the Tax Reform Act of 1986, itemized deductions shrank by about a quarter, dropping to 9.2 percent of personal income by 1988. Meanwhile the zero bracket amount, which had been indexed for inflation beginning in 1984, was converted once again to a standard deduction and raised substantially back to 5.3 percent of personal income by 1988. Since a portion of the decline in itemizations was due to restoration of the value of the standard deduction, these data make clear that tax reform only had a moderate effect on itemized deductions. Among itemizible expenses, only deductions for consumer interest and state and local sales taxes were totally eliminated by that Act, although others were pared. The most significant change in the tax base over the postwar era was never legislated: the personal exemption fell from National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 NATIONAL 460 TAX JOURNAL [Vol. XLIV TABLE 3 DEDUCTIONS, EXEMPTIONS, CREDITS AND OTHER NONTAXABLE AGI (As a Percentage of Personal Income) Year lwmized Deductions on Taxable Returns Standard Deductions or Zme Bracket Amounts for Non-lfznizers on Taxable Returns Exemptions on Taxable Rcu= AGI of Nonmable Individuab Nonrepmled AGI, & ReconcMa6on Incon-c Offset by Credits on Taxable Re-tmw Total Nontaxable AGI The Tax Base 1948 3.3 4.5 27.2 17.5 0.3 52.8 35.5 1960 8.0 2.9 19.8 13.5 0.5 44.7 41.4 1969 1970 9.9 10.1 2.3 2.2 13.8 12.9 9.7 10.6 0.5 0.2 36.1 36.0 49.8 49.0 1975 1976 1977 1978 1979 8.7 8.7 8.2 8.6 8.7 5.3 5.6 7.0 6.4 6.3 9.4 8.8 7.8 7.3 8.9 11.4 11.1 12.4 12.4 12.0 3.1 4.7 4.5 4.9 1.6 3&0 38.9 39.9 39.6 37.3 41.8 41.5 40.8 41.4 43.7 1980 1981 1982 1983 1984 9.2 9.6 10.0 10.2 10.9 5.6 5.0 4.6 4.3 3.9 8.2 7.6 7.2 6.8 6.5 11.1 10.6 9.5 9.8 9.9 1.6 2.7 1.7 1.7 1.8 35.6 35.5 33.0 32.9 33.0 44.5 43.4 44.2 43.8 44.5 1985 1986 1987 1988 11.4 12.0 9.8 9.2 3.8 3.7 4.3 5.3 6.3 6.2 8.9 8.5 10.4 11.1 10.6 11.3 1.8 1.2 1.0 1.0 33.7 34.2 34.5 35.2 44.5 45.9 47.9 49.7 See Appendix Table A.3 for details and notes. * CipAt data not available for 1948; income offset assunwd here tD be the sanr. as 1954. 27.2 percent of personal income in 1948 to a low of 6.2 percent in 1986, before being restored moderately in the Tax Reform Act of 1986 to 8.5 percent in 1988. The personal exemption had been allowed to remain at a constant $600 from 1948 to 1969, during which time its value relative to personal income eroded dramatically due to inflation and real wage growth. Ad hoe increases were finally enacted in 197072 and 1979, and inflation indexing was provided in 1981 for years after 1984, but these had only a modest impact. A somewhat more substantial increase was established in the Tax Reform Act of 1986, raising the nominal level of the exemp- tion to $2,000 by 1989. Another significant set of components of the gap between adjusted gross income and taxable income includes the AGI of nontaxable individuals, nonreported income on taxable returns, and a residual that reconciles the difference between the BEA and IRS measures of AGI." It is not possible to measure these items separately because no records are kept on the AGI of individuals who do not file tax forms, and illegal underreporting and legal nonreporting by nonfilers are difficult to disentangle. Nonetheless, the combined measure decreased sharply from 17.5 percent of personal income in 1948 to 9.7 National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME TAXATION percent in 1969 mainly because decreases in the personal exemption and the standard deduction meant that there were fewer nontaxable individuals. Subsequent cycles seem to move in line with cycles of the personal exemption and standard deduction, which together influence what percent of the population is taxable. A final way to reduce individual income tax liability is through the use of credits. Here, we convert credits to a form of tax base reduction by calculating the amount of taxable income that would have to be offset in order to yield a similar amount of reduction in tax liability. For I inst ance, someone with $150 of credits and an initial tax rate of 15 percent would be treated as if their taxable income were reduced by $1,000, if the tax rate bracket was wide enough to use up all of the credits." Credits have traditionally played only a very small role in the tax system, never offsetting more than 0.8 percent of personal income on taxable returns before 1975. In that year, a general tax credit available to all taxpayers was introduced, helping personal income offset by credits to jump to 4.9 percent by 1978. The elimination of this general credit (actually, its conversion back to an increased personal exemption) caused a drop to 1.6 percent of personal income in 1979. Since then, the ratio has oscillated somewhat and was influenced by the growth in the tax shelter market and corollary use of the investment credit. This credit, along with a number of smaller ones, was eliminated after 1986. By 1988, credits offset only 1.0 percent of income on taxable returns. 16 Aggregate Change in the Tax Base After all exclusions, deductions, exemptions, credits, and other adjustments have been subtracted from personal income, we are left with the federal income tax base. No more than 50 percent of all personal income has ever been part of the tax base in the sense of being taxed at a positive rate. The average size of the tax base from 1948 to 1988 was 43.2 percent of personal income. By 1988, the federal individual 461 income tax base stood at almost one-half, or 49.7 percent, of personal income, which was roughly equal to the all-time high reached in 1969. More interesting than the overall trend has been the combination of factors which produced the movement (see Table 4). Between 1948 and 1986, the total amount of exclusions, deductions, and income offset by credits increased by a dramatic 17.0 percent of personal income. Nonetheless, the tax base still grew by 10.4 percent of personal income because of a decrease of 27.4 percent of personal income in the value of personal exemptions and the AGI of nontaxable individuals. 17 Between 1986 and 1988, the sign or direction of change in every single category affecting the tax base is the reverse of the 1948-86 trend, partly due to the maturation of private and public pension systems and the Tax Reform Act of 1986. Thus, personal exemptions and standard deductions increased relative to personal income, while exclusions and itemizations declined. Only the net direction stayed the same; the base still expanded. The reversals, however, are far from permanent. Absent legislation, both exemptions and standard deductions will erode with real income growth, while exclusions due to public and private pensions are subject to demographic changes and the vagaries of the stock market. Tax-Exempt Levels of Income The "tax-exempt threshold" is the maximum amount of adjusted gross income a typical, non-itemizing individual or family can receive without having to pay in. come tax. This threshold is generally determined by the combination of the standard deduction, the personal exemption, and any general tax credits, such as the one offered temporarily between 1975 and 1978. Figures 4 and 5 illustrate how the value of this tax-exempt threshold has changed over time for a single person and a family of four (two parents and two dependent children). For our purposes here, the earned income tax credit is not considered, although those interested in including its value as an offset to income taxes may refer to Appendix Table A.4. National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 462 NATIONAL TAX JOURNAL [Vol. XLIV TABLE 4 AGGREGATE CHANGE IN THE TAX BASE (As a Percentage of Personal Income) 1949-96 1986-M 194&89 +21.0 -2.2 +18.8 AGI of NonUmable ludividuah, Nmreported AGI and Reconciliation + 6A -0.2 +6.2 Net Exclusions fi=n AGI -8.2 +4.8 -3.4 I=dntions -8.7 +2.8 -5.9 StandardDeductions +0.8 -1.6 -0.7 Inconic Offset by Credits -0.9 +0.2 -0.7 +10.4 +3.8 +14.2 1 Changein TaxBaseDue toChangein: PersonalFxenlptions Net Change in the Tax Base.. See Appendix Tables A.2 mWA.3 for details and not=. A positive sign indicates an increase in the toL base due to a decrease in the item in quesfim and a negative sip indicates the opposite. * C@rAtdam not available for 1948; inconic offset assunra here to be the sam as 1954. Figure 4 shows changes in the value of the tax-exempt threshold relative to the official poverty line since 1948. The official poverty line varies according to family size, and is adjusted each year only by the percentage change in the consumer price index (CPI). In 1990, "poverty levels" were defined as $6,652 for a single person and $13,359 for a four-person family. Because the personal exemption and minimum standard deduction remained constant in nominal terms between 1948 and 1963, while the poverty line rose with inflation, the tax-exempt threshold for a family of four declined gradually from 109 percent to 85 percent of poverty, while for single persons the fall was from 55 percerit, to 4a@percent, WjWthe AwWaWpW of "official" poverty statistics in 1963 '18 Congress began occasionally to adjust taxexempt levels back up toward the poverty level, at least for joint retums with zero to two dependents. Through the 1960s and 1970s, the standard deduction was the primary vehicle used to achieve this end. For years after 1969, the standard deduction was raised for a single person to a level greater than half of that for a joint return. On several occasions it was raised for both single and joint returns. Between 1977 and 1985, tax-exempt thresholds underwent their greatest erosion relative to poverty levels, only to be raised once again in the Tax Reform Act of 1986. While tax-exempt thresholds have been restored to levels roughly approximating the poverty line, they shield a much' smaller portion of income from taxation than in the past. They require a larger share of the population to pay taxes, and they are less favorable to families with children. IFAW=@5iUu etpk &Oawges in the-yaue of the tax-exempt threshold per family member relative to per capita personal income over the postwar period. For a fourperson family, the threshold per family member declined from nearly half of per capita personal income in 1948 to less than National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL TAX-EXEMPT THRESHOLDS INCOME TAXATION FIGURE 4 AS A PERCENTAGE 463 OF THE OFFICIAL POVERTY 120% LINE 120% 100% .... ......... ...................... ... ... .... . .............. ........ 80% .................................... ................... 60% ..................................... ..................................... 40% lfill-ill 1948 1934 I--! 1960 1966 ,., li@il 1972 .. . .. . 60% ... 1978 1()n I I , , I i4O% l@84 140 FIGURE 5 TAX EXEMPT THRESHOLD PER FAMILY MEMBER AS A PERCENTAGE OF PER CAPITA PERSONAL INCOME SO% 50% 40% .... .................................. 30% ................... ..... . ...... ... ...... 20% ...................................... io%l ..... 1948 1 , .... 1954 --014 percent in 1986. ...................... 40% ..................... ............ ... 30% ...... ........ ................ 1 , , , I 1 1 1 , I I 1 1 , , , @, i ... 1960 1966 Family of Four Tax reform in 1986 about 19 percent, still considerably lower than it had been throughout most of the postwar period. In effect, while thresholds were adjusted to keep pace with inflation, they did not keep up with growth in real per capita personal income. As a result, many families raised this ratio to ..... 1972 1978 - @ , i .... 1984 ... 20% t 1 10% 1990 Single with less-thanaverage incomes were pushed into the tax system and bore large increases in marginal and average tax rates. The personal exemption, of course, is worth more the greater the number of exemptions that can be claimed. Henc6, the decline in the relative value of the per- National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 464 NATIONAL TAX JOURNAL sonal exemption would be felt most strongly by larger households, mainly households with children. Standard deduction increases were far from sufficient to offret the decline in the personal exemption and, moreover, the size of the standard deduction is adjusted only for the presence of a spouse, not dependents. As a consequence, the relative tax burden of households with dependents was to increase significantly throughout the postwar period. Increases in the personal exeniption in the Tax Reform Act of 1986 only partially offset this trend. For lowerincome households, however, the 1986 Act and the 1990 budget agreement also expanded the earned income tax credit, which is available only if there are dependents in the household.'9 Marginal Tax Rates The defining characteristic of a progressive income tax system is a series of graduated marginal rates. A taxpayer's marginal rate is the portion of his or her next dollar of income that is taken away by taxes. It is the marginal, not average, tax rate that is believed to influence individual decisions to work more or save additional dollars of income. Many changes in the tax code during the 1980s were motivated at least in part by the notion that extremely high marginal rates were seriously distorting the work and investrnent decisions of some taxpayers, thereby harming the natiows economic productivity. As a result of these legislated changes, the marginal rate structure of the federal income tax was altered significantly. Figures 6 and 7 provide historical comparisons of how marginal rates have changed o@er close to three decades. Figure 6 displays the percentage distribution of all tax returns, classified according to the marginal federal income tax rate, for the years 1961, 1979 and 1988 .20 In 1961, the federal income tax was essentially a flat tax for the vast majority of taxpayers. Approximately 20 percent of returns paid no tax, and another 70 percent of returns faced a marginal rate between 20 percent .and 22 percent. Despite a schedule with a top rate of 91 percent, fewer than 10 [Vol. XLIV percent of returns faced marginal rates higher than 22 percent, and less than 2 percent were subjected to rates higher than 30 percent. By 1979 the rate structure had become more progressive. As a result of across-theboard tax rate reductions in 1964, about one-third of all returns faced lower Marginal rates of federal income tax than in 1961. 21 Meanwhile, bracket creep due to inflation and real wage growth caused a much larger percentage of taxpayers to shift into the range of steeply graduated marginal rates. Almost all returns in the top half of the distribution in 1979 faced higher marginal rates than in 1961. This effect was most pronounced at the highest levels of income. A return at the 95th percentile in 1961 would be subject to a top marginal rate of 26 percent; by 1979, it would face a marginal rate of 38 percent. A principal focus of the 1980s was on marginal income tax rates. Marginal rates were reduced significantly by 1981 legislation, and then restructured and lowered still further by the 1986 Tax Reform Act. Base broadening and bracket creep managed to offset a portion of these cuts. By 1988 the shape of the marginal rate structure looked quite different. In 1979 there had been 29 different marginal rate brackets ranging from 14 percent to 70 percent. By 1988, there were only four brackets and three rates. The rate schedule was now composed of a 15 percent first bracket, a 28 percent second bracket, a 33 percent "bubble" on a narrow range of income, and finally a top 28 percent bracket for those at the highest income levels. 