Federal personal income tax liabilities and payments, 1990-92

Survey of Current Business, Nov, 1993 by Thae S. Park

This article presents revised estimates of Federal personal income tax liabilities and payments for 1990-91 and new estimates for 1992 (table 1).(1) The estimates incorporate the annual revision of the national income and product accounts NIPA's) released in August 1993 and newly available data from the following Internal Revenue Service (IRS) sources: Statistics of Income, Individual Income Tax Returns (SOI), Annual Reports for 1989-91, and unpublished information on individual income tax collections for liability year 1992.

Table I. - Federal Personal Income Tax Liabilities and
                  Payments, 1980-92

[Billions of dollars, quarters seasonally adjusted annual rates]

                            Personal income taxes

     Year and quarter   Liability   Payment    Excess of
                         basis(1)   basis(2)   liability
                                                 basis over
                                                  payment
                                                   basis

     1989               437.0        451.7          -14.7
     1990               449.6        471.5          -21.9
     1991               447.5        462.3          -14.8
     1992               471.3        478.0           -6.7

     1989:I             424.0        440.0          -16.0
          II            432.2        456.7          -24.5
          III           439.5        450.7          -11.2
          IV            462.2        459.4           -7.2

     1990:I             437.7        465.1          -27.4
          II            448.4        473.5          -25.1
          III           454.0        475.6          -21.6
          IV            458.3        471.6          -13.3

     1991:I             439.9        461.7          -21.8
          II            449.7        460.3          -15.6
          III           449.6        461.2          -11.6
          IV            455.7        466.0          -10.3

     1992:I             457.3        467.3           10.0
          II            465.7        469.8           -4.1
          III           470.8        476.7           -6.0
          IV            491.5        498.3           -6.8
(1) This series is derived by the Bureau of Economic Analysis based on data from
 the
following Internal Service sources: Statistics of Income, Individual Income Tax
Returns (SOI), Annual Reports for 1989-91, and unpublished information on indivi
dual income
tax collections for liability year 1992.
(2) This series appears in the table 3.4 of the full set of national income and
product accounts
tables, published most recently in the August 1993 Survey of Current Business.

This article first presents an overview of the tax liabilities and payments measures and the reasons why they differ. It then discusses the differences for 1990-92 and the sources of revision to the estimates for 1990-91.

Overview

In the NIPA's, personal income taxes are recorded on a payment basis - that is, at the time tax payments are made by or on behalf of persons.(2) For certain types of analysis, personal income taxes recorded on a liability basis - that is, at the time persons earn their income and incur their tax liability - may be more appropriate.

The payment series, which appears in table 3.4 of the NIPA tables,(3) consists of three parts: Withheld taxes; declarations and final settlements, or "nonwithheld taxes"; and refunds. Withheld income taxes are those withheld at the income source. Declarations are estimated taxes paid quarterly, largely on income not subject to withholding, and final settlements are additional taxes paid either at the time of filing tax returns or as the result of audits. Refunds, made when payments exceed liabilities, occur at the time of filing tax returns.

The liability series is derived from SOI estimates of total income tax paid by individuals; the following adjustments are made: Refundable earned income credits are subtracted; fiduciary income taxes are added because the NIPA definition of persons includes fiduciaries; and audit assessments are added because SOI estimates of total income tax are before audits. When the SOI estimates of total income tax are not available, the liability series is derived from unpublished information on individual income tax collections.

For taxes withheld from wages and salaries, differences between tax liabilities and payments arise for several reasons. First, overwithholding is built into the withholding tables used by employers, although, as discussed later, the extent of overwithholding has been reduced because of new withholding tables introduced in 1992. Second, the withholding tables are constructed under the assumption that taxpayers use the standard deduction in calculating their income tax liabilities; overwithholding results when taxpayers who itemize their deductions do not request enough exemptions for withholding purposes. Third, withholding is based on the assumption that wages remain unchanged during the year; overwithholding results when wages change from one pay period to another and are subject to different withholding rates. Fourth, withholding tables may not always be revised to coincide with changes in liabilities; tax law provisions usually are effective on January 1, but corresponding revisions in withholding tables sometimes occur later. In addition, withholding tables are usually revised to reflect changes in the standard deduction, exemptions, and tax rates; they are usually not revised to reflect changes in provisions affecting itemized deductions. Fifth, at the option of the employer, taxes withheld on bonuses, commissions, overtime pay, sick pay, and taxable fringe benefits may be based on a flat 20-percent rate instead of the regular withholding rate.