Measuring the Average Marginal Tax Rate from the Individual Income Tax

The economic effects of taxation depend on the configuration of marginal tax rates. We consider here the appropriate measure of a marginal tax rate for the federal individual income tax, which has a graduated-rate structure and allows for numerous legal and illegal deductions from total income.Our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes.Hence, we construct approximately weighted averages of these marginal tax rates for 1916-80. When weighted by adjusted gross income, the arithmetic average of marginal tax rates is 5% in 1920, 2%in 1930, 6% in 1940, 20% in 1950, 23% in 1960, 24% in 1970, and 30% in 1980.We also discuss the dispersion of marginal tax rates, as well as the behavior of average tax rates and deductions from taxable income. One noteworthy result concerns the fraction of adjusted gross income that accrues to families that face a marginal tax rate of at least 35%. This fraction quadruples from 1964 to 1980.

Average Marginal Tax Rates from Social Security and the Individual Income Tax

We extend previous estimates of the average marginal tax rate from the federal individual income tax to include social security "contributions." The social security tax is a flat-rate levy on labor earnings (and income from self-employment) up to a ceiling value of earnings. Our computations consider first, the tax rates on employers, employees and the self-employed; second the amounts of income that accrue to persons with earnings below the ceiling; and third, the effective deductibility of employer's social security contributions from workers' taxable income. We find that the net impact of social security on the average marginal tax rate is below .02 until 1966, but than rises to .03 in 1968, .04 in 1973, .05 in 1974,and .06 in 1979. Thus, since 1965, the overall average marginal tax rate rises more rapidly than that from the income tax alone. In 1980 this overall rate is 36%. We note that, in comparison with the income tax, the social security levy generates 3-4 times as much revenue per unit of contribution to the average marginal tax rate. The social security tax is relatively "efficient" because first, it is a flat-rate tax (rather than a graduated one) for earnings below the ceiling, and second, there is a zero marginal tax rate at the top. However, the last feature has become less important in recent years. The rapid increase in the ceiling on earnings raised the fraction of total salaries and wages accruing to persons with earnings below the ceiling from 29% in 1965 to 68% in 1982.

Average Marginal Tax Rates from Social Security and the Individual Income Tax

We extend previous estimates of the average marginal tax rate from the federal individual income tax to include social security. Our computations consider the tax rates on employers, employees, and the self-employed; the income that accrues to persons with earnings below the ceiling; and the effective deductibility of employers' social security contributions from workers' taxable income. The next effect of social security on the average marginal tax rate is below .02 until 1966 but then rises to .03 in 1968, .04 in 1973, .05 in 1974, .06 in 1979, and .07 in 1982.Economic

Measuring the Average Marginal Tax Rate from the Individual Income Tax

The economic effects of taxation depend on the configuration of marginal tax rates. We consider here the appropriate measure of a marginal tax rate for the federal individual income tax, which has a graduated-rate structure and allows for numerous legal and illegal deductions from total income. Our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes. Hence, we construct approximately weighted averages of these marginal tax rates for 1916-80. When weighted by adjusted gross income, the arithmetic average of marginal tax rates is 5% in 1920, 2% in 1930, 6% in 1940, 20% in 1950, 23% in 1960, 24% in 1970, and 30% in 1980.Economic