60

70

30

50

20

10

40

0

Shares of Before-Tax Income and Federal Taxes, by Income Group, 2009

Before-Tax Income

Federal Taxes

Lowest

Quintile

Middle

Quintile

Second

Quintile

Fourth

Quintile

Highest 

Quintile

Top 1 Percent

81st to 99th

Percentiles

Percent

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

The Distribution of 

Household Income and 

Federal Taxes, 

2008 and 2009

JULY 2012
CBO

Notes and Definitions

Numbers in the text, tables, and figures may not add up to totals because of rounding.

Unless otherwise indicated, all years referred to in this study are calendar years.

Some of the figures have white vertical bars that indicate the duration of recessions. 

(A recession extends from the peak of a business cycle to its trough.)

Before-tax income is the sum of market income and government transfers. 

Market income is composed of labor income, business income, capital gains, capital income 

(excluding capital gains), income received in retirement for past services, and other sources of 

income.

Government transfers are cash payments and in-kind benefits from social insurance and other 

government assistance programs.

After-tax income is the sum of market income and government transfers, minus federal tax 

liabilities. 

Federal tax liabilities are the amount of federal taxes a household owes based on income 

earned in a year, regardless of when the taxes are paid. In assessments of the impact of various 

taxes, individual income taxes are allocated directly to households paying those taxes. Social 

insurance, or payroll, taxes are allocated to households paying those taxes directly or paying 

them indirectly through their employers. Corporate income taxes are allocated to households 

according to their shares of capital and labor income. Excise taxes are allocated to households 

according to their consumption of the taxed good or service.

Average federal tax rates are calculated by dividing federal tax liabilities by before-tax income. 

Negative average tax rates result when refundable tax credits, such as the earned income and 

child tax credits, exceed the tax owed by people in an income group. (Refundable tax credits 

are not limited to the amount of income tax owed before they are applied.)

Income categories are defined by ranking all people by their income adjusted for household 

size—that is, divided by the square root of a household’s size. (A household consists of the 

people who share a housing unit, regardless of their relationships.) Quintiles, or fifths, contain 

equal numbers of people, as do percentiles, or hundredths. Households with negative income 

(business or investment losses larger than other income) are excluded from the lowest income 

category but are included in totals.

Income is adjusted for inflation using the personal consumption expenditures price index, 

which is calculated by the Bureau of Economic Analysis. 

These terms are explained in greater detail in the appendix.

Pub. No. 4441
Contents

CBO

Summary i

Introduction 1

Estimates for 2008 and 2009 1

Households’ Before-Tax Income 2

Federal Tax Rates 2

Distribution of Federal Taxes Across the Income Scale 3

Households’ After-Tax Income 9

Historical Trends 10

Average Federal Tax Rates, by Source 11

Average Federal Tax Rates, by Income Group 14

2010 and Beyond 16

Differences with Earlier Estimates 16

Incidence of the Corporate Income Tax 16

Valuation of Government-Provided Health Insurance 18

Measuring Inflation 21

Appendix: Methodology 23

Lists of Tables and Figures 26

About This Document 27
CBO

Summary

The recent recession has had a substantial impact on 

income, the amount of taxes owed, and average tax rates. 

In this report, the Congressional Budget Office (CBO) 

extends its estimates of the distribution of household 

income and federal taxes through 2008 and 2009, the latest year for which comprehensive data are available, and 

compares those estimates with estimates for 2007 and for 

the 1979–2009 period. Major findings are as follows:

 Before-Tax Income. In 2009, the share of total beforetax income (which includes government transfer 

payments, such as Social Security benefits) received by 

households in the lowest income quintile (that is, the 

lowest one-fifth) was 5.1 percent, the share received by 

households in the middle quintile was 14.7 percent, 

and the share received by households in the highest 

quintile was 50.8 percent (see Summary Table 1).1

Average before-tax income fell 12 percent from 2007 

to 2009 in real (inflation-adjusted) terms. The 

declines in before-tax income were 5 percent or less for 

households in each of the four lowest income quintiles 

and 18 percent for households in the top quintile 

(including a 36 percent decline for households in the 

top percentile, or top 1 percent). Because income fell 

more rapidly for households in the top percentile than 

for other income groups, their share of before-tax 

income also fell, by 5.3 percentage points.

