Estimates of Average Federal Tax Rates

June 18, 2010

Yesterday CBO released estimates of average federal tax rates—households’ federal tax liability divided by their income—in 2007 for households with various amounts of income.  For each income category, the report also presents estimates of average before-tax and after-tax household income; the number of households; and that category’s share of taxes and income. A page on our website, Distribution of Federal Taxes, includes CBO’s estimates of average federal tax rates going back to 1979, as well as other information and publications on household income and taxes. 

CBO’s most recent analysis indicates that:

  • On average, in 2007 households paid federal taxes, either directly or indirectly, totaling about 20 percent of their income. (That percentage includes corporate income taxes and employers’ share of payroll taxes, which are passed on to households in various ways.) Individual income taxes, the largest component, were 9.3 percent of household income. Payroll taxes for social insurance programs were the next largest source, with an average tax rate of 7.4 percent. Corporate income taxes and excise taxes were smaller, with average tax rates of 3.0 percent and 0.6 percent.
  • The overall federal tax system is progressive—that is, average tax rates generally rise with income. Households in the bottom quintile (fifth) of the income distribution paid 4 percent of their income in federal taxes, while the middle quintile paid 14 percent, and the highest quintile paid 25 percent. Average rates continued to rise within the top quintile, with the top 1 percent facing an average rate of close to 30 percent.
  • Higher-income groups earn a disproportionate share of pretax income and pay a disproportionate share of federal taxes.  In 2007, the highest quintile earned 56 percent of pretax income and paid 69 percent of federal taxes, while the top 1 percent of households earned 19 percent of income and paid 28 percent of taxes. In all other quintiles, the share of federal taxes was less than the income share. The bottom quintile earned 4 percent of income and paid less than 1 percent of taxes, while the middle quintile earned 13 percent of income and paid 9 percent of taxes.
  • Average tax rates in 2007 changed only slightly compared with their levels in 2006. There were no significant changes in the tax law between those years, and changes in the distribution of incomes were not enough to cause large movements in average rates.

This publication was prepared by Ed Harris of CBO’s Tax Analysis Division.