21 The marginal rate structure was to be altered by the 1990 budget agreement, but only slightly. A new top rate of 31 percent was created, the'%ubble" was modified and moved to a higher income range, and a limitation on the itemized deductions of high income taxpayers was introduced. As a result, certain high income taxpayers now faced one of a variety of effective marginal rates ranging between roughly 32 and 35 percent.23 In 1988, the income tax was once again essentially flat for the majority of taxpayers; slightly less than 20 percent of returns owed no tax, while 58 percent of re- National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL 465 INCOME TAXATION FIGURE 6 CUMULATIVE PERCENT OF RETURNS TAXED AT OR BELOW EACH MARGINAL RATE OF FEDERAL INDIVIDUAL INCOME TAX 60%+ 1961 m -1979 1989 50% - 40% - 33% "Bubbie n 30% T ......... ........... 70% 80% 2D% R t 10% OC/0 0% 10% 20% 30% 40% SM 60% Pacent of Tax RMm 90% 100% FIGURE 7 CUMULATIVE PERCENT OF PERSONAL INCOME TAXED AT OR BELOW EACH MARGINAL RATE OF FEDERAL INDIVIDUAL INCOME TAX 60%+ ..... m 1961 -1979 1988 50% j I 40% n 33% -Bubbie' r 30% T a ................ 2D% - f r . .......... R 10% - 0% 0% 10% 20% 30% 50% 60% Pftvau OfPasma 40% bm= 70% 80% 90% 100% National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 466 NATIONAL TAX JOURNAL turns fell into a single 15 percent rate bracket. Less than one-quarter of returns, therefore, faced any positive rate other than 15 percent. Moreover, this remainder of returns faced a rate that ranged narrowly between 28 and 33 percent. As is apparent from Figure 6, marginal federal income tax rates in 1988 were lower than in 1979 for almost all taxpayers. The greatest reduction in marginal rates occurred for returns in the top decile of the distribution and for those in the 50th to 75th percentiles. Marginal rates for returns at the very top of the scale were reduced to levels not seen since before World War 11. While many low- and moderate-income workers received some reductions in marginal rates of federal individual income tax, it is important to note that marginal rates for total federal, state, and local direct taxes on earnings remained at or near historical peaks for these taxpayers, largely because of increases in Social Security taxes and state and local income taxes.21 Between 1979 and 1988, the combined employer and employee rates of the Social Security payroll tax increased by 2.76 percent, 25 while income tax rates in many states increased by 1 or 2 percentage points. These increases offset much of the reduction in the marginal rate of federal individual income tax for the lower half of taxable returns shown in Figure 6. Moreover, while almost all low-income persons benefitted from increases in personal exemptions and standard deductions in the 1986 tax reform, many did not witness a drop in marginal rates from that act, as bottom brackets ranging from 11 to 14 percent were eliminated and replaced by a 15 percent bracket. An alternative perspective is presented in Figure 7, which demonstrates the cumulative percentage of personal income taxed at or below each successive marginal rate. Figure 7 provides a remarkably useful teaching vehicle for understanding the individual income tax. The width along the x-axis indicates not only how much income is subject to tax at different rates, but also how much is excused from taxation because of exclusions, exemptions, and so forth. The y-axis [Vol. XLIV shows the marginal rater, at which this income is taxed. In addition, the area under the curve is exactly equal to the average percent of income collected in tax, while the remaining area shows after-tax income as a percent of personal income. Excluding behavioral adjustments, one can quickly discern the ultimate revenue effects of changes in tax rates. For instance, the drop in rates formerly above 50 percent took up little of the area under the curve and, hence, cost few revenues. On the other hand, sufficient base broadening (at all rates) can increase the area under the curve or average tax rates significantly. Conclusion The federal individual income tax has been altered significantly over time due to a variety of legislative, economic, and behavioral changes. Despite a flurry of legislation, especially in the 1980s, the burden of the federal individual income tax has remained in a fairly narrow range between 9.0 percent and 11.8 percent of personal income since the early 1950s. The Reagan era tax changes left receipts near the postwar average at 10.3 percent in 1990. The total federal, state, and local tax burden was nearly the same percentage of personal income at the end of the decade as at its beginning, as decreases in the federal income tax were offset by increases in other taxes, particularly the Social Security tax. Long-term historical trends in the growth of most categories of income excused from the individual income tax base were reversed, at least temporarily, during the middle and latter part of the decade. Net exclusions from AGI, which had risen dramatically relative to personal income between 1948 and the early 1980s, experienced an unprecedented plunge, falling by about a third relative to personal income. This was due largely to the maturation of public and private pension and Social Security systems. Itemized deductions, which had tripled relative to personal income between 1948 and 1981, also rose rapidly during the early Reagan years, reaching a historical zenith in 1986. National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME TAXATION TRA (1986) cut them back to 1980 levels as a share of personal income. Tax reform also reversed, at least temporarily, trends toward an ever-decreasing relative value of the personal exemption and continual increase in the share of the total tax burden paid by households with dependents. The overall federal income tax base, despite a great expansion of exclusions and itemized deductions, actually broadened, rather than narrowed, between World War ll and the late 1960s, from about 36 percent to nearly 50 percent of persona income. This was mainly due to the erosion of the personal exemption. After declining somewhat during the 1970s, the tax base rebounded and hit 49.7 percent o personal income in 1988. Personal exemptions and standard deductions usually determine the maximum amount of adjusted gross income that can be received tax-free. Tax-exempt thresholds for a family of four hovered fairly close to the "official" inflation-adjusted poverty line over much of the postwar period, as did those for single persons beginning in the mid-1960s. They were allowed to erode well below these poverty thresholds during the late 1970s and early 1980s, but were restored once again to near the poverty line by TRA (1986). Since personal income has grown much faster than poverty levels, however, tax-exempt thresholds have fallen dramatically as a share of personal income since 1948. Reforms in 1986 made up for only a small portion of this long-term decline. The marginal rate structure of the federal income tax was influenced significantly by both bracket creep and legislation. Cuts in the top rate of tax from 91 percent in the early 1960s to approximately one-third that level in the late 1980s had only modest effects on revenues because of the small numbers of taxpayers affected and, later, because of the offsetting effects of base broadening. For , a broad spectrum of taxpayers, margina federal individual income tax rates are currently lower than they have been for decades, although reductions at the top of the income distribution have been far more ie substantial than those elsewhere. many low- and moderate-income taxpay- 467 ers have seen their marginal rates of federal individual income tax drop slightly, these decreases have been offset by increases in marginal rates of Social Security taxes and state income taxes. By 1990, many faced marginal rates that were at an all-time high. ENDNOTES **A substantial debt is owed to members of the Statistics of Income Division of the Internal Revenue Serice and to those at the Bureau of Economic Analysis, especially Thae Park. Much of this article would not be possible without data that they helped develop. Yolanda Henderson and Natalie Inman Shapiro deserve special thanks for discussions and encouragement; we are particularly grateful to them and to anonymous referees of this Journal. Financial supPort fro- the John D. and Catherine T. MacArthur Foundation is gratefully acknowledged. Opinions expressed are those of the authors and should not be attributed to the Urban Institute or its sponsors. 