 Tax Rates. Average tax rates depend on tax laws and 

economic conditions. The average federal tax rate—

that is, households’ federal tax liabilities divided by 

their income (including transfer payments) before 

taxes—was 17.4 percent in 2009 for all households 

and ranged from 1.0 percent for households in the 

lowest quintile to 23.2 percent for households in the 

highest quintile (and to 28.9 percent for households in 

the top percentile). The average federal tax rate for all 

households fell 2.5 percentage points from 2007 to 

2009, reaching the lowest level seen in the 1979–2009 

period. The largest decline was for households in the 

lowest income quintile. With the decline in before-tax 

income offset in part by the decrease in federal taxes, 

average after-tax income fell 10 percent in real terms.

 Share of Tax Liabilities. In 2009, the share of federal 

taxes owed was 0.3 percent for households in the lowest income quintile, 9.4 percent for households in the 

middle quintile, and 67.9 percent for those in the 

highest quintile. Declines in before-tax income among 

households in the top income percentile lowered their 

share of federal tax liabilities from 26.7 percent to 

22.3 percent between 2007 and 2009.

Although the detailed data that form the basis of CBO’s 

estimates in this report are available only through 2009, 

other data can provide some insight into changes in the 

distribution of income and federal taxes in 2010 and 

2011. Those data suggest that overall income continued 

to grow slowly in 2010 and 2011 and that income for 

households toward the higher end of the distribution 

increased more rapidly than income for households elsewhere in the income distribution in 2010. Average federal 

tax rates probably remained near their post-1979 low 

levels in both 2010 and 2011. 

The analysis in this report reflects two significant changes 

CBO has made to the methodology it uses to derive 

estimates of before-tax income and federal tax liability. 

Specifically, the agency has revised its assumptions about 

the incidence of the corporate income tax and its method 

for valuing government-provided health insurance. Those 

changes are discussed later in the report. CBO has also 

changed the index it uses to measure inflation; it now 

uses the personal consumption expenditures (PCE) price 

index, also referred to as the PCE deflator. 

1. For information on definitions of income, the allocation of taxes, 

and the ranking of households, see “Notes and Definitions” at the 

front of this report.
II THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Summary Table 1.

Distribution of Federal Taxes and Household Income, by Income Group, 

2007 and 2009

Source: Congressional Budget Office.

Notes: Average tax rates are calculated by dividing tax liabilities by before-tax income. 

Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business income, 

capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of income. 

Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. For more 

detailed definitions of income, see the appendix.

After-tax income is the sum of market income and government transfers, minus federal tax liabilities. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Federal taxes include individual and corporate income taxes, social insurance (or payroll) taxes, and excise taxes.

Income amounts have been rounded to the nearest $100. *=between -0.05 percentage points and zero.

All Federal Taxes (Percent)

1.0 6.8 11.1 15.1 23.2 17.4 18.8 21.1 24.1 28.9

0.3 3.8 9.4 18.3 67.9 100.0 16.1 12.2 17.3 22.3

Before-tax 23,500 43,400 64,300 93,800 223,500 88,400 131,700 175,800 271,800 1,219,700

After-tax 23,300 40,500 57,100 79,600 171,600 73,100 107,000 138,700 206,200 866,700

Before-tax 5.1 9.8 14.7 21.1 50.8 100.0 14.9 10.1 12.5 13.4

After-tax 6.2 11.1 15.8 21.6 47.2 100.0 14.6 9.6 11.4 11.5

All Federal Taxes (Percent)

5.1 10.3 14.0 17.5 24.7 19.9 20.6 22.5 25.4 28.3

1.2 4.7 9.4 16.8 67.8 100.0 14.2 10.7 16.2 26.7

Before-tax 23,900 45,600 67,600 98,400 273,000 101,000 138,000 187,300 315,800 1,917,200

After-tax 22,700 40,800 58,100 81,200 205,600 80,900 109,600 145,200 235,700 1,373,700

Before-tax 4.8 9.0 13.3 19.1 54.6 100.0 13.7 9.5 12.7 18.7

After-tax 5.6 10.0 14.3 19.6 51.4 100.0 13.6 9.2 11.8 16.7

Change in All Federal Taxes

(Percentage points)

-4.1 -3.5 -2.9 -2.4 -1.5 -2.5 -1.8 -1.4 -1.3 0.6

-0.9 -0.9 * 1.5 0.1 0 1.9 1.5 1.1 -4.4

Average (2009 dollars)

