If you make more than about $33,500 a year, your federal income tax burden is probably lighter than you think.
The portion of your income that you pay in taxes is your “effective tax rate.” But when politicians and pundits talk about effective tax rates, the data they typically use relies on an incomplete measure for income. Use an incomplete measure for income and your tax rate calculation comes out high.
In a new analysis the Tax Policy Center, a nonpartisan Washington research organization, used a wider measure of income to calculate effective tax rates. The rates are much lower using this broader measure of income.
The Tax Policy Center computer model of the tax system, which estimates how changes in the law would affect tax burdens, has repeatedly made projections that subsequent events showed were accurate. The center is a joint project of two Washington research organizations, the Urban Institute and the Brookings Institution. The George W. Bush administration went out of its way to praise the reliability of the center findings even when they were not helpful to administration policy.
The incomplete measure is called “adjusted gross income,” or AGI. This is the number on the last line of the front page of the standard tax return.
To get a fuller picture, the Tax Policy Center used what it called “cash income” to calculate effective tax rates. This included municipal bond interest, government benefits and many of the other items that are excluded from AGI. Use this fuller measure of income and the share of income that goes to taxes falls.
In its new analysis, the Tax Policy Center found that the discrepancy between these two ways of measuring tax rates varies significantly between different income groups.