2002 Ad

Statistics of Income Bulletin, Winter, 2004 by Michael Parisi

Taxpayers filed just over 130.0 million returns for Tax Year 2002, of which almost 91.0 million (or 69.9 percent) were classified as taxable returns. This represents a reduction of 4.0 percent in the number of taxable returns from 2001. Adjusted gross income (AGI) on these taxable returns fell 3.5 percent to $5,641 billion for 2002. Total income tax fell 10.2 percent for 2002, a percentage decrease of almost three times that of AGI. This decrease in total income tax was attributable to a decline in income being reported and to tax cuts implemented in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The average tax rate for taxable returns fell 1.1 percentage points to 14.1 percent. This was the second year in a row there was a decline in average tax rates. The last time that average taxes fell by as much as for Tax Years 2001 and 2002 was for 1987, the first year under the Tax Reform Act of 1986.

Taxpayers with an AGI of at least $285,424, the top 1 percent of taxpayers, accounted for 16.1 percent of AGI. This was the second year of decline in the percent of AGI reported on the top 1 percent of tax returns. These taxpayers accounted for 33.7 percent of the total income tax reported, a decrease from 33.9 percent in 2001. The top 5 percent of taxpayers accounted for 30.6 percent of AGI and 53.8 percent of total income tax. To be included in the top 5 percent, a taxpayer must have had an AGI of $126,525, whereas, in 2001, a taxpayer must have had an AGI of $127,904.

This article discusses the individual income tax rates and tax shares and the computation of "tax generated" for 2002. To put this discussion into perspective, the appendices to the article provide explanations of selected terms used in the article and describe the income tax structure, certain tax law changes, income and tax concepts (the "1979 Income Tax Concept," "modified" taxable income, and marginal tax rates), the computation of "alternative minimum taxable income," and the data sources and limitations.

Income Tax Rates

Discussions of income tax rates generally center on measuring two distinct tax rates: average tax rates and marginal tax rates. Average tax rates are calculated by dividing some measure of tax by some measure of income. For the statistics in this article, the average tax rate is "tax generated" (see Appendix A: Explanation of Selected Terms) divided by AGI reported on returns showing some income tax liability. Measures of marginal tax rates, on the other hand, focus on determining the tax rate imposed on the last (or next) dollar of income received by a taxpayer. For this article, the marginal tax rate is the statutory rate at which the last dollar of taxable income is taxed. (See Appendix D for a more detailed explanation of marginal tax rates.) The following sections describe the measurement of the average and marginal tax rates in more detail, and discuss the statistics based on these rates for 2002.

Average Tax Rates

Figure A presents statistics for 1986 through 2002 on income (based on each year's definition of AGI and on the common 1979 Income Concept) and taxes reported. (See Appendix D for an explanation of the 1979 Income Concept.) These tax years can be partitioned into seven distinct periods:

(1) Tax Year 1986 was the last year under the Economic Recovery Tax Act of 1981 (ERTA81). The tax bracket boundaries, personal exemptions, and standard deductions were indexed for inflation, and the maximum tax rate was 50 percent.

(2) Tax Year 1987 was the first year under Tax Reform Act of 1986 (TRA86). For 1987, a 1year, transitional, five-rate tax bracket structure was established with a partial phase-in of new provisions that broadened the definition of AGI. The maximum tax rate was 38.5 percent.

(3) During Tax Years 1988 through 1990, there was effectively a three-rate tax bracket structure [1]. The phase-in of the provisions of TRA86 continued with a maximum tax rate of 33 percent.

(4) Tax Years 1991 and 1992 brought a three-rate tax bracket structure (with a maximum tax rate of 31 percent), a limitation on some itemized deductions, and a phaseout of personal exemptions.

(5) Tax Years 1993 through 1996 had a five-rate tax bracket structure (with a maximum statutory tax rate of 39.6 percent), a limitation on some itemized deductions, and a phaseout of personal exemptions.

(6) Tax Years 1997 through 2000 were subject to the Taxpayer Relief Act of 1997 which added three new capital gain tax rates to the previous rate structure to form a new eight-rate tax bracket structure (with maximum statutory tax rate of 39.6 percent). See Appendix C for a more detailed description of the capital gains rates.

(7) Tax Years 2001 and 2002 were affected by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This law included a new 10-percent tax rate bracket, one-half percentage point reductions for 2001 and one percentage point reduction for 2002 in ordinary marginal tax rates higher than the 15-percent rate, increases in the child tax credit, and an increase in alternative minimum tax exemptions.