Before-tax -400 -2,200 -3,300 -4,600 -49,500 -12,600 -6,300 -11,500 -44,000 -697,500

After-tax 600 -300 -1,000 -1,600 -34,000 -7,800 -2,600 -6,500 -29,500 -507,000

Share (Percentage

points)

Before-tax 0.3 0.8 1.4 2.0 -3.8 0 1.2 0.6 -0.2 -5.3

After-tax 0.6 1.1 1.5 2.0 -4.2 0 1.0 0.4 -0.4 -5.2

Percentage Change in

Average Income, 2007 to 2009

-2 -5 -5 -5 -18 -12 -5 -6 -14 -36

3 -1 -2 -2 -17 -10 -2 -4 -13 -37

Average federal tax rate

Share of tax liabilities

Lowest Second

Quintile

Middle

Quintile

Top 

1 Percent

2009

2007

Change from 2007 to 2009

81st to 90th

Average after-tax income

Income

Income

Change in Income

Average federal tax rate

Share of tax liabilities

Average (2009 dollars)

Share (Percent)

Average (2009 dollars)

Share (Percent)

Average federal tax rate

Share of tax liabilities

Average before-tax income

Quintile Percentiles Quintiles

91st to 95th

Percentiles

96th to 99th

Percentiles

Fourth

Quintile

Highest

Quintile

All
CBO

The Distribution of Household Income and

Federal Taxes, 2008 and 2009

Introduction

In this analysis, the Congressional Budget Office (CBO) 

examines the distribution of household income and 

federal taxes, focusing on calendar years 2008 and 2009. 

This study builds on the work in previous CBO 

publications that looked at income and taxes over the 

1979–2007 period.1

Using data from the Internal Revenue Service (IRS) and 

survey data collected by the Census Bureau, CBO estimated income—including government transfer payments 

and federal taxes—for a representative sample of households in each year during that period. (The appendix

contains a more detailed discussion of the data and methodology.) This report shows average tax rates for various 

income categories for the four largest sources of federal 

revenue—individual income taxes, social insurance (or 

payroll) taxes, corporate income taxes, and excise taxes—

and for the four taxes combined. The report also presents 

average household income (before and after taxes) and 

shares of federal taxes and income for each fifth (or quintile) of the income distribution and for subgroups of the 

top quintile.

The study uses several measures of income. Market 

income is composed of labor income, business income, 

capital gains, capital income (excluding capital gains), 

income received in retirement for past services, and other 

sources of income. (Labor income includes the value of 

income received in-kind from sources such as employerpaid health insurance premiums; business income 

includes taxes paid by businesses that are imputed to 

households.) Before-tax income is the sum of market 

income and government transfers, and after-tax income is 

before-tax income minus federal tax liabilities.

The analysis focuses on annual income, showing average 

income in different years for different households 

grouped by income. The households in any particular 

segment of the income distribution in 2009 were not 

necessarily the same households who were in that segment in earlier years. The analysis does not assess trends 

in the distribution of other measures of economic wellbeing, such as household income measured over a longer 

period, household consumption, or household wealth. 

The analysis presents average income and tax rates for 

various income groups. Within each income group there 

is considerable variation in income, taxes paid, and tax 

rates, but this report does not examine that variation.

Estimates for 2008 and 2009

Changes in households’ before-tax income and average 

tax rates in 2008 and 2009 were substantial and differed 

markedly across the income distribution. Average aftertax income fell notably, owing to a drop in market 

income that was caused by the recession that began in 

December 2007 and was only partially offset by increases 

in government transfers and decreases in federal taxes.

1. See Congressional Budget Office, Trends in the Distribution of 

Household Income Between 1979 and 2007 (October 2011), and 

Average Federal Taxes by Income Group (June 2010). The methodology used in this report differs somewhat from that used in the 

earlier studies, although the primary conclusions of the earlier 

studies are unaffected by the changes in methodology. In conjunction with this report, CBO has also published supplemental tables 

that present estimates for the 1979–2009 period derived using the 

current methodology. Those tables are available at www.cbo.gov/

publication/43310.
2 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Households’ Before-Tax Income

Market income is very unevenly distributed. In 2009, 

households in the lowest income quintile received 

2.2 percent of market income, equal to about $7,600 

per household, and those in the middle quintile received 

13.5 percent, or $54,200 per household (see Table 1 on 

page 4). Households in the highest quintile received 

56.8 percent of income, or $218,800 per household, 

but that average masks wide differences between subgroups of that quintile; households in the 81st to 90th 

percentiles received $125,800, on average, compared 

with $1.2 million for households in the top percentile. 

