Economic Snapshot | Budget, Taxes, and Public Investment

The middle-class economic squeeze is not about rising federal taxes

Policymakers and candidates for office have reacted to rising inequality and near-stagnant wages in recent decades by promising to either cut or hold the line on federal taxes for “middle-class” families (and they tend to define “middle-class” awfully liberally, often lumping in those with incomes higher than 98 percent of American households). However, the rise in inequality and the near-stagnation of hourly wages for most American workers has not been driven by rising federal taxes. In fact, federal tax rates have steadily fallen for the middle 60 percent of American households, as shown in the figure below.

Economic Snapshot

The middle-class economic squeeze is not about rising federal taxes: Average federal tax rate for the middle 60 percent of American households, 1979–2011

Year Lower middle class Middle class Upper middle class
1979 14.5% 18.9% 21.5%
1980 14.1% 18.9% 21.8%
1981 14.7% 19.2% 22.3%
1982 13.5% 17.9% 20.6%
1983 13.4% 17.4% 20.2%
1984 14.3% 17.8% 20.3%
1985 14.5% 18.0% 20.4%
1986 14.3% 17.9% 20.5%
1987 13.5% 17.4% 20.2%
1988 13.8% 17.8% 20.6%
1989 13.5% 17.7% 20.6%
1990 14.1% 17.7% 20.6%
1991 13.5% 17.3% 20.5%
1992 12.9% 17.1% 20.2%
1993 12.7% 17.1% 20.3%
1994 12.5% 17.1%  20.5% 
1995 12.7% 17.1% 20.6%
1996 12.6% 17.0% 20.5%
1997 12.8% 17.3% 20.7%
1998 12.3% 16.6% 20.6%
1999 12.6% 16.6% 20.6%
2000 12.4% 16.5% 20.6%
2001 10.9% 15.0% 18.9%
2002 10.3% 14.4% 18.3%
2003 9.4% 13.6% 17.4%
2004 9.6% 13.7% 17.4%
2005 9.9% 13.8% 17.6%
2006 10.1% 14.0% 17.8%
2007 10.3% 14.0% 17.5%
2008 7.3% 11.6% 15.6%
2009 6.7% 11.1% 15.0%
2010 8.1% 12.6% 16.9%
2011 7.9% 12.3% 16.5%
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Lower-middle households are those in the second income quintile, middle households are the middle income quintile, and upper-middle households are the fourth income quintile.

Lower-middle households are those in the second income quintile, middle households are the middle income quintile, and upper-middle households are the fourth income quintile.

Tax rates for 2011 are adjusted so that the temporary 2 percentage point payroll tax holiday in that year is not reflected in rates shown in the chart. For each quintile we multiplied the share of total income accounted for by cash wages and salaries (the tax base of the payroll tax) by the 2 percent payroll tax rate reduction to calculate the effect of the temporary holiday on rates. We then added this amount back to the official 2011 effective tax rates to neutralize the holiday’s effects.

Source: EPI analysis of data from the Congressional Budget Office (2014)

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Note that the figure includes all federal taxes—the income tax rate faced by these households, meanwhile, is much, much lower. In 2011, for example, the total federal tax rate for the lower-middle fifth of households was 7.9 percent, but the income tax rate was actually negative; the total federal tax rate for the middle-fifth of households in 2011 was 12.3 percent, while their income tax rate averaged just 2.4 percent.

It is true that state and local taxes remain quite regressive relative to federal taxes and that the total tax bill of middle-income families is higher when you include this state and local taxation. But federal policymakers and candidates for federal office should present people with the facts: federal taxes have been steadily lowered for the middle 60 percent in recent decades, and this hasn’t stemmed the rise in inequality or the near-stagnation of hourly pay. As EPI President Lawrence Mishel has noted, “The problem isn’t what the federal government has taken out of paychecks, it’s what employers haven’t put in.” In short, we need to focus on lots of policies besides federal taxes on middle-income families if we’re looking for ways to boost hourly pay for most.


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