David Cay Johnston explains why your federal income tax burden may be lighter than you assumed, in his column, “You’re Not Paying The Tax Rate You Think You Are:”
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.