This analysis does not separately examine subgroups of 

the top percentile.

Aggregate market income declined in both 2008 and 

2009, largely because of the recession that began in 

December 2007 and lasted through June 2009 and the 

slow recovery that followed. Declines were especially 

steep for capital gains, which fell by 75 percent in real 

(inflation-adjusted) terms between 2007 and 2009. 

Other sources of capital income also fell: interest income 

by 40 percent and dividend income by 33 percent. 

Wages, the largest source of income, fell by a more 

modest 6 percent. Average real market income fell by 

16 percent between 2007 and 2009.2

That decline in market income was mitigated somewhat 

by an increase in government transfers. Payments from 

most government transfer programs grew: Transfers rose 

by 15 percent for Social Security, nearly tripled for unemployment insurance, nearly doubled for the Supplemental 

Nutrition Assistance Program, and grew by between 

5 percent and 10 percent for Medicare and Medicaid. 

Consequently, real before-tax income fell by 12 percent, 

less than the 16 percent decline in market income alone.

Government transfers lift incomes for all income groups, 

but the increases are larger for households with less 

income. In 2009, households in the bottom quintile of 

the market-income distribution received over 40 percent 

of total transfer payments—an average of about $23,000 

per household. Almost two-thirds of that came from 

Social Security and Medicare. The share of transfers 

received fell steadily moving up the income distribution, 

with the top quintile receiving less than 10 percent of 

transfer payments. (Higher-income households receive 

transfers because eligibility for some large programs, 

such as Social Security and Medicare, is not based on 

household income.)

Because of that pattern, before-tax income is more evenly 

distributed than is market income alone. Households in 

the lowest quintile of the before-tax income distribution 

received 5.1 percent of income, the middle quintile 

received 14.7 percent, and the top quintile received 

50.8 percent.

Federal Tax Rates

Decreases in federal taxes meant that the drop in after-tax 

income was also less than the decline in market income. 

The overall average federal tax rate (household federal 

tax liabilities divided by before-tax household income) 

declined from 19.9 percent of income in 2007 to 

18.0 percent in 2008 and 17.4 percent in 2009 (see 

Table 2 on page 6). 

The average individual income tax rate (household 

income tax liabilities divided by before-tax household 

income) fell to 7.2 percent in 2009—a drop of 2.0 percentage points from 2007—owing to both declines in 

income and changes in tax law. The average social insurance tax rate (household payroll tax liabilities divided by 

before-tax household income) rose 0.7 percentage points, 

to 8.0 percent of household income in 2009. That average rate rose because earnings fell by less than did other 

sources of income and because earnings above the cap on 

payroll taxes ($106,800 in 2009) fell more rapidly than 

did earnings below it. 

The average individual income tax rate is typically higher 

than the payroll tax rate, but in 2009 it was lower. Two 

factors explain that unusual result. First, because the tax 

base for payroll taxes is limited to earnings, a steep drop 

in nonwage income (such as interest, dividends, and capital gains) reduced income taxes but not payroll taxes in 

2009. Second, the American Recovery and Reinvestment 

Act of 2009 (ARRA, Public Law 111-5) made several 

changes that lowered individual income taxes in that year. 

The act introduced new refundable income tax credits 

and expanded existing ones. In the analysis for this 

2. Real personal income—the measure of income the Bureau of 

Economic Analysis (BEA) uses in the national income and product accounts (NIPAs)—also declined from 2007 to 2009, though 

not by nearly as much as CBO’s income measure. Much of that 

difference in the two measures occurs because CBO includes 

capital gains in market income; in contrast, BEA does not include 

capital gains as part of personal income in the NIPAs.
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 3

CBO

report, CBO measured individual income taxes net of 

refundable credits.3

The average corporate income tax rate (corporate taxes 

allocated to households divided by before-tax household 

income) also fell between 2007 and 2009—by 1.4 percentage points, to a rate of 1.5 percent in 2009. That 

change reflects both a sharp decline in corporate profits 

in 2008 that was only partially reversed in 2009 and legislation that reduced corporate income taxes in both 2008 

and 2009. Excise taxes averaged 0.6 percent of household 

income in 2009, up 0.1 percentage point from 2007.

