CBO report: Americans' federal tax bite hit 30-year low in 2009

A report from the Congressional Budget Office has found that the federal tax rate for most Americans fell to an historic low in 2009. All but the top one percent paid lower taxes in 2009 as a consequence of the Great Recession that cut income and because the government approved tax breaks'such as those in the Obama administration's stimulus package'designed to ease the impact of downturn.

The report, The Distribution of Household Income and Federal Taxes, 2008 and 2009, includes personal income taxes, corporate taxes, Social Security and Medicare taxes, and excise taxes on gasoline, alcohol and tobacco. It only covers up to 2009 because that is the last year for which full data are available. CBO researchers said they expect the low average continued through 2010 and 2011.

John D. McKinnon reports:

[T]he middle quintile of earners'with average before-tax incomes of $64,300'saw their average federal tax rate fall to 11.1% from 11.6% a year earlier. The bottom quintile'with average before-tax income of $23,500'saw their average federal tax rate fall to 1%, from 1.5% in 2008.

But the average tax rate for the top 1%'those with average incomes of about $1.2 million'rose to 28.9% from 28.1% a year earlier.

For all U.S. households, federal taxes combined averaged 17.4 percent in 2009, the lowest level since the CBO began the data series in 1979. The reason the top one percent saw a higher average rate for the year is most likely because the recession cut deeply into that part of their income coming from capital gains in 2009. Capital gains are taxed at a lower level than income from wages, which made up a larger proportion of their income for that year.

The Financial Times reports that in 2009, the average U.S. household income was $88,400. In 2007, the average was $101,000. Over that period, average income for the top one percent fell by more than a third. That average is skewed upward by higher-income households. Median household income, with half earning more and half earning less, was $50,020 in January 2012. Adjusted for inflaton, that's nearly 8 percent less than it was in December 2007 when the recession began.

The CBO report notes:

The decline in after-tax income for the highest-income households reversed a substantial portion of the sharp rise in their income between 1979 and 2007.

Although the detailed data that form the basis of CBO's estimates in this report are available only through 2009, other data can provide some insight into more-recent changes in the distribution of income. Those data suggest that income for households toward the higher end of the distribution increased more rapidly than income for households elsewhere in the income distribution in 2010.

Republicans and the White House are at odds over what will happen to taxes on higher-income earners come January 2013. President Obama has proposed extending tax cuts initiated by the Bush administration in 2001 and 2003, but only on the first $250,000 of household income. Money earned above that level would return to the higher pre-Bush marginal tax rates.

The GOP wants not only to permanently extend all those cuts, which have benefited higher earners more than other groups, but also to make deeper cuts, including a reduction in capital gains and corporate taxes. The lost revenue would be covered by cuts in government programs, which most Republicans want to come from the discretionary budget spent on social programs while shielding the Pentagon from further cuts. In the case of Mitt Romney, the domestic spending cuts would be even deeper because he seeks to raise Pentagon spending by about 20 percent.