'In a poll conducted annually since 1972, the fecleral individual income tax has been cited as the most unfair tax by the largest percentage of respondents in the majority of years, and was a close second to the property tax in other years. See ACIR (1989, Table 7). 2 "Tax expenditures" are preferences written into the tax code for certain categories of expenditure and income such as mortgage interest payments and emplo;@r provided health insurance. The value of federal tax expenditures is estimated every year in the Budget of the UnitedStates Government(see,for example, OMB 1991, Section XI). Neubig and Joulfaian (1988) have estimated that the total value of tax expenditures in the federal individual and corporate income taxes (excluding interactions) was equivalent to $315 billion in outlays in 1988, and would have been $509 billion without the effects of the 1986 Tax Reform Act. SThis article updates and amends Steuerle and Hartzmark (1981). For further discussion of how that article led to concern for taxation of the poor and taxation of the family in the Tax Reform Act of 1986, see Steuerle (1992). 4Historicaldata on various aspects of the tax sYstem are not only updated to 1988 (or 1990, where possible), but also revised back to 1948 to reflect the 1986 Bureau of Economic Analysis benchmark revisions in er ' ng data. @@Effectivetax rates, defined in this article as tax receipts as a percentage of personal income, can be measured in several ways. Tax burdens could alternatively be based upon liabilities, while income could be approximated by any one of several other measure" such as national income or GNP. in this article, tax burdens are presented on a receipts basis because "liabilities" are not measured for some of the taxes under consideration here. Since later parts of this study use personal income as the measure of the income of individuals, consistency dictated its use in discussion of the tax burden also. Some taxes, such as excise taxes National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 468 NATIONAL TAX JOURNAL or the corporate profits tax, are usually measured as a percent of national income (among several reasons, BEA counts corporate dividends, but not profits, as part of personal income). Nonetheless, the trends presented in Figures 1 and 2 would vary little if alternative measures of tax burdens or income were chosen. 6TJ.8. Department of Conunerce National Inconie and Product Accounts (1986, Table 7. 1). As an alternative measure of inflation, the consumer price index for all urban consumers rose by an average of 9.1 percent per year between 1975 and 1981, as opposed to 3.0 percent between 1948 and 1975. (U.S. Department of Labor, 1989, Table 113). 7The 23 percent rate cut derives fi-om successive cuts of 5 percent, 10 percent, and 10 percent, so that taxes were cut by I - [(I - .05) x (I - .10) x (1 - .10)]. 8'Ms was due in part to the fact that many states piggyback their tax bases onto the federal tax base. For a detailed discussion of state income tax reform, see Gold (1988). % a more elaborate accounting frwnework, one may want to treat some taxes as deferred and then perform a present value calculation to associate future taxes with present income. Given the uncertainty of future tax rates, such accounting can never be precise. 190ASDI beneficiaries represented 15.3 percent of the U.S. population in 1988, up only slightly from 15.1 percent in 1980. By contrast, this figure had increased rapidly from 12 percent of the population in. 1970, 7.8 percent in 1960, and 2.2 percent in 1950 Real declines in the Disability Insurance rolls in the early 1980s contributed to the slowdown in the growth of the eligible population. See U.S. Department of Health and Human Services (1990), p. 163. "For a more detailed discussion of the historical development of fringe benefits and their relationship to the tax base, see Munnell (1984 and 1989). 12 From 1948 to 1963, the standard deduction was calculated as a percentage of income. Minimum and maximum amounts were added in 1964. A low income allowance, which reduced the deduction partially as AGI rose, was introduced in 1970, but the deduction was returned to its previous structure from 1971 to 1976. In 1977, the deduction was converted to a flat zero bracket amount (ZBA) that was granted automatically to all taxpayers in the tax rate schedule. Itemizers were then required to reduce their itemized deductions by the amount of the ZBA. In order to maintain consistency with the standard deduction, the ZBA on returns of itemizers is counted as part of itemized deductions in this paper. Since the Tax Reform Act of 1986, the "standard deduction" terminology has been restorecl and a flat amount of standard deduction is allowed regardless of income. 13 Non-itemizing taxpayers generally had itemizable expenses that were less than the standard deduction. Hence, the cumulative value of the standard deduction across all taxpayers-that is, the effect of the deduction on reducing the tax base-would always be greater than the value of the itemizable expenses that were replaced. 14To avoid an overstatement of the amount of offsets to the tax base, this category includes the AGI of all nontaxable individuals, including thoee who filed and declared deductions. Thus, deductions, exemp- [Vol. XLIV tions, and credits listed in this paper are only those on taxable returns. In this manner, a person with $1,000 of AGI and $2,000 of deductions is only treated as having an offset to the tax base equal to $1,000, AGI of nontaxable filers accounted for about 21 percent of this category in 1988. "If the bracket is not wide enough, the bottom bracket is used up, and then remaining credits are applied against the tax rate in the next higher tax bracket. Unlike regular deductions and exemptions, which reduce taxable income from the top down, we calculate income offset by credit@sfrom the bottom up. Except for credits such as the EITC, which change in value as income changes, most credits do not affect a taxpayees top marginal rates of tax unless they are large enough to offset all tax liability. For example, consider a taxpayer with $1,000 of income subject to tax at 15 percent and $1,000 subject to tax at 20 percent. If such a taxpayer were to receive a simple credit of $150, he or she would find that the credit did not prevent the last $1,000 from facing a marginal rate of 20 percent. See the notes to Appendix Tables A.3 and A.5 for ftuther details. 16only a Small portion of the earned MOOME CreCht_ the amount that offsets positive income taxes on taxable returns-is counted here. Most expenditures from this credit go to those who are nontaxable. The refiindable portion of the credit, which goes exclusively to nontaxable individuals, is counted in Internal Revenue Service and U.S. budget accounting as a direct expenditure rather than a tax reduction. 