Distribution of Federal Taxes Across the 

Income Scale

The federal tax system is progressive—that is, average 

tax rates generally rise with income. In 2009, households 

in the bottom fifth of the before-tax income distribution 

paid 1.0 percent of their before-tax income in federal 

taxes, households in the middle quintile paid 

11.1 percent, and households in the highest quintile paid 

23.2 percent (see Figure 1 on page 8). Average rates were 

higher for higher-income groups within the top quintile, 

and households in the top 1 percent of the before-tax 

income distribution faced an average rate of 28.9 percent. 

Because average federal tax rates rise with income, the 

share of federal taxes paid by higher-income households 

exceeded their share of before-tax income, and the opposite was true for lower-income households. In 2009, 

households in the highest quintile received 50.8 percent 

of before-tax income and paid 67.9 percent of federal 

taxes; households in the top 1 percent received 13.4 percent of income and paid 22.3 percent of taxes (see 

Figure 2 on page 9). In all other quintiles, the share of 

federal taxes paid was smaller than the share of before-tax 

income: Households in the bottom quintile received 

5.1 percent of income and paid 0.3 percent of taxes, and 

households in the middle quintile received 14.7 percent 

of income and paid 9.4 percent of taxes.

Individual Income Taxes. Much of the progressivity of 

the federal tax system derives from the individual income 

tax. In 2009, the bottom quintile’s average rate for the 

individual income tax was -9.3 percent—that is, refundable tax credits exceeded the income tax owed by that 

group (see Figure 3 on page 10). On average, households 

in the second quintile also received more in refundable 

credits than they paid in individual income taxes. The 

average income tax rate was 1.3 percent for the middle 

quintile, 4.6 percent for the fourth quintile, and 

13.4 percent for the highest quintile. The top 1 percent, 

on average, paid 21.0 percent of their income in 

individual income taxes.

Two changes in tax law lowered individual income tax 

rates in 2008 and 2009 relative to what they were in 

2007. The Economic Stimulus Act of 2008 (P.L. 110-

185) provided a partially refundable payment of between 

$300 and $600 per person in 2008.4

 Several provisions of 

ARRA reduced individual income taxes in 2009. The 

largest tax provision was the Making Work Pay credit, a 

refundable credit of up to $400 for a single worker or 

$800 for a married couple. Other provisions of ARRA 

increased the exemption for the alternative minimum tax, 

provided special additional payments for Social Security 

beneficiaries, lowered the threshold for the refundable 

child tax credit, created the American Opportunity Tax 

Credit (a new credit for college expenses), expanded the 

earned income tax credit, and exempted some unemployment compensation from individual income taxes. 

The changes in tax law reduced average tax rates more for 

lower-income taxpayers than for higher-income taxpayers, primarily because of the Making Work Pay credit, 

which phased out for taxpayers with higher income. 

Between 2007 and 2009, the individual income tax rate 

fell by more than 3 percentage points for the lowest 

income quintile, about 2.5 points for the second quintile, 

just under 2 points for the middle quintile, roughly 

1.5 points for the fourth quintile, and about 1 point for 

the top quintile. In contrast, the average rate for households in the top percentile rose. The reason is that capital 

gains and dividends, which are taxed at preferential rates 

below the rates on other taxable income, fell by much 

more than other sources of income, and capital gains and 

3. In the federal budget, the refundable portion of income tax credits 

is counted as outlays. In fiscal year 2009, the revenues collected 

from individual income taxes (which do not count the refundable 

portion of those tax credits) were a slightly larger share of gross 

domestic product (6.6 percent) than the revenues collected from 

social insurance taxes (6.4 percent).

4. The Internal Revenue Service made those payments to taxpayers 

in 2008 on the basis of information provided on their 2007 tax 

returns. Taxpayers who did not receive an advance payment could 

take a credit against their 2008 tax liabilities. In this analysis, 

CBO counted such payments as part of 2008 tax liabilities.
4 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Table 1.

