CBO Shows Federal Taxes Remained Progressive in 2022

The Congressional Budget Office (CBO) recently published updated estimates on the distribution of US household income in 2022, including the effects of federal transfers and taxes. Consistent with prior findings, the report illustrates that the federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and transfer system remains progressive, even after the expiration of pandemic-era policies.

US household income growth after taxes and transfers dipped slightly in 2022 after banner years in 2020 and 2021. CBO points out that this dip is driven by the expiration of pandemic-era legislation, such as recovery rebates, expanded unemployment benefits, and the temporary expansion of the child tax credit (CTC) in 2021. Excluding these items, household incomes across the spectrum rose except for the top 20 percent of households.

Zooming out, since 1979, average incomes in the lowest quintile have doubled, while average incomes for the middle three quintiles have grown by about 65 percent. The highest quintile’s income after taxes and transfers has risen by 144 percent since 1979. The CBO data shows that labor income is the major income source for most taxpayers, while business and investment income is a more important income source for higher earners.

Average federal tax rates vary across tax types. For example, individual income taxes are highly progressive, providing a negative effective tax rate for taxpayers in the bottom 20 percent due to refundable tax credits, such as the earned income tax credit (EITC) and the CTC. The negative effective tax rates are driven by refunds provided to filers who do not have tax liabilities to offset. In fact, the lowest quintile’s average effective federal income tax rate was -10.1 percent in 2022. On the other hand, taxpayers in the top 20 percent paid an average 16.6 percent effective income tax rate.

Payroll taxes are applied more evenly but are somewhat regressive, ranging from a 9.5 percent effective tax rate for the lowest quintile to 6.1 percent for the top 20 percent. The Social Security portion of payroll taxes applies to wages and self-employment income up to $147,000 in 2022, which concentrates effective payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. rates on middle earners.

Federal excise taxes are regressive, as taxpayers in the lower quintiles pay higher effective rates than those in higher quintiles.

Corporate income taxes are borne across the income distribution but are still progressive, with higher effective rates for higher-income households (0.8 percent for the bottom 20 percent compared to 2.9 percent for the top 20 percent), who own more corporate equities than lower-income households.

Taken as a whole, the federal tax system was progressive in 2022, applying higher effective tax rates at higher income levels. The effective federal tax rate rose from 1.4 percent for the bottom quintile to 23.2 percent for the top quintile and 31.5 percent for the top 1 percent of earners.

Within the top 1 percent of earners in 2022, those in the 99th to 99.9th percentiles face a tax rate of 31.0 percent, rising to 32.6 percent for those in the 99.9th to 99.99th percentiles. The top 0.01 percent of earners face a slightly lower 31.2 percent effective federal tax rate.

The share of federal taxes paid by high-income households has increased over time. The top one percent paid 27.3 percent of all federal taxes in 2022, up from an average of 14.3 percent in the 1980s. By contrast, the share of federal taxes paid by the bottom 60 percent fell from an average of 22.3 percent in the 1980s to 12.8 percent in 2022.

The shares of federal taxes paid were even more lopsided in 2020 and 2021 due to pandemic relief administered through the tax code. As that relief expired in 2022, the shares of taxes paid began to normalize. For example, the bottom 60 percent of taxpayers paid only 3.3 percent of federal taxes in 2020 and 1.3 percent in 2021, but that rose to 12.8 percent of federal taxes in 2022.

The rise in the share of federal taxes paid by higher earners over time can reflect a more progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. code. It can also result from increasing income inequality. If a higher share of income accrues to top earners, they would mechanically pay a greater share of tax under a progressive system.

We can account for the shift in income inequality in two ways: compare the change in share of income earned with the share of taxes paid for different income groups over time, and consider average federal tax rates for income groups over time (which factors in taxes paid in the numerator and incomes earned in the denominator).

In 1979, the bottom 80 percent of earners earned 54.6 percent of income and paid 44.8 percent of all federal taxes. In 2022, the bottom 80 percent earned 45.1 percent of income and paid 29.6 percent of all federal taxes.

By contrast, in 1979, the top 1 percent earned 9 percent of income and paid 14.1 percent of federal taxes. In 2022, it earned 17.8 percent of income and paid 27.3 percent of all federal taxes.

In other words, from 1979 to 2022, the top 1 percent’s share of income increased by 97.8 percent, and its share of taxes paid increased by a similar 93.6 percent. The bottom 80 percent of earners saw a 17.4 percent decline in their share of income but experienced a much larger 33.9 percent decline in their share of federal taxes paid.

Effective federal tax rates tell a similar story. The bottom 20 percent of households’ average tax rate declined from 10 percent in the 1980s to 0.7 percent from 2010 to 2019. Pandemic relief brought their average tax rate to all-time lows of -16.5 percent in 2020 and -22.5 percent in 2021. As relief expired, their average tax rate reached 1.4 percent in 2022.

The top 1 percent, on the other hand, saw an effective tax rate of 31.2 percent from 2010 to 2019. It hovered around 30 percent through the pandemic years, close to the 1979-2000 average federal rate of 30.5 percent for the top 1 percent of households.

The latest CBO data from 2022 indicate that: (1) income earned after taxes and transfers has increased over the past several decades for all income groups, (2) the federal tax system is progressive and has become more progressive over the past three decades, and (3) the federal system relies heavily on higher earners to raise revenue for government services and means-tested transfers. Policymakers should remember such facts when considering proposals to increase tax burdens or reshape the distribution of existing taxes.