'This figure also contains a small, unknown amount of change in unreported income, accounting reconciliation, etc. '8The modem poverty threshold was developed by Mollie Orshansky of the Social Security Administration in 1963, and was adopted in slightly modified form as the "official" poverty standard of the federal government in 1969. An informal Congressional policy of tying tax-exempt levels to this poverty line was established in 1964. Our calculation of earlier poverty levels uses current procedures and simply adjusts for changes in the consumer price index. For a detailed discussion of the development of and issues surrounding the federal poverty line, see Ruggles (1990) "The EITC is phased out starting at modest income levels. For instance, even after its significant expansion in the Tax Reform Act of 1986, in 1990 the credit was gradually eliminated for tax returns with incomes between $10,730 and $20,260. 2OUnderlying data on the distribution of marginal tax rates is not available before 1961, and 1988 was the latest year for which data was available as of Decernber 1991. 2'For many workers, of course, Social Security tax increases led to higher marginal rates and more than offset income tax reductions. 'The bubble was defined technically as a phase-out of the benefits of the personal exemption and bottom tax rate, so that an average and a marginal tax rate of 28 percent would apply to all taxable AGI for those with incomes above the phase-out threshold. This was, however, effectively the same as a 33 percent marginal rate bracket on a narrow range of income. 'The phase-out of the personal exemption was altered to depend on the number of exemptions. For a joint return with AGI between $150,000 and $272,000, National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL INCOME TAXATION each personal exemption was phased out at a rate of 2 percent for each $2,500 by which the taxpayer's income exceeded the threshold amount. In effect, assuming a personal exemption of $2,150 in 1991, each additional dollar of AGI produces an increase in taxable income of (.02 x $2,150)/$2,500 for each exemption. For 4 exemptions and a taxpayer in the 31 percent tax bracket, the marginal tax rate increased by 4 x [(.02 x $2,150)/$2,5001 x .31, or 2.13 percent. In addition, itemized deductions were reduced by 3 percent of the amount by which AGI exceeded $100,000. This effectively increased the marginal tax rate by .03 x .31, or 0.93 percent, for high-income itemizers. Combined, these provisions raised the marginal rate on a four-person, itemizing family with income between $150,000 and $272,000 to .31 + @0213+ .0093, or 34.06 percent. 'When federal and state individual income taxes and the employer and employee portions of the Social Security tax are considered together, a four-person family in Virginia with one-half the median income faced an overall marginal tax rate on earnings of 35 02 percent in 1988. This figare represented an all-time high, and was almost 2 percentage points higher than in 1980 despite a 3 percent reduction in the marginal rate of federal individual income tax between 1980 and 1988 for such a family- For purposes of comparison, this family's overall marginal rate would have been 33.16 percent in 1980, 26.60 percent in 1970, 28.00 percent in 1960, and only 3.00 percent in 1950. The pattern is similar in many different states and for families at median income. See Steuerle and Wilson (1986 and 1987). 25Social Security taxes increased by another 0 2.1( percent between 1988 and 1990. REFERENCES ACIR (Advisory Commission on Intergovernmental Relations), Changing Public Attitudes on Governments and Taxes, Washington D.C., 1989. Annual Report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Disability Trust Funds, 1991, Washington, D.C.: U.S. Government Printing Office, 1989. 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Eugene, and Paul Wilson, "The Taxation of Poor and lower Income Workers." In Ladders OLt of Poverty: A Report of the Project on the Welfare of Families. Jack A. Meyer, ed. Washington, D C.: American Horizons Foundation, 1986. Reprinted and updated for Tax Notes, vol. 34, no. 7, February 16, 1987, pp. 695-711. U S Department of Comraerce, Bureau of the Census, Money Income and Poverty Status in the United States, Washington, D.C.: U.S. Government Printing Office, various years. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, various years. U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts of the U.S. 1929-1982: Statistical Tables, Washington, D.C.: U.S, Government Printing Office, 1986. U.S. Department of Health and Human Services, Social Security Administration, Social Security Bulletin Annual Statistical Supplement 1990, Washington D.C.: U.S. Government Printing Office, 1990. U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics, Washington, D.C.: U.S. Government Printing Office, 1989. U.S. Department of the Treasury, Internal Revenue Service, Statisti4c8 ofincome: Individual Income Tax Returns, Washington, D.C.: U.S. Government Printing Office, various years. U.S. House of Representatives, Committee on Ways and Means, Overview of Entitlement Program: 1991 Green Book, Washington, D.C.: U.S. Government Printing Office, 1991. U.S. House of Representatives, Committee on Ways and Means, Overview of the Federal Tax System, Washington, D.C.: U.S. Government Printing Office, 1990. National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 [Vol. XLIV NATIONAL TAX JOURNAL 470 APPENDIX Year PMOIW I== (PI) Fodad indvidw lncdm Tex Amunt 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 19171 19r72 1973 1974 1975 1976 1977 1979 1979 IM 1981 1982 1983 1984 1985 1986 1997 1988 1989 1990 Somm 209'2 206'4 228.1 256 5 273.9' 29D.5 293.0 314.2 337.2 356.3 367.1 390.7 409.4 426.0 453.2 476.3 510.2 552.0 60D.8 6".S 707.2 772.9 831.8 894.0 981.6 1107.7 1210.1 1313.4 1451.4 1607.5 1812.4 2034.0 2258.5 2520.9 2670.9 2838.6 3108.7 3325.3 3526.2 3766.4 4070.8 4384.3 4645.5 =W fwtnota TABLE A.1-TOTAL FEDERAL, STATE, AND LOCAL TAX RECEIPTS (Amounts in Billions of Dollars) %Pl &1 @5.4 17.4 25.4 30.1 31.3 2&0 30.4 33.8 35.9 35.4 38.5 41.8 42.7 46.5 49.2 46.0 51.1 5&6 64.4 76.5 91.5 8&8 95.7 102.7 109.5 126.4 12D.8 141.5 162.5 189.5 225.2 251.1 291.7 296.5 298.1 303.7 339.3 353.5 3917.2 405.7 453.1 479.1 at 8.7 7.5 7.6 9.9 11.0 10.8 9.6 9.7 10.0 10.1 9.6 9.9 10.2 10.0 10.3 10.3 9.0 9.3 9.8 10.0 10.9 11.8 10.7 9.6 105 9.9 IQ4 9.2 9.7 10.1 10.5 11.1 11.1 11.6 11.1 10.1 9.8 10.2 10.0 1(15 10.0 10.3 10.3 soew seemity & Ralmd Rotuemnt Taxes An% 2.2 2.2 3.2 3.9 4.4 4.6 5.7 6.6 7.2 8.5 8.4 10,3 12.6 12.8 13.9 16.4 17.3 18.3 25.9 29.4 32.9 3&5 39.9 44,1 49.9 64.7 73.9 77.1 85.4 94.5 109.3 129.1 142.5 17&4 179.8 194.3 219.9 243.2 264-5 281.2 315.2 340.7 367.6 FadeW Caponte Rofits Tax %Pl %Pl 1.1 I'l 1' 4 1.5 1.6 1.6 1.9 2.1 2.1 2.4 2.3 16 3.1 3.0 3.1 3.4 3.4 3.3 4.3 4.6 4.7 5.0 4.8 4.9 5.1 5.8 6.1 5.9 5.9 5.9 6.0 6.3 63 6.8 6.7 6.8 7.1 7.3 7.5 7.5 7.7 7.8 7.9 at the end of the Appendix. 11.8 9.6 17.2 21.7 1&6 19.5 16.9 21.1 20.9 20.4 1&0 22.5 21.4 21.5 22.5 24.6 26.1 28.9 31.4 30.0 36.1 36.1 30.6 33.5 36.6 43.3 45.1 43.6 54.6 61.6 71.4 74.4 70.3 65.7 49.0 61.3 75.2 76.3 83.8 103.2 110.5 110.4 108.5 5.6 4.7 7.5 8.5 6.8 6.7 5.8 6.7 6.2 5.7 4.9 5.8 5.2 5.0 5.0 5.2 5.1 5.2 5.2 4.7 5.1 4.7 3.7 3.7 3.7 3.9 3.7 3.3 3.8 3.8 3.9 3.7 3.1 2.6 1.8 2.2 2.4 2.3 2-4 2.7 2.7 2.5 2.3 O&M Fadad Taxes (a) ANIL % PI I 93 9.2 9.5 10.2 11.3 III 10.8 11.9 12.9 13.6 13.2 14.4 15.6 16.2 17.6 1&2 19.1 19.2 1&4 19.2 21.0 W 23.3 25.4 26.0 272 27.1 29.9 30.2 33A 34.9 35.8 45.4 62.5 5,LO 57.2 61.1 60.4 5&5 61.6 65.7 67.6 73.9 4.4 4.5 4.2 4.0 4.1 4.2 3.7 3.8 3.8 3.9 3.6 3.7 3.8 3.8 3.9 3.8 3.7 3.5 3.1 3.0 3.0 2.9 2.9 2.8 2.6 2.5 2.2 2.3 2.1 2.1 1.9 1.8 2.0 25 2.0 2.0 2.0 1.8 1.7 1.6 1.6 1.5 1.6 stm & Local (b) AM 15.1 16.0 18.0 19.8 21.3 22.6 23.6 25.9 2IL7 30.8 3Z3 36.3 39.7 417 46.4 49.6 53.6 5&0 62.9 67.9 77.2 96.5 95.1 106.0 121.7 133.6 143.9 155.3 177.0 197.1 214.0 229.1 246.4 272.6 291.1 320.5 361.5 388.2 413.1 441.6 467.8 503.8 529.9 %Pll 7.2 7.8 7.9 7.7 7.8 7.8 8.1 8.2 9.5 8.6 8.8 9.3 9.7 laO 10.2 10.4 10.5 1%5 lM5 10.5 10.9 11.2 11.4 11.9 17.4 12.1 11.9 11.8 12.2 IZ3 11.8 11.3 1&9 10.8 1&9 11.3 11.6 11.7 11.7 11.7 11.5 11.5 11.4 Sm & I=d I"vidud lumm Taxes TOW Tax Rompts A@ 56.5 52.4 65.3 81.0 85.7 90.1 85.0 95.9 103.5 109.2 IU7.3 122.0 131.1 135.9 146.9 158.0 162.1 175.5 197.2 210.9 243.7 275.1 277.7 294.7 336.9 37&3 41&3 426,6 498.7 549.3 619.1 693.6 755.7 ga9 SM.4 921.4 IM1.4 1107.4 1173.4 1284.8 1364.9 1475.6 1558.9 %Pl A..t 27.0 25.4 28.6 31.6 31.3 31.0 29.0 30.5 30.7 30.6 29.2 31.2 3?