Distribution of Before-Tax Income, by Income Group, 2007 to 2009

Continued

Income Group

Lowest Quintile 7,600 22,900 30,500 23,500

Second Quintile 30,100 14,800 45,000 43,400

Middle Quintile 54,200 10,400 64,600 64,300

Fourth Quintile 86,400 7,100 93,500 93,800

Highest Quintile 218,800 6,000 224,800 223,500

All Quintiles 75,700 12,700 88,400 88,400

81st to 90th Percentiles 125,800 5,800 131,600 131,700

91st to 95th Percentiles 169,800 5,700 175,500 175,800

96th to 99th Percentiles 266,200 6,200 272,400 271,800

Top 1 Percent 1,219,600 9,000 1,228,600 1,219,700

Lowest Quintile 8,900 20,300 29,200 23,500

Second Quintile 33,100 12,300 45,500 43,800

Middle Quintile 57,100 8,500 65,600 65,400

Fourth Quintile 89,800 6,100 95,900 95,700

Highest Quintile 243,200 5,400 248,700 246,600

All Quintiles 82,600 11,000 93,600 93,600

81st to 90th Percentiles 130,000 5,100 135,100 135,000

91st to 95th Percentiles 175,900 5,300 181,200 180,500

96th to 99th Percentiles 286,800 5,800 292,600 290,500

Top 1 Percent 1,559,900 9,000 1,568,900 1,558,900

Lowest Quintile 9,900 19,700 29,600 23,900

Second Quintile 35,200 12,000 47,100 45,600

Middle Quintile 59,800 8,200 68,000 67,600

Fourth Quintile 92,500 6,100 98,600 98,400

Highest Quintile 269,400 6,000 275,400 273,000

All Quintiles 90,300 10,800 101,000 101,000

81st to 90th Percentiles 132,800 5,300 138,200 138,000

91st to 95th Percentiles 182,300 5,700 187,900 187,300

96th to 99th Percentiles 310,700 7,200 317,900 315,800

Top 1 Percent 1,919,700 9,400 1,929,100 1,917,200

2007

2008

2009

Market Income Transfers Received

With Households Ranked by Market Income

Before-Tax Income Before-Tax Income

Ranked by

With Households

Average Income (2009 dollars)a
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 5

CBO

Table 1. Continued

Distribution of Before-Tax Income, by Income Group, 2007 to 2009

Source: Congressional Budget Office.

Notes: Market income is composed of labor income, business income, capital gains, capital income (excluding capital gains), income received 

in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social 

insurance and other government assistance programs. Before-tax income is the sum of market income and government transfers. For

more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by either their market or before-tax income. Quintiles contain equal numbers of 

people.

a. Income amounts have been rounded to the nearest $100.

Income Group

Lowest Quintile 2.2 40.5 7.7 5.1

Second Quintile 7.6 22.4 9.7 9.8

Middle Quintile 13.5 15.5 13.8 14.7

Fourth Quintile 21.7 10.7 20.1 21.1

Highest Quintile 56.8 9.3 50.0 50.8

All Quintiles 100.0 100.0 100.0 100.0

81st to 90th Percentiles 16.2 4.4 14.5 14.9

91st to 95th Percentiles 11.1 2.2 9.9 10.1

96th to 99th Percentiles 14.1 2.0 12.4 12.5

Top 1 Percent 15.4 0.7 13.3 13.4

Lowest Quintile 2.5 42.3 7.1 5.0

Second Quintile 7.6 21.4 9.2 9.4

Middle Quintile 13.0 14.5 13.2 13.9

Fourth Quintile 20.5 10.5 19.3 20.1

Highest Quintile 57.8 9.8 52.1 52.8

All Quintiles 100.0 100.0 100.0 100.0

81st to 90th Percentiles 15.2 4.5 14.0 14.3

91st to 95th Percentiles 10.6 2.4 9.7 9.8

96th to 99th Percentiles 13.9 2.1 12.5 12.6

Top 1 Percent 18.0 0.8 16.0 16.0

Lowest Quintile 2.5 41.7 6.7 4.8

Second Quintile 7.4 21.1 8.9 9.0

Middle Quintile 12.5 14.3 12.7 13.3

Fourth Quintile 19.3 10.6 18.4 19.1

Highest Quintile 59.2 11.0 54.1 54.6

All Quintiles 100.0 100.0 100.0 100.0

81st to 90th Percentiles 14.5 4.9 13.4 13.7

91st to 95th Percentiles 10.1 2.6 9.3 9.5

96th to 99th Percentiles 13.8 2.7 12.6 12.7

Top 1 Percent 20.8 0.9 18.7 18.7

With Households Ranked by Market Income Ranked by

Market Income Transfers Received Before-Tax Income Before-Tax Income

2007

2009

2008

Share of Income (Percent)

With Households
6 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Table 2.

