Summary of Federal Individual Income Tax Data (2007)

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http://www.taxfoundation.org/news/show/250.html

July 30, 2009
Summary of Latest Federal Individual Income Tax Data

by Gerald Prante

Fiscal Fact No. 183

The Internal Revenue Service has released new data on individual income taxes, reporting on calendar year 2007, a year in which the economy remained healthy and continued to grow. Individual income tax collections increased substantially that year, while the overall average effective tax rate remained about the same.

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

The 2007 numbers show that the top 1 percent’s income and tax shares reached all-time highs for the third year in a row. That is likely to reverse direction when data from recessionary 2008 is published a year from now.

For the first time this year, we are also presenting data on the top 0.1% of tax returns (the top 10 percent of the top 1 percent). This 10 percent of the returns in the top 1 percent amounts to only 141,000 tax returns but accounts for nearly 12 percent of the adjusted gross income earned and approximately 20 percent of the nation's federal individual income taxes. The average income for a tax return in this top 0.1 percent is $7.4 million, while the average amount of income tax paid is $1.6 million, indicating an average effective individual income tax rate of 21.5 percent. This very top income group actually has a lower average effective tax rate than the rest of the top 1 percent of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates. (Note that in the case of capital gains and dividends, in most cases the income has already been taxed once by the corporate income tax, which is not included here.)

The IRS data also shows increases in individual incomes across all income groups (see Table 3). Just as the highest earners lost the largest percentage of their incomes during the recession of 2001, so they have prospered the most as the economy continued to rebound through 2006. For example, from 2000 to 2002, the AGI of the top 1 percent of tax returns fell by over 26 percent. In that same period, the AGI of the bottom 50 percent of tax returns actually increased by 4.3 percent. However, since 2002, as the recession has ended, AGI has more than doubled for the top 1 percent (an average of over 20 percent per year), while the bottom 50 percent of returns have seen an aggregate increase of AGI since 2002 of 24 percent.

In sum, between 2000 and 2007, pre-tax income for the top 1 percent of tax returns grew by 50 percent, while pre-tax income for the bottom 50 percent increased by 29 percent. All figures are nominal (not adjusted for inflation).

This pattern of income loss and growth at the top of the income spectrum is the same during almost every recession and recovery. The net result has also been a sharp rise in federal government tax revenue from 2003 to 2007 compared to previous years. And we should expect the same to have occurred from 2007 through 2009-2010 when the economy will have suffered what is likely the worst recession since the early 1980s.

The IRS data below include all of the 141.1 million tax returns filed in 2007 that had a positive AGI, not just the returns from people who earned enough to owe taxes. These figures exclude those tax returns filing a tax return merely to receive a stimulus check. From other IRS preliminary data, we can see that in 2007, around 47 million tax returns were filed with either positive or negative AGI that used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. Not only did they get back every dollar that the federal government withheld from their paychecks during 2007, but some even received more back from the IRS. This is a result of refundable tax credits like the Earned Income Tax Credit, the refundable portion of which is not included in the aggregate percentile data here. EITC is Congress's way of using the tax code to simply administer a transfer system, while doing it in a way that some economists prefer, via a negative income tax. (For more on the limitations of the data on this page, see the notes below. For a detailed paper on the distribution of the entire U.S. fiscal system, including all federal, state and local taxes, read "Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991 - 2004.")

Including all tax returns that had a positive AGI, taxpayers with an AGI of $160,041 or more in 2007 constituted the nation's top 5 percent of earners. To break into the top 1 percent, a tax return had to have an AGI of $410,096 or more, the first time that this threshold has exceeded $400,000. These numbers are up significantly from 2003 when the equivalent thresholds were $130,080 and $295,495. Top incomes in 2007 are also continuing to surpass the peak they reached in 2000. In order for one to break into the top 0.1 percent, one would need an AGI of over $2.15 million. (Note also that for the first time, the figures in the tables include data on the top 2 percent, 3 percent and 4 percent, available at http://www.taxfoundation.org/publicatio ... 23408.html.)

The top-earning 25 percent of taxpayers (AGI over $66,532) earned 68.7 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86.6 percent). The top 1 percent of taxpayers (AGI over $410,096) earned approximately 22.8 percent of the nation's income (as defined by AGI), yet paid 40.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid more in federal individual income taxes than the bottom 95 percent of tax returns.

Average tax rates increased once again in 2007 as the economy continued to grow, even though there were no significant pieces of tax legislation enacted in 2006. Overall, the average tax rate for returns with a positive liability went from 12.60 percent to 12.68 percent from 2006 to 2007. (This does not include refundable credits.)

The 2003 tax cut was the second in three years, and although tax rates are lower, the federal income tax still remains highly progressive. The average tax rate in 2007 ranges from around 3 percent of income for the bottom half of tax returns to 22.45 percent for the top 1 percent. Since 2001, the average tax rate has fallen from 4.09 percent to 2.99 percent for the bottom 50 percent, and it has fallen from 28.20 percent to 21.46 percent for the top 0.1 percent and 27.5 percent to 22.45 percent for the top 1 percent. This large drop-off for the very top is largely due to the reduction in capital gains and dividends taxes, as well as the drop in ordinary tax rates.

The source for the following charts is the Internal Revenue Service, http://www.irs.gov/taxstats/indtaxstats ... 21,00.html ("Individual Income Tax Returns with Positive Adjusted Gross Income (AGI) Returns Classified by Tax Percentile - Early Release") To see more-detailed versions of these charts or to download them in Excel or PDF, see http://www.taxfoundation.org/publicatio ... 23408.html.