-0 31.9 32.4 33.2 31.8 31.8 3ZB 3Z7 34.5 35A 33.4 33.0 34.3 34.2 34.4 32.5 33.7 34.2 34.2 34.1 33.5 34.2 32.6 32.5 319 33.3 33.3 34.1 33.5 33.7 33.6 0.6 0.7 0.8 0.9 1.0 1.0 1.1 1-3 1.6 1.7 1.8 2.2 2.5 18 3.2 3.4 4.0 4.4 5.4 6.1 7.9 9.8 10.9 12.4 17.2 1&9 2OL4 27.5 26.3 30.4 35.0 3&2 42.6 47.9 51.9 5&3 67.6 72.2 77.6 K2 90.1 101.7 106.2 0.3 0.3 0.4 0.4 0.4 0.3 0.4 0.4 0.5 0.5 0.5 0.6 0.6 M7 0.7 0.7 as 0.8 0.9 0.9 1.1 1.3 13 1.4 1.8 1.7 1.7 1.7 1.9 1.9 1.9 1.9 1.9 1.9 1.9 2.1 2.2 2.2 2.2 2.3 2.2 2.3 7-3 TOW indivi" Incom Taxes 18.7 16.1 1&2 26.3 31.1 37.3 29.1 31.7 35.4 37.6 37.2 40.7 44.3 45.5 49.7 57.6 50.0 55.5 64.0 70.5 "-3 101.3 99.7 9&1 119.9 128.4 146.8 143.3 167.8 192.9 224.5 263.4 293.7 339.6 349.4 346.4 371.3 41" 431.1 483.4 495.8 554.8 595-3 8.9 7.8 8.0 10.3 11.4 11.1 9.9 1&1 10-5 10.6 IMI 10.4 la8 1&7 11.0 11.0 9.8 10.1 10.7 10.9 11.9 13.1 12.0 11.0 12.2 11.6 111 10.9 11.6 12.0 17.4 IZ9 13.0 13.5 13.0 12.2 11.9 12.4 12.2 12.8 12.2 IZ7 12.6 -%Pr=pmwtwofpmwAimmm Sources: U.S. Department of Commerce National Income and Product A ecounts (1986), and Survey of Current Business, various years (Tables 1.1, 3.2, 3.3, 3.5, 3.6). (a) Includes federal estate taxes, gift taxes, excise taxes, custom duties, federal unemployment insurance taxes, and contributions for federal worker's compensation. Excludes nontax receipts, Supplementary Medical Insurance premiums, and contributions to federal government employee retirement plans. (b) Includes all personal taxes, corporate profits taxes, indirect business taxes, state unemployment insurance taxes, and contributions to state and local workers' compensation and disability ini;urance. Excludes nontax receipts, receipts from federal grants-in-aid, and contributions to state and local goveniment employee retirement plans. National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 INDIVIDUAL TABLE A.2-PERSONAL Nd Nmux" Ycor 194 1949 1950 1951 1952 1953 1954 1955 1956 1957 1959 1959 1960 1961 1962 1963 1964 1%5 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 im 1984 1985 1986 1997 1988 Gommnw kfed=m (b) AniL %Pl AaL %Pl Ant 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 &0 &0 to &0 0.0 0.0 &0 0.0 0.0 tO 060 0.0 0.0 0.0 0.0 to 0.0 0.0 -OA -0.1 2.0 03 2.5 0.4 3.1 0.4 3.5 0,4 3.9 0.4 4.3 0.4 2.5 0.2 4.3 0.4 7.5 &6 9.7 0.7 12.0 0.7 13.1 0.7 15.0 a7 20.0 &9 22.7 0.9 2L9 1.1 32.9 1.2 35.2 1.1 39.5 1.2 41.2 1.2 44.4 1.2 44.5 1.1 10.1 11.1 13S 9.9 IMI 10.1 11.5 11.4 11.7 12.9 15.9 110 15.9 ILI 17.3 1&3 IU 19.6 21.0 2" VA 31.5 39.1 47.3 525 56.1 67.3 92.2 95.3 96.3 100.0 1073 128.6 13L2 141.8 ISIA 132.2 136.7 143.5 138.4 147.1 -02 -&1 -&I u -03 -&1 02 mi 0.3 0.1 1.1 a4 1.1 0.4 2.1 %7 M &7 3.5 1.0 4.6 13 5.5 1.4 5.4 13 6.8 IA LO 12 7A IA &0 IA 9.6 1.7 &A IA &5 1.3 11.1 IA 10.3 13 14.9 1.8 18.2 2.0 20.1 2.1 25-1 2.3 2L2 2.3 35.4 2.7 40.8 2.8 45.8 2.8 4&4 2.7 51.8 25 62.6 2.8 73.5 Z9 K7 3.2 9(XI 3.2 79.3 2.6 75.1 2.3 773 7.2 75A 2.0 7a4 1.7 Od= Nonta" Tundm (e) SommandfootndommithetWofftAppmdix 471 INCOME EXCLUDED FROM ADJUSTED (Amounts in Billions of Dollars) Tnnden OAMI A RsOtoW Rem=L (9) INCOME TAXATION %Pl Net Houbiable Libm4toldW bwom POW&= & PM& Sherb* (d) Odw LobwC=V=am (0 Odwr SMtory &d@ Arm -%PI Av* %Pl AuL 0.4 0.6 0.7 1.0 1.1 1.3 1.5 1.7 2.1 2.4 2.7 3A 3A 3.7 4.2 4A 52 5.9 6,4 &9 L4 9.9 12.1 13.7 16.2 19.3 21.1 2" 32.0 3&8 44.1 51.3 59.6 6&8 M3 89.1 96.9 IO(LB 109.0 117,4 132.1 1.0 1.0 1.1 1.2 1.4 1.5 1.6 1.8 2.0 2.2 2.3 2.5 2.7 LB 3.1 3.3 3.6 3.9 4.4 4.9 5.6 6.2 6.8 7.3 &2 9.1 la2 1" 13.2 117 18.3 2D.9 22.7 23.7 23.7 24.6 26,0 2LB 33.2 37.2 41.2 3.3 2.7 1.6 2.8 3.7 3.6 4,0 3.9 4.2 4.4 4.6 4.9 5.2 S.3 6.2 6.5 7.2 LO la7 12.0 I&S lt9 118 16.9 17.6 ILO 22.1 24.4 26.0 28.6 32.6 37.3 41.0 516 SL7 106.5 123.0 130.2 1433 65.3 63.6 AuL %Pl 4.9 5.4 5.9 3.9 3.7 3.5 3.9 3.6 3.5 3.6 4.3 3.8 3.9 42 3.8 3.3 3.7 3A 3.5 3.9 3.9 4.1 4.7 5.3 5.3 5.1 5A 7.0 &6 6.0 5.5 5.3 5.7 5.5 5.3 5.3 43 4.1 4.1 3.7 3.6 I'l 1.2 1.7 2.2 2.4 2.7 2.7 3.2 3.5 ss 3a 4.5 4.7 4.6 5b 5.3 6.0 7A 7.7 8.2 9.2 9.9 IOL6 11.9 13.6 16.5 20.2 23.7 27.9 31.8 37.2 43.6 54,3 57.6 59.0 54.0 SM3 33.9 12.7 .3.8 -19A 0-5 0.6 0.7 0.8 0.9 Q9 OL9 1.0 1.0 1.1 1.1 1.2 1.1 1.1 1.1 1.1 12 1.3 1.3 1.3 13 13 13 1.3 IA 1.5 1.7 1.8 1.9 2.0 ZI 2.1 2.4 23 2.2 1.9 1.6 1.0 a4 4kl -05 ltuhh kma= (0) 0.2 0.3 03 a4 Q4 M 0.5 05 0.6 &7 0.7 0.9 &$ 0.9 &9 1.0 1.0 1.1 1.1 1.1 12 1.3 1.5 1.5 1.6 1.7 1.7 1.9 2.2 2A 2.4 7.5 2.6 2.7 3.0 3.1 3.1 3.0 3.1 3.1 3.2 0.5 U 0.5 0.5 0 0.5 u 0.6 Oj6 0.6 0,6 OL6 0.7 &7 &7 &7 %7 &7 0.7 MO Mg MI 0.8 U U U 0.8 M9 0.9 1.0 1.0 1.0 1.0 a9 &9 0.9 0.8 &9 0.9 1.0 1.0 GROSS INCOME (g) %Pl 1.6 13 0.7 1.1 1.4 1.2 1.4 1.2 1.2 1.2 1.3 1.2 1.3 1.2 1.4 1.4 1.4 1.4 1.8 1.9 2.0 1.9 1.9 1.9 1.8 1.6 1.8 1.9 1.9 1.8 1.8 1.8 1.8 2.2 3.3 3.9 4.0 3.9 4.1 1.7 1.6 Od=Nct Diffam= (b) AwL %Pl L9 L3 8.4 10.4 13.0 13.0 14.2 13.1 13.3 16.4 17.2 16,6 19.7 ILS 21.6 22.0 19.4 IU 22.4 22.0 1&9 23.7 30.9 29.3 24.4 35.6 32.3 45.2 39.7 41.5 51.8 59.5 61.9 90.7 104.3 113.7 ISS.5 177.0 142.7 187.7 137.2 4.2 4.0 3.7 4.1 4.7 4.5 4.9 4.2 3.9 4.6 k7 4.3 4.8 4.4 4.8 4A 3.8 3.4 3.7 3.4 2.7 3.1 3.7 3-3 2.5 3.2 2.7 3A 2.7 2.6 19 2.9 2.7 3.6 3.9 4.0 5.1 5.3 4.0 5.0 3.4 TOW Nd Excludms fionAGI AuL %Pl 24.6 24.7 26.7 27.7 32.0 33.4 36.6 37.1 393 45.6 SLI SU SL9 6062 61A 67A 6L2 72.6 KS 89.1 97.2 109.5 133.5 14&4 15&9 181.7 20LI 265.4 2K7 310.S 345.5 386.7 45&6 M9 611A 662.3 701A 721.9 7OLS 662.0 617.1 11.8 12.0 113 IOLS 11.7 11.5 12.S ILS IL7 122 13.9 13.3 13.9 14.1 14,4 14.2 13.4 13.2 13.4 13.8 13.7 14.2 16A 1" t6.0 16A 17.0 20.2 19A 19.3 19.1 19.0 2(10 21.1 27.9 23,3 22.6 2L7 19.9 17A 15.2 '%Pr=pacentWofpcnondinomr- Sources: U.S. Department of Commerce National Inconw and Product Accounts (1986), and Survey of Current Business, various years (Tables 1.1, 3.6, 3.11, 6.13, 8.14); Park (various years); and unpublished data furnished by the Bureau of Economic Analysis. (a) Equals benefit payments from the OASDI and Railroad Retirement programs, less taxable benefits and personal contributions to same. (b) Equals benefit payments from the Hospital Insurance and Supplementary Medical Insurance programs, less personal contributions and premiums to same. (c) Total government transfers excluding military pay, taxable government pensions, transfers for Social Security and railroad retirement, employment compensation, fare benefits. and the taxable worker's compensation, portion of unemployment veterans' benefits, compensation. Includes nontaxable food stamps, and other nontaxable wel- (d) Equals employer contributions plus imputed interest on private pension funds, less taxable private pension income received by individuals. (e) Equals employer contributions to private group health insurance plans. (f) Includes employer contributions for group life insurance, private worker's compensation, and Supplementary unemployment. (g) Includes a variety of other kinds of personal income excluded from adjusted gross income, such as: payments to individual retirement accounts; exempt interest income; moving expenses; and certain business expenees treated as personal income by the Bureau of Economic Analysis. (h) This category reconciles personal income, less items in previous columns, with adjusted gross income as measured by