The voices of Tax Policy Center's researchers and staff
For the individual income tax, effective tax rates—measured as federal income tax divided by adjusted gross income (AGI) —have fallen significantly over the past seven decades for those in the top 1 percent of the income distribution. The individual income tax still is progressive— meaning that effective tax rates tend to go up with income—but the effective tax rates for those earners have dropped substantially over time.
For those in the top 0.1 percent of the income distribution the effective tax rates fell still further. From 1945 through 1995 effective tax rates were progressive even within the top one percent so that those with the highest incomes faced progressively higher rates. But by 2015 the effective tax rates of the very highest income earners were about the same as the rate of the 1 percent.
In 1945, when the top statutory income tax rate was 94 percent, the effective tax rate on the top 1 percent was about 40 percent. Taxpayers with even larger incomes faced even higher effective tax rates, peaking at about 65 percent of income for those in the top 0.001 percent. In other words, those taxpayers paid about 65 percent of their AGI in federal income taxes.
From 1955 through 1995 the top 1 percent paid a smaller share of their AGI in federal income taxes: About a 30 percent effective tax rate. But taxpayers with higher AGI continued to face higher effective tax rates; the highest effective rate in 1955 was more than 50 percent for those with incomes in the top 0.0005 percent. That highest effective tax rate fell over the subsequent decades, and by 1995 it was just over 30 percent, not that much higher than the 29 percent average effective tax rate on the top 1 percent.
In 2005 and 2015 the effective tax rates fell even more. In 2015 the average effective tax rates for the top 1 percent were about 26 percent. Not only that, but taxpayers with higher incomes had lower effective tax rates: in 2015 the top 1 percent had an effective tax rate of about 26 percent while the top 0.01 percent paid an effective tax rate of about 24 percent on average.
We also plotted the effective tax rates for the top 1 percent and the top 0.1 percent, and the effective tax rate averaged over all tax filers. From 1950 through 1975 the rate on the top 1 percent held steady at about 31 percent while the average rate for all individual income tax filers crept up from 10 percent to 13 percent. For this time period, the effective tax rate on the top 1 percent was 17.5 to 21 percentage points higher than the average for all taxpayers. Over the same time period the effective tax rate for the top 0.1 percent fell from about 44 percent to about 40 percent.
Effective tax rates generally popped up in 1980 but by 1990 the effective tax rate on both the top 1 percent and the top 0.1 percent had fallen to 23 percent. The effective tax rates on the top 1 percent and top 0.1 percent rose after 1990 and by 2015 they stood at about 27 percent, while the effective tax rate for all taxpayers was 14 percent. So over this 25-year period the effective tax rates on the top 1 percent and top 0.1 percent were only about 12 percentage points above the effective tax rate paid by all taxpayers, on average.
We calculated effective income tax rates using the Internal Revenue Service’s annual summary of the incomes and taxes of individuals. They include both income tax after credits and AGI, broken down by AGI category. The Internal Revenue Service publishes total taxes and AGI for years after 2000. For years 2000 and before we converted the dollar categories (such as incomes above $100,000) into percentiles of AGI, such as incomes in the top 10 percent.
Note that our measure of effective tax rates is different from those usually calculated by the Tax Policy Center. To start, we only consider the individual income tax, and do not include other taxes such as payroll taxes, excise taxes, and the corporate income tax. In addition, the measure of income we use (AGI) is narrower than the Expanded Cash Income measure TPC typically uses (which includes things like employer contributions to retirement and health insurance plans).
Our measure isn’t perfect—along with employer contributions to health and retirement plans for employees—it does not include accrued capital gains and other income not recorded in AGI. It also only looks at federal individual income taxes. But it does provide an easy-to-understand way to describe how the tax burden on the highest-income taxpayers has fallen in the post-World War II period.