Distribution of Federal Taxes, by Income Group, 2007 to 2009

Continued

Before-Tax 

Income Group

Lowest Quintile 1.0 -9.3 8.3 0.5 1.5

Second Quintile 6.8 -2.6 7.9 0.5 0.9

Middle Quintile 11.1 1.3 8.4 0.6 0.8

Fourth Quintile 15.1 4.6 9.1 0.7 0.6

Highest Quintile 23.2 13.4 7.2 2.3 0.4

All Quintiles 17.4 7.2 8.0 1.5 0.6

81st to 90th Percentiles 18.8 7.7 9.7 0.9 0.5

91st to 95th Percentiles 21.1 10.3 9.2 1.1 0.5

96th to 99th Percentiles 24.1 14.6 7.4 1.7 0.4

Top 1 Percent 28.9 21.0 2.5 5.2 0.2

Lowest Quintile 1.5 -9.1 8.6 0.6 1.3

Second Quintile 7.3 -2.5 8.3 0.6 0.9

Middle Quintile 11.6 1.2 8.9 0.8 0.7

Fourth Quintile 15.6 4.7 9.4 0.9 0.6

Highest Quintile 23.6 14.0 6.5 2.7 0.4

All Quintiles 18.0 7.8 7.8 1.8 0.6

81st to 90th Percentiles 19.1 7.9 9.6 1.1 0.5

91st to 95th Percentiles 21.7 10.8 9.1 1.4 0.4

96th to 99th Percentiles 24.7 15.4 6.8 2.1 0.4

Top 1 Percent 28.1 20.4 2.0 5.5 0.2

Lowest Quintile 5.1 -5.8 8.7 1.0 1.2

Second Quintile 10.3 -0.1 8.6 1.0 0.8

Middle Quintile 14.0 3.1 8.9 1.3 0.7

Fourth Quintile 17.5 6.1 9.3 1.5 0.6

Highest Quintile 24.7 14.4 5.8 4.1 0.3

All Quintiles 19.9 9.2 7.3 2.9 0.5

81st to 90th Percentiles 20.6 8.9 9.4 1.8 0.5

91st to 95th Percentiles 22.5 11.2 8.5 2.3 0.4

96th to 99th Percentiles 25.4 15.5 6.0 3.5 0.3

Top 1 Percent 28.3 19.4 1.6 7.2 0.1

2009

2008

2007

Average Federal Tax Rate (Percentage of before-tax income)

Taxes Income Taxes Insurance Taxes Income Taxes Taxes

All Federal Individual Social Corporate Excise
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 7

CBO

Table 2. Continued

Distribution of Federal Taxes, by Income Group, 2007 to 2009

Source: Congressional Budget Office.

Notes: Average tax rates are calculated by dividing tax liabilities of each type by total before-tax income for each income group.

Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs. For more detailed definitions of income, see the appendix.

