Individual income tax returns, 2002

Statistics of Income Bulletin, Fall, 2004 by Michael Parisi, Scott Hollenbeck

As shown in Figure J, real total income tax rose continually from $329.2 billion in 1991 to its high of $569.5 billion for 2000, but declined for 2001 and 2002 by 12.0 percent and 11.6 percent, respectively. Tax as a percentage of real GDP behaved similarly. During the mid to late 1990's, tax as a percentage of real GDP increased. Part of this increase is attributable to the substantial increase in realizations of capital gains and, thus, income taxes on those capital gains. The income taxes on those capital gains are included in the numerator of the income tax-to-GDP ratio, but, by definition of GDP, the capital gains are not included in the denominator. However, between 2000 and 2002, the ratio of income tax to GDP fell from 10.0 percent for 2000 to 8.8 percent for 2001 and to 7.6 percent for 2002. In the same way that net capital gain (less loss) had boosted income tax relative to real GDP during the mid to late 1990's, the lower net capital gain (less loss) was partially responsible for the falling tax as a percentage of real GDP figure.

[FIGURE J OMITTED]

Net capital gain (less loss) is the sum of gains and losses from the sale of capital assets. Figure K shows that, in constant dollars, net capital gain (less loss) decreased 28.0 percent for 2002, the second year in a row it declined. This followed annual increases for real net capital gain (less loss), during which it increased almost fivefold from a low of $75.5 billion for 1991 to a high of $366.2 billion for 2000. During this period, capital gains (less loss) were affected by both tax law changes and a rising stock market. Due to several significant tax law changes enacted during the 1990's (including the Omnibus Budget Reconciliation Act of 1993--OBRA93--and the Taxpayer Relief Act of 1997), the maximum differential between ordinary income and long-term capital gain income increased from 3 percentage points for 1991 and 1992 to 19.6 percentage points for 1997 through 2000.

Along with net capital gain (less loss), the constant-dollar amount of capital gain distributions from mutual funds increased tremendously during the 1990's. Capital gain distributions, similar to net capital gain (less loss), declined since 2000, declining 61.4 percent to just under $3.0 billion (in 1982-84 dollars) from 2001 to 2002. The large declines of reported capital gain distributions over the past 2 years brought them back to the 1990 inflation-adjusted level of just under $3.0 billion.

Figure L presents constant dollar data for several income, deduction, and tax items over time. Real taxable interest income fluctuated mildly over the previous decade. Having decreased during 1990-1994, it rebounded 19.3 percent to $101.6 billion for 1995. For 2000, it jumped again, this time by 9.8 percent. After a slight decrease for 2001 (3.3 percent), real taxable interest showed a major decline of 26.0 percent to just under $82.9 billion for 2002. This represents the largest decrease in real taxable interest over the years 1988-2002. Dividends had increased for 6 of the previous 7 years before 2001, but have had 2 consecutive years of large decreases, 20.9 percent for 2001 and 15.0 percent for 2002.