Economic Snapshot | Budget, Taxes, and Public Investment

The truth about taxes

Despite the popular rhetoric, there is no truth to the claims that government taxes, at least at the federal level, are taking a larger chunk out of worker’s incomes.

Even if we only look at the stereotypical “family of four” (with two children and one earner), changes in federal taxes have had little impact on family living standards, except for low-income families, which have actually seen declining taxes over the 1990s. A family of four receiving the median annual income paid 23.1% of its income in federal taxes in 1979. The effective rate rose slightly to 24.4% in 1989 and then fell to 22.8% in 1999. On net, federal taxes for this typical family fell about 0.3 percentage points over the full 1979-99 period. Effective tax rates rose slightly for a high-income family of four (about 1.6 percentage points between 1979 and 1999). Low-income families of four saw the widest variation in effective tax rates. Their federal taxes rose 2.9 percentage points in the 1980s (mostly reflecting an increase in payroll taxes that fund Social Security) and then fell 6.2 percentage points in the 1990s (mostly as a result of the increased generosity of the earned income tax credit).

Effective federal tax rate for family of four, 1955-99

As the figure demonstrates, tax rates have remained fairly steady for most of these families and actually declined for the poorest families. So if your paycheck doesn’t seem to go as far as it once did, it’s not what the government is taking out, but what your employer isn’t putting in.