CBO:Top 40% Paid 106.2% of Income Taxes; 'Bottom 40% Paid -9.1%, Got Average of $18,950 in 'Transfers'

CBO:Top 40% Paid 106.2% of Income Taxes;

'Bottom 40% Paid -9.1%, Got Average of $18,950 in 'Transfers'

By Terence P. Jeffrey

The top 40 percent of households by before-tax income actually paid 106.2 percent of the nation’s net income taxes in 2010, according to a new study by the Congressional Budget Office.

At the same time, households in the bottom 40 percent took in an average of $18,950 in what the CBO called “government transfers” in 2010.

Taxpayers in the top 40 percent of households were able to pay more than 100 percent of net federal income taxes in 2010 because Americans in the bottom 40 percent actually paid negative income taxes, according to the CBO study entitled, “The Distribution of Household Income and Federal Taxes, 2010.”

“When refundable tax credits, such as the earned income tax credit and the child tax credit, exceed the other federal tax liabilities of the households in an income group, those households are said to have a negative average tax rate,” said the CBO study.

“In its analysis, CBO measured individual income taxes net of refundable credits,” it said.

In 2010, the CBO determined, American households in the bottom 40 percent paid negative amounts in income-tax dollars and a negative average income-tax rate.

“Much of the progressivity of the federal tax system derives from the individual income tax,” said the report. “In 2010, the lowest quintile’s average rate for the individual income tax was -9.2 percent and the second income quintile’s rate was -2.3 percent.”

“A group can have a negative income tax rate if its refundable tax credits exceed the income tax otherwise owed,” said the CBO report.

The households in the top 20 percent by income paid 92.9 percent of net income tax revenues taken in by the federal government in 2010, said CBO. The households in the fourth quintile paid another 13.3 percent of net income tax revenues. Together, the top 40 percent of households paid 106.2 percent of the federal government’s net income tax revenue. The third quintile paid another 2.9 percent—bringing the total share of net federal income tax revenues paid by the top 60 percent to 109.1 percent.

That was evened out by the net negative income tax paid by the bottom 40 percent.

Those in the second quintile paid -2.9 percent of net federal income tax revenues, and those in the bottom quintile paid -6.2 percent of federal income tax revenues.

When the negative 9.1 percent in federal income taxes paid by those in the bottom 40 percent is subtracted from the 109.1 percent paid by those in the top 60 percent, federal tax revenues net out to an even 100 percent.

The CBO’s calculation of before-tax income included both the money a household earned and the money it got from the government.

“Before-tax income is the sum of market income and government transfers,” said CBO. “Market income is composed of labor income, business income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs."

The households in the bottom 40 percent of income—which on average paid negative federal income taxes—were on average receiving many thousands of dollars in what the report calls “government transfers.” These transfers included, among other things, benefits from unemployment insurance, Medicare and Social Security, as well as from means-tested programs such as the Supplemental Nutrition Assistance Program (food stamps), and Medicaid. “Government transfers increase income in all groups, but those increases, both in dollars and as a percentage of market income, are larger for groups with lower market income,” says the report.

According to the CBO, households in the bottom quintile received an average of $22,700 in government transfers in 2010 (including $14,300 in payments from Medicare and Social Security and $8,500 in payments from other government programs); and households in the second quintile received an average of $15,200 in government transfers (including $10,300 in payments from Medicare and Social Security and $4,900 from other government programs).

Thus, households in the bottom 40 percent received a combined average of $18,950 in government transfers in 2010.

Households in the middle quintile got an average of $10,800 in transfers (including $7,900 from Medicare and Social Security and $2,900 from other programs). Households in the fourth quintile got an average of $7,400 in transfer (including $5,500 from Medicare and Social Security and $1,900 from other programs). And households in the top quintile got an average of $6,500 (including $5,500 from Medicare and Social Security and $1,300 from other programs).

Although they paid negative federal income taxes on average in 2010, Americans in the bottom 40 percent of households did end up paying some taxes to the federal government that year, according to the CBO.

Households in the lowest quintile paid 5.6 percent of the social insurance taxes (for Medicare, Social Security, etc.), and 13.4 percent of the excise taxes. The CBO also allotted them a 1.7 percent share of corporate income taxes.

But when these taxes that those in the bottom quintile actually paid are balanced against the refundable tax credits they received, households in this quintile ended up paying only 0.4 percent of federal taxes in 2010.

By contrast, those in the top quintile, according to CBO paid 68.8 percent of all federal tax revenues in 2010. That means those in the top quintile paid 172 times as much in taxes as those in the bottom quintile.

(The average after-tax income for American households in the bottom quintile in 2010 was $23,700, according to CBO. It then rose to $41,00 for households in the second quintile; $57,900 for households in the middle quintile; $80,600 for households in the fourth quintile; and $181,800 for households in the top quintile.)