Middle-Income Tax Rates: Trends and Prospects

The federal tax liabilities of different income groups change constantly in response to new tax laws and shifting economic circumstances. For example, in recent years, Congress has lowered individual income tax rates, increased child and dependent care credits, and reduced taxes on dividends and capital gains. Much of the economic analysis and political debate about these federal tax changes concerns the impact on upper- or lower-income groups, while the impact on middle-income taxpayers sometimes gets forgotten. ; The trends in tax rates can be difficult for middle-income taxpayers, themselves, to discern. Modest revisions to the federal tax code may hardly be noticed in any given year; yet these revisions could build over time into a large change in the middle-income tax rate. Some taxpayers may also find it difficult to determine whether changes in their tax liability are due to legislated changes in the federal tax code or shifts in their own circumstances. ; Davig and Garner define the effective federal tax rate for middle-income households and discuss the problems in computing this measure. They find that the effective federal tax rate facing middle-income households has trended downward over the last 25 years and is currently low by historical standards. Moreover, the composition of middle-income tax liabilities over this period has shifted away from individual income taxes toward payroll taxes. Finally, they show that under current tax law middle-income taxes are projected to rise in the future.