Michael Parisi Individual Income Tax Rates and Shares , 2001

David Campbell and Michael Parisi are economists with the Individual Statistics Branch Returns Analysis Section. This article was written under the direction of Jeff Hartzok, Chief. T axpayers filed 130.3 million returns for Tax Year 2001, of which almost 94.8 million (or 72.8 percent) were classified as taxable returns. Adjusted gross income (AGI) on taxable returns fell 4.0 percent to $5,847 billion for 2001. Total income tax fell 10.4 percent for 2001, a rate more than twice that of AGI. This decrease in total income tax was attributable to a decline in income being reported and to tax cuts implemented in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The average tax rate for taxable returns fell 0.9 percentage points to 15.2 percent. The last decline in average tax rates was in 1991 when the economy declined, and the last time the average tax rate fell by a similar magnitude was for 1987, the first year under the Tax Reform Act of 1986. Using the 1979 Income Concept (see Appendix D for an explanation of the 1979 Income Concept), the income share for the top 1 percent of taxpayers fell from 21.6 percent from 2000 to 18.2 percent for 2001, while the share of income for the bottom 50 percent of taxpayers increased from 12.8 percent to 13.7 percent (Table 7). The resulting 4.5-percentage point gap for 2001 between the income shares of the top 1 percent and the bottom 50 percent of taxpayers contrasted with the 28.8-percentage point gap between the shares of income tax from the same two groups. The income tax share for the top 1 percent of taxpayers was 32.9 percent for 2001, while the corresponding share for the bottom 50 percent was 4.1 percent. This article discusses the individual income tax rates and tax shares and the computation of “tax generated” for 2001. To put this discussion into perspective, the appendices to the article provide explanations of selected terms used in the article and describe the income tax structure, certain tax law changes, income and tax concepts (the “1979 Income Tax Concept,” “modified” taxable income, and marginal tax rates), the computation of “alternative minimum taxable income,” and the data sources and limitations. Income Tax Rates Discussions of income tax rates generally center on measuring two distinct tax rates: average tax rates and marginal tax rates. Average tax rates are calculated by dividing some measure of tax by some measure of income. For the statistics in this article, the average tax rate is “tax generated” (see Appendix A: Explanation of Selected Terms) divided by AGI reported on returns showing some income tax liability. Measures of marginal tax rates, on the other hand, focus on determining the tax rate imposed on the last (or next) dollar of income received by a taxpayer. For this article, the marginal tax rate is the statutory rate at which the last dollar of taxable income is taxed. (See Appendix D for a more detailed explanation of marginal tax rates.) The following sections describe the measurement of the average and marginal tax rates in more detail, and discuss the statistics based on these rates for 2001.