BEA. Includes differences in accounting treatment, plus personal income received by non-individuals and items of imputed income not in previous columns (such as imputed rental income of homeowners), less items reported in adjusted gross income, but not counted as personal income (such as capital gains). National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 NATIONAL TAX JOURNAL 472 TABLE A.3-DEDUCTIONS, TOW BEADerived Year Ac@usted Grew -IUC@ Anowt 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1969 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1990 1981 1982 1993 1994 1995 1986 1987 1988 So@ 184.6 191.7 201.4 228.8 241.8 257.1 256.4 277.1 297.9 310.7 316.0 338.7 3W 365.9 387.9 40&7 4420 479.4 52D.0 555A 610.0 663A 698.3 745.6 n4,7 926.0 IOD'LO 104&0 1166.7 1297.0 1466.9 16473 IWI.9 1990.0 2059A 21763 24073 2603A 28M.4 3104.4 3453.7 INnized DodLcdons on Taxable Reum EXEMPTIONS, CREDITS AND OTHER NONTAXABLE (Amounts in Billions of $) sundw Deductim or Z13A for Non-itmi=s on Taxable Rem= (a) AniL %Pl 6.9 33 7.7 3.7 9.9 3.9 IOL9 4.2 12.7 4.6 14.5 5.0 15.9 5A 1&$ 5.9 21.0 6.2 23.9 6.7 255 C9 29.6 7.6 32.8 8.0 35.6 &4 3&7 &5 42.6 &9 43A 8.5 47.4 &6 51.2 L5 56-5 &g 65.9 9.3 7&1 9.8 94.1 10.1 87A 9.8 92.0 9.4 102.1 9.2 113.6 9.4 114.4 &7 126.7 &7 132.1 &2 156.2 8.6 175.9 8.6 297.1 9.2 9A 242-4 267.3 1&0 290.0 10.2 338.5 10.9 3303 11.4 4232 170 369.9 9.8 373.9 9.2 and footiotm at at ft end offt [Vol. XLIV Am 9.5 9.1 10.1 11.7 12.2 12.8 11.6 17.0 12.6 12.3 11.7 12.1 11.7 11.6 11.8 11.9 14.8 15.7 17.1 17.6 17.9 17.7 1&4 34.9 XB 54.9 57.8 70.0 80.9 112.3 115.4 1273 126.2 12tLg 123.2 121.6 122.4 1263 130.7 160.8 214.4 %Pl 4.5 4.4 4.4 4.6 45 4.4 4.0 3.8 3.7 3.5 3.2 3.1 2.9 2.7 16 7-5 7-9 2.8 2.8 2.7 7-5 2.3 2-2 3.9 52 4.9 4.9 53 5.6 7.0 6A 63 5.6 5.0 4A 43 3.9 3.8 3.7 43 53 EXMOQM on Taxable Rau= AM 5&9 S&I 55.2 61A 64.5 6&9 67.0 71.2 74,6 76.9 75.9 79.7 81.2 MS 85.1 87.4 U3 91.9 96.2 99.1 IOL6 106.3 107.0 115.6 128.2 137-4 136.8 123.8 129.0 126.0 132.3 IOD.1 185.6 191.1 191.4 193.2 201.0 210.2 219.9 334.5 344.4 %Pl 27.2 24.3 24.2 23.9 23.6 23.7 22.9 2Z7 2ZI 21.6 2(X6 20.4 19.9 19.4 I&B 1&3 173 1" 16.0 114 14.5 13.8 129 17.9 13.1 12.0 113 9.4 &g 7.9 73 &9 L2 7.6 7.2 6.9 6.5 6.3 6.2 &9 &5 Appendix "% Pr =pumugc AGI of NcomxaW mviduals, Nomq)orWd AGI & Rooondhadw (b) Mm 36.5 43.1 42.9 45.6 45.2 46.6 46.7 47.5 4&3 49.5 53.8 50.9 55.3 54.S $7.2 5&2 66.0 7QI 70.0 67.9 71.7 75.1 97.9 94.1 107.0 126.1 123A 149.4 161.7 19&7 224.5 2433 249.8 265.9 257-6 27&9 307.9 3453 391.4 397.7 459.0 cfpwmw %Pl 17.4 20.9 I&S 17.8 16.5 16.0 15.9 15.1 14,3 13.6 14.7 13.0 13.5 12.9 12.6 12.2 17.9 127 11.7 105 10.1 9.7 10.6 IQS la9 IIA 10.2 11.4 11.1 12.4 12.4 17.0 11.1 la5 9.5 9.8 9.9 1&4 11.1 10.6 11.3 Twud& incorm on Taxable AGI ReUm (Bxdaft ZBA) bwom offwt by Credits on Taxable Ran= (C) incom Taxed at a Pbdtive Raw (-M Tax Bm") (d) AniL SPI 7tg 35.9 71.7 34.7 U3 37.0 99.2 3&7 107.2 39.2 39.3 114.3 115.2 39.3 IV.9 40.7 141.4 41.9 149.2 41.9 149.2 40.6 166.4 42.6 171-5 41.9 191,6 47.6 195.0 43.0 208.6 43.8 229.3 44.9 2543 4&1 285.5 47.5 314.3 4L& 352.0 49.8 3982 5&2 400.9 4&2 413.4 46.2 446.7 45.5 510.6 46.1 572.4 473 SW.4 410 669.4 46.1 7Z7.9 413 SW 46.3 92D.7 45.3 1039.2 46.0 1163.8 46.2 1224.9 45.9 1292j6 45.5 1437A 46.2 1541.3 46.4 165&2 47.0 1841A 4&9 2062.0 5&7 MM %Pl nA n/a nA a/a CA 0/a ch 9& DA 0/a a/& via 0.9 0.3 1.6 0.5 1.8 0.5 1.8 0.5 1.8 0.5 1.9 0.5 1.9 0.5 2.1 0.5 3.3 0.7 3.9 0.8 3.7 &7 2.8 0.5 3.2 0.5 3A 0.5 3.7 0.5 3.6 0.5 1.8 02 3.5 0.4 5.2 05 7.3 0.7 7.7 0.6 413 3.1 67.7 4.7 72.2 4.3 4.9 OLS 32.8 1.6 35.0 1.5 69.1 2.7 45A 1.7 1.7 4&6 1.9 54A 60.7 1.9 1.2 41.5 35.6 0.9 39.1 1.0 AmL %PI rA/a DA 0 0/& DA DA DA DA a/& 0 em DA 114.3 19.0 126.3 40.2 139.6 41A 147A 41.4 147.4 4Q2 164.5 42.1 169.6 41.4 1795 42.1 M.7 42.3 204.8 43.0 225A 4IL2 251.5 45A 2U3 47.0 31&9 4&2 34L3 ".3 30U ".g 399.1 4&0 409.9 45.9 441.5 45.0 SM3 414 564.7 46.7 549.1 41.9 601.7 41.5 655.7 4QS 749.7 4L4 8US 43,7 44.5 1004.2 1094.7 43.4 11793 44.2 1244.0 43.8 1383.0 44.5 14$DA 44.5 1616.7 413 180.9 47.9 2022.9 49.7 inomm Sources: U.S. Department of the Treasury, Statistics of Income: Individual Income Tax Returns (various years); and unpublished data fumished by the Internal Revenue Service Statistics of Income Division. (a) Between 1977 and 198(,, the standard deduction was converted to a "zero bracket amount" or "ZBA" (see text endnote 12 for a more detailed explanation). In order to make these years comparable with those in which the standard deduction was in effect, this category is calculated by subtracting the ZBA used by itemizers on taxable returns (equal to "total itemized deductions" minus "excess itemized deductions") from the total ZBA on taxable returns. (b) This variable equals the difference between adjusted gross income (AGI) as measured by BEA and the sum of taxable income, exemptions, and deductions on taxable returns. Its major components include AGI of nonfilers and nonreported AGI of filers. (c)Total income offset by credits on taxable returns was calculated by dividing total credits on taxable returns by the estimated average tax rate against which credits offset income. This tax rate was estimated at approximately 21.4 percent until 1964, 17-5 percent from 1964 to 1980, 14.6 percent from 1981 to 1987, and 15 percent in 1988. See note (b) to Table A 5 for explanation of how these rates were derived. (d) Equals taxable income less income off-3et by credits on taxable returns. Accounts for all aspects of the individual income tax code except the alternative minimum tax, which was negligible, producing revenues amounting to about .02 percent of personal income in 1988. National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 21 TABLE A.4-TAX-EXEMPT INDIVIDUAL INCOME TAXATION 473 THRESHOLDS RELATIVE TO PER CAPITA PERSONAL INCOME AND THE POVERTY LINE TU-F=Vllre"d(c) Year pmonai hfmbnm ofrlcw per Tax En Exenq*on Stuxlffd P--Y capita uwucdcnof Lille(d) Pmond AsaPcmmmpof M ZBA(a) FmulyofF*ur IACMDM dnPo Lin. (PCM Fo p_dy -"y0) of4 omple log.6 1949 600 67 267 667 1333 2667 2667 1223 2455 1427 W 46.8 46.7 67 267 667 1333 2667 2667 1211 2432 1383 55,1 109.7 1949 600 4&2 4L2 600 67 267 667 1333 2667 2667 1223 2455 m 54,5 108.6 1950 44.5 44-5 67 267 667 1333 2667 2667 1320 2649 1951 60D 1656 So 100.7 4a3 4a3 60D 67 267 667 1333 2667 2667 1359 2728 1738 49.1 97.8 1952 3&4 3&4 267 667 1333 2667 2667 1359 2729 1953 600 67 1914 4$Ll 97.8 36.9 36.8 1954 600 67 267 667 1333 2667 2667 1366 X741 1797 48.8 97.3 37.1 37.1 600 67 267 667 1333 2667 2667 1361 2731 1894 49.0 97.7 1955 352 35.2 1996 4&3 9&2 1956 600 67 267 667 1333 2667 2667 1381 2m 33.4 33.4 600 67 1957 267 667 1333 2667 2667 1430 2871 2W2 4&6 gzg 3Z2 3z2 67 1958 601) 267 667 1333 2667 2667 1469 2949 2099 45.4 90.4 31.8 31.8 600 67 267 667 1333 2667 2667 1481 2913 2197 45.0 29.7 1959 3OL4 3OL3 267 667 1333 2667 2667 M 3022 2266 44,3 g" 1960 600 67 29.4 29.4 600 67 267 667 1333 2667 2667 1519 3054 2319 43.9 C7.3 1961 2LO 2u 1962 600 67 267 667 1333 2667 2667 1537 3089 2430 43.4 s63 27Z 27.4 2517 419 &,,3 1963 600 67 267 667 1333 2667 2667 1555 3128 20 2(,5 300 600 90D 16DO 3000 30M 1575 3169 2M 57.1 94,7 1964 600 318 A2 1965 600 3M 600 900 1600 3000 3000 1603 3223 2841 5&1 93.1 2&4 3057 s4.6 9OL4 31.7 1966 600 300 60D 900 1600 3000 3000 1649 3317 29.4 24,5 .60D 300 60D 900 1600 3ODD 3000 1697 3410 32o43 S3.0 g&o 1967 27.7 23.1 "A 1%8 600 300 600 900 1600 3000 3WD 1767 3553 3524 sag 25J 213 300 1969 60D 60D 900 1600 30DO 3WD 1862 3743 3913 4&3 MI 23.6 ig.7 625 9&7 1970 1100 1100 1725 2350 3600 3600 1972 3968 4057 t7,5 42,5 2Z2 9&6 19r7i 675 1050 IWO 1725 2400 3750 3750 208 4137 4305 a# 4d] 21.8 4677 9&5 IOD.6 750 1300 1300 2050 2800 4300 4300 2124 4275 1972 43.8 23.0 750 1300 1300 2050 2$W 4300 4300 2257 4540 5227 ga8 94,7 1973 20.6 ".o g5A 39.2 1974 750 1300 1300 2(k5O 2800 4300 4300 2205 5038 SM 3&2 19.0 1975 750 1600 1900 2564 4829 5757 6692 2734 5300 6oot 93.8 IOL7 4Z2 23.7 1 4OL6 22.9 1976 750 1700 21M 2700 4100 6100 6892 2891 5815 6657 93.4 104.9 1977 750 2200 3200 3200 5200 72DO 7520 3079 6191 7299 104.0 163 43.8 24.7 1978 750 2200 320D 3200 MW 7200 7533 3311 6662 8143 96.6 IC&I 393 U1 1979 1000 230D 3400 3300 5" 7400 806 3693 7412 9038 $9.4 ".