Fiscal Fact No. 249
Summary of Federal Individual Income Tax Data
Number of Federal Individual Income Tax Returns Filed, 1980-2008
Adjusted Gross Income of Taxpayers in Various Income Brackets, 1980-2008
Total Income Tax after Credits, 1980-2008
Adjusted Gross Income Shares, 1980-2008
Total Income Tax Shares, 1980-2008
Download these tables in Excel format
The Internal Revenue Service has released new data on individual income taxes, reporting on calendar year 2008, a year of economic recession in which the world's financial system was temporarily in a perilous state.
The amount of individual income taxes paid fell substantially in 2008, by $84 billion, and nationally, average income tax rates were at their lowest levels since 2004. The average tax rate for returns with a positive liability went from 12.68 percent in 2007 to 12.24 percent in 2008.
As the data below show, incomes reported by tax returns at the high end of the income spectrum plummeted from 2007 to 2008, as did their share of the nation's income and income taxes paid. In 2008, the top 1 percent of tax returns paid 38.0 percent of all federal individual income taxes and earned 20.0 percent of adjusted gross income, compared to 2007 when those figures were 40.4 percent and 22.8 percent, respectively. Both of those figures—share of income and share of taxes paid—were their lowest since 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.
Each year from 2005 to 2007, the top 1 percent's constantly growing share of income earned and taxes paid set a record. That trend reversed in 2008. In fact, the income share for the top 1 percent of tax returns was lower in 2008 than in 2000, largely due to differences in capital gains.
Another indicator of this reversal in the income and tax shares of the top 1 percent is that during 2007, the top 1 percent had actually paid more in federal income tax than the bottom 95 percent, a comparison that was much remarked on a year ago. But the diminished income of the top 1 percent in 2008 means that the comparison no longer holds. During 2008, the bottom 95 percent (AGI under $159,619) paid 41.3 percent of the total collected, a larger share than the 38.0 percent paid by the top 1 percent (AGI over $380,354).
The top-earning 5 percent of taxpayers (AGI over $159,619), however, still paid far more than the bottom 95 percent. The top 5 percent earned 34.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes.
For the past few years, the IRS has also been presenting data on a small subset of the top 1 percent, the top 0.1 percent (the top 10 percent of the top 1 percent). In 2008, this top 0.1 percent filed 140,000 tax returns, reporting nearly 10 percent of all adjusted gross income earned and paying approximately 18.5 percent of the nation's federal individual income taxes. The average income for a tax return in the top 0.1 percent was $6.0 million in 2008, while the average amount of income tax paid was $1.36 million, indicating an average effective individual income tax rate of 22.7 percent. Both the income figures and tax figures for this group in 2008 were down significantly from 2007 levels.
[Note: This very top income group actually has a lower average effective income tax rate than the rest of the top 1 percent of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates. It's worth pointing out that in the case of capital gains and dividends, usually the income has already been taxed once by the corporate income tax, which is not included here, meaning the average effective tax rate numbers can be somewhat misleading.]
Overall, these data on high-income tax returns appear to confirm that the recent recession had the same diminishing effect on income inequality that most recessions have, and that it occurred for the same reason, a sharp decline in income at the high end. This appears to contradict recent reports based upon Census data suggesting the opposite, that this recession had actually increased income inequality. This inconsistency between IRS data and Census data is explained by a number of factors such as: (1) Census doesn't break down data for the extremely high income tax returns (typically stops at the 5 percent threshold), (2) Census income measures do not account for capital gains realizations, and (3) Census data gathered from household surveys are less reliable for income information at the high end of the income spectrum than IRS data.
The IRS data below include all of the 139.96 million tax returns filed in 2008 that had a positive AGI, not just the returns from people who earned enough to owe taxes. These figures exclude those tax returns filing a return merely to receive a stimulus check.
From other IRS data, we can see that in 2008, around 52 million tax returns were filed with either positive or negative AGI that used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. Not only did they get back every dollar that the federal government withheld from their paychecks during 2008, but some even received more back from the IRS. This is a result of refundable tax credits like the earned income tax credit (EITC), the refundable portion of which is not included in the aggregate percentile data here. (For a detailed paper on the distribution of the entire U.S. fiscal system, including all federal, state and local taxes, read "Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991 - 2004.")
Including all tax returns that had a positive AGI, taxpayers with an AGI of $159,619 or more in 2008 constituted the nation's top 5 percent of income earners. To break into the top 1 percent, a tax return had to have an AGI of $380,354 or more, which was significantly lower than the 2007 threshold of $410,096. The income threshold to break into the top 0.1 percent also fell dramatically from 2007 to 2008, from about $2.15 million in 2007 to $1.8 million in 2008. (Note also that the figures in the tables include data on the top 2 percent, 3 percent and 4 percent, available at http://www.taxfoundation.org/publications/show/23408.html.)
Although the 2001 and 2003 tax cuts were across the board (even though certain provisions within those cuts were targeted at various income ranges), the federal individual income tax remains highly progressive. The average tax rate in 2008 ranged from around 2.6 percent of income for the bottom half of tax returns to 23.27 percent for the top 1 percent. For the top 1 percent (as well as the top 0.1 percent), their average income tax rate actually increased from 2007 to 2008, despite shrunken income. This counterintuitive result is explained by the diminished capital gains and dividend income on high-income tax returns, income sources that are taxed at lower rates. With their 2008 income more dominated by ordinary income taxed at higher rates, then, the average rate on high-income returns rose in 2008. With the possible exception of the estate tax, the federal income tax is the most progressive tax in the United States, and these numbers show why.
The source for the following charts is the Internal Revenue Service, http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html ("Individual Income Tax Returns with Positive Adjusted Gross Income (AGI) Returns Classified by Tax Percentile - Early Release"). To view more-detailed versions of these charts or to download them in Excel or PDF, see http://www.taxfoundation.org/publications/show/23408.html.
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