The Distribution of Federal Taxes, 2009-12

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Abstract

Overall, the federal tax system is progressive. On average, households with higher incomes pay taxes that are a larger share of their income. But barring legislative action, the numerous sunsets and phase-ins that Congress has written into the tax code will result in a tax system that is in a state of flux over the next few years. As a result, current law dictates significant changes in the degree of progressivity in the federal tax system between now and 2012. This paper summarizes the Tax Policy Center's latest estimates of the distribution of federal taxes for 2009 through 2012.

Introduction

Overall, the federal tax system is progressive. On average, households with higher incomes pay taxes that are a larger share of their income. But barring legislative action, the numerous sunsets and phase-ins that Congress has written into the tax code will result in a tax system that is in a state of flux over the next few years. As a result, current law dictates significant changes in the degree of progressivity in the federal tax system between now and 2012. Almost all of the provisions included in the 2001 and 2003 tax cuts passed during the Bush administration are set to expire at the end of 2010, resulting in large scheduled increases in effective tax rates across the income spectrum. Because the Bush tax cuts were regressive, the largest increases will occur at the top of the income distribution and so the tax system will become more progressive in 2011 unless Congress acts. The stimulus legislation passed by Congress in the early months of the Obama administration contains several measures that reduce effective tax rates for low-income households making the system slightly more progressive. Those measures, including the Making Work Pay (MWP) tax credit, are in effect for 2009 and 2010 only, although the Obama administration proposes to make them permanent. If they are allowed to expire-as scheduled under current law-lower-income households will face large increases in their effective tax rates in 2011.

There are also significant changes set to occur between 2009 and 2010. Relative to this year, effective rates will fall for high-income households in 2010 as phased-in repeal of the estate tax and the limitations on itemized deductions and personal exemptions become complete. In addition, the problem of the alternative minimum tax (AMT) remains unresolved. Congress "patched" the AMT for 2009-limiting its reach to only about 4 million taxpayers this year-but failed to enact a permanent solution. Barring legislative action, the AMT's reach will expand in 2010 to more than 27 million taxpayers. It will become the de facto tax system for those in the 80th to 99th percentiles of the income distribution, raising their effective tax rates significantly.

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