& 34L5 2o.5 1980 1000 2300 340D 3300 SM 7400 8626 4186 8414 "16 7&8 87.9 33.3 1&7 IODD 2300 340D 3300 5400 7400 804 1981 462() 9297 10954 71.4 79.7 30LI 16,9 1000 2300 340D 3300 5400 7400 OW 49M 9862 11466 67.3 75.0 1982 2&7 16.1 SMI 10179 12099 65.2 777 1993 1000 2300 3400 330D 5400 7400 SM 27.3 153 2300 3400 330D 5400 7400 SM SV7 1OW9 13117 625 rgg 1994 1000 212 14.1 1985 1040 2400 300 3390 5540 7540 9327 5463 10989 13897 a 1 69,6 24.4 13.6 im logo 2480 3670 3360 5830 7990 9575 5572 11203 14594 63.9 713 24.4 13.7 1987 1900 2540 3760 4440 7560 11360 13299 5778 11611 15440 76.8 97.g 2&8 1&4 1950 30DO 5WO 4950 NM 12800 15110 6024 12092 i65z7 82.2 105.9 1998 3040 19.4 1989 2000 3100 5200 5100 9200 13200 15656 6311 12675 17624 Mg 104.1 1&7 2050 3250 5M SM 9550 13050 16296 6652 13359 19479 79.7 102.2 2&9 1990 2&7 I&S SoamesaWfoomowsm attheendofdieAnmdix Sources: U.S. Bureau of Commerce Money Incorne and Poverty Status in the U-8- (various Years), National Inconw and Product Accounts (1986), and Survey of Current Business (various years); and U.S. House of Rep. resentatives (1990, pp. 44-46, and 1991, pp. 1263, 1273-74). (a) See text endnote 12 for an explanation of the standard deduction and zero bracket aMOUnt, (b) Throughout this table, "family of four" assumes two parents and two dependent children -hoe ae 1. Also assumes the family does not claim health insurance supplement to EITC. (e) The tax exempt threshold is equal to the sum of exemptions and the minimum standard dduction. it also includes the general tax credit during the years 1975 to 1978. (d) Weighted average poverty threshold for the U.S., based on the consumer prce index for urban consumers (CPI-U). National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 NATIONAL TAX JOURNAL 474 TABLE A.5-RETURNS UWrginal Tax Raw (a) 0 (b) 11 12 14 15 16 17 is 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 28 (c) 34 35 36 37 38 39 40 41 42 43 44 45 46 47 49 49 50 59 68 70 77 84 91 Sour= [Vol. XLIV AND PERSONAL INCOME BY MARGINAL RATE OF FEDERAL INCOME TAX Pmentage of AU Remm Taxed at or Below Pcmentage of AU PmorAl Incom Taxed at Each &=mdve NW&W Rate Below Each Swmdve h@ RW 1961 1969 (d) 1974 1979 1984 1988 (a) 1961 1969 (d) 1974 1979 1994 20.63 15.32 1&76 19.92 15.13 17.87 57.86 $0.53 53.70 56.55 55.41 21.54 59.02 27.41 62.77 23.44 24.13 27.96 37.71 56.62 $7.99 61.65 69.69 30.45 2&40 41.54 76.06 62.26 61.74 7a9g 37.91 33.45 34.92 SalO 67.66 65.66 66.68 76.35 37.95 51.43 76.75 69.09 39.24 48.42 60.80 69.49 75.45 81.54 59.30 52.63 80.93 76.80 66.98 44.70 63.92 83.53 72.30 92.47 67.74 93.80 63.36 63.95 82.22 87.98 90.16 45.75 75.% 64.89 69.31 n3l 72.63 8&09 83.27 95.49 71.94 76.31 7230 85.51 8&17 86.34 90.30 97.89 79.45 75A7 73.04 92.41 91.67 W97 97." 8&52 gL78 7&94 9164 89.22 96.47 77.98 97-27 95.09 8&60 90.09 99.94 92.93 94.36 93.68 94.03 97.12 9(L60 94.30 94A6 91.29 92.01 94.27 94.83 9&11 94.42 85." 9&86 96.31 94.32 91.79 92.46 96.89 94.60 86.29 95.63 94.95 91.87 9&13 96.43 91.02 99.04 96.32 95.94 93.82 92.51 93.94 ".28 94.50 100.00 98.77 96.93 96.63 92.57 94.81 97.05 95.65 96.01 94.22 94,74 97." 96.64 94.93 96.45 96.02 94.79 9&79 9769 92.67 97.06 96.71 94M 95.17 95.38 97.76 97.57 97.36 96.76 99.13 96.14 99.14 9LOO 9L27 95.71 97.57 96.46 97.21 95.55 9&61 98.37 97.01 91.26 97.27 98.38 99.14 9&72 95.74 9&97 97.57 97.61 95.57 97.23 99.37 9&95 97.72 97.94 97.40 96.47 97.94 9&95 97.41 96.93 9&95 99.02 99.28 97.93 97.41 97.65 97.97 99.18 97.72 9&85 99.53 ".19 9&21 97.72 99.46 9&15 99.19 97.79 99.54 9&92 99.69 98.21 97.68 98M 99.66 99.36 99.49 9&98 100.00 9906 9797 9&99 9LS9 10000 ".48 99.97 99.88 ".82 99.70 99-54 99.42 99.18 9995 9996 "97 ".93 99.71 99.77 99.72 99.54 99.98 100.00 IOD.00 99.82 IOD.00 100.00 100.00 100.00 99.91 99-99 100.00 100.00 and footnotes we at die end of the Appwdx or IM (0) 49.94 M53 - 89.29 91.14 - National Tax Journal, Vol. 44, no. 4, (December, 1991), pp. 451-75 No. 4, Part 2] INDIVIDUAL INCOME TAXATION 475 Sources: Most of the information provided on Table A.5 can be derived from data found in U.S. Department of the Treasury Statistics of Income: Individual Income Tax Returns (various years). Since 1961, this publication has provided information on taxable income and taxes paid classified by both the marginal rate and each rate at which the tax was computed. See, for example, Table 3.4 in the 1988 edition. (a) Marginal tax rates above 50 percent are abridged in this table. Table does not account for the impact of the EITC on taxpayers' marginal rates. (b) Personal income taxed at a zero rate equals total personal income, less total income taxed at a rate greater than zero. Unlike SOI data, income taxed at a positive rate is adjusted here to account approximately for income offset by credits. Credits are assumed to oltset income in the lowest rate brackets first. If the income offset for an individual taxpayer is greater than the width of the first bracket, the remainder is offset against the tax rate in the next bracket, and so on until the entire credit is used up. Income offsets are subtracted from each positive rate bracket in which they apply and added to the zero rate bracket. The percentage distribution of income offset by credits among rate brackets was estimated by the Treasury Tax Model for the years 1979 and 1984 based on a sample of tax returns. From this, the average credit offset rate used in Table A.3 could be estimated. The credit-offset procedure for other years was necessarily less rigorous. It was approximated for years before 1981 based on the 1979 distribution adjusted for changes in the structure of marginal rates, and for 1981 to 1987 using the 1984 distribution. In 1988, it was assumed that all credits offset income at the 15 percent rate, because most credits going to higher income taxpayers were eliminated, and the 15 percent bracket was wide enough to encompass any remaining credits (for example, a joint return could receive a credit of up to $4,462 without offsetting any income outside of the 15 percent bracket). Note that these offsets make only a small difference in the overall distribution, accounting for less than 1 percent of personal income in 1988. Total personal income taxed at a zero rate in Table A.5 is not always exactly identical to that in Table A.3, largely because Statistics of Income performs a small modification on the income of past-year returns in the data used in Table A.5, but not in the data used in Table A.3. Again, the effect is very small, generally a fraction of 1 percent of personal income. (c) This is the top 28 percent bracket following the 33 percent "bubble" created by the Tax Reform Act of 1986. (d) An adjustment was made to 1969 data to account for a 10 percent surcharge imposed in that year. Because of the phase-in of the surcharge by AGI, an approximation was made that income in the 14 to 16 percent brackets faced the regular statutory rates, income in the 17 to 20 percent brackets faced effective marginal tax rates that were 1.2 times the statutory rates, and income in brackets above 20 percent faced effective marginal rates that were 1.1 times the statutory rates. All rates are rounded to the nearest percent. (e) 1988 data was adjusted slightly by the authors to account for the estimated distribution among brackets of Form 8615 income (investment income of dependent children). This has a negligible effect, accounting for 0.35 percent of total returns and 0.02 percent of personal income.