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Before-Tax 

Income Group

Lowest Quintile 0.3 -6.6 5.3 1.8 12.2

Second Quintile 3.8 -3.5 9.7 3.2 15.1

Middle Quintile 9.4 2.7 15.4 5.8 18.8

Fourth Quintile 18.3 13.4 24.0 10.2 21.3

Highest Quintile 67.9 94.1 45.3 77.2 32.1

All Quintiles 100.0 100.0 100.0 100.0 100.0

81st to 90th Percentiles 16.1 15.9 17.9 8.7 12.5

91st to 95th Percentiles 12.2 14.3 11.6 7.4 7.5

96th to 99th Percentiles 17.3 25.2 11.6 14.1 7.7

Top 1 Percent 22.3 38.7 4.2 47.1 4.4

Lowest Quintile 0.4 -5.8 5.5 1.7 11.9

Second Quintile 3.8 -3.0 10.0 3.2 14.6

Middle Quintile 8.9 2.2 15.8 5.7 18.1

Fourth Quintile 17.4 12.1 24.3 9.9 20.9

Highest Quintile 69.2 94.6 44.1 78.0 34.1

All Quintiles 100.0 100.0 100.0 100.0 100.0

81st to 90th Percentiles 15.1 14.5 17.6 8.5 12.6

91st to 95th Percentiles 11.8 13.5 11.4 7.3 7.7

96th to 99th Percentiles 17.3 24.8 11.0 14.4 8.1

Top 1 Percent 25.0 41.8 4.2 47.8 5.7

Lowest Quintile 1.2 -3.0 5.6 1.7 10.9

Second Quintile 4.7 -0.1 10.5 3.2 14.2

Middle Quintile 9.4 4.6 16.2 5.8 18.3

Fourth Quintile 16.8 12.6 24.4 9.9 22.2

Highest Quintile 67.8 86.0 43.1 78.5 34.2

All Quintiles 100.0 100.0 100.0 100.0 100.0

81st to 90th Percentiles 14.2 13.3 17.6 8.6 13.5

91st to 95th Percentiles 10.7 11.6 11.1 7.7 7.9

96th to 99th Percentiles 16.2 21.5 10.4 15.6 8.0

Top 1 Percent 26.7 39.6 4.1 46.7 4.8

2009

2008

2007

Share of Federal Tax Liabilities (Percent)

All Federal Individual Social Corporate Excise

Taxes Income Taxes Insurance Taxes Income Taxes Taxes
8 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Figure 1.

Average Federal Tax Rates, by Income Group, 2009

(Percent)

Source: Congressional Budget Office.

Notes: Average tax rates are calculated by dividing tax liabilities by before-tax income. 

Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs. For more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Federal taxes include individual and corporate income taxes, social insurance (or payroll) taxes, and excise taxes.

dividends are a much larger portion of income for households in the top percentile than for those in other income 

groups.

The changes in average individual income tax rates 

between 2007 and 2009 led to a larger share of income 

taxes being paid by households who were higher in the 

income distribution. Specifically, between 2007 and 

2009, the share of taxes paid fell for the bottom three 

income quintiles, was close to flat for the fourth quintile, 

but rose for the highest quintile (from 86 percent to 

94 percent). Within the top quintile, however, the shift 

was uneven; the share paid by the top percentile fell, and 

the share paid by the rest of the top quintile rose.

Social Insurance (Payroll) Taxes. Average rates for 

payroll taxes are fairly flat across most of the income distribution but are lower at the top. In 2009, the average 

payroll tax rate was 8.3 percent for the lowest quintile, 

7.9 percent for the second quintile, 8.4 percent for the 

middle quintile, and 9.1 percent for the fourth quintile, 

compared with 7.2 percent for the highest quintile and 

2.5 percent for the top percentile of households (see 

Table 2 on page 6). The rate for higher-income households is lower than that for others in part because more 

of the earnings for those households are above the maximum income subject to Social Security taxes and in part 

because earnings are a smaller share of their income. 

Social insurance taxes account for the largest share of 

taxes paid by households in all but the top quintile. 

The average social insurance tax rate (social insurance 

taxes as a share of before-tax income) rose between 2007 

and 2009, from 7.3 percent to 8.0 percent. Aggregate 

payroll tax rates increased because wages and salaries—

the base for the tax—fell more slowly than did other 

types of income, pushing up payroll taxes as a share of 

total income. Also, wages of taxpayers whose earnings 

were above the taxable maximum fell by more than wages 

of taxpayers whose earnings were below it. Consequently, 

the share of wages subject to the Social Security payroll 

tax rose, pushing up the average tax rate. 

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile

0

5

10

15

20

25

All Quintiles
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 9

CBO

Figure 2.

Shares of Before-Tax Income and Federal Taxes, by Income Group, 2009

(Percent)

Source: Congressional Budget Office.

Notes: Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs. For more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Federal taxes include individual and corporate income taxes, social insurance (or payroll) taxes, and excise taxes.

The pattern of changes was not uniform across the 

income distribution, however. Average payroll tax rates 

decreased for the bottom three quintiles; for those 

groups, wages declined as a share of total income, because 

government transfers rose and wages fell. In contrast, the 

rate for the highest quintile rose by 1.4 percentage points, 

because wages fell by less than did income from sources 

not subject to the payroll tax.

Corporate Income Taxes. The impact of the federal 

corporate income tax also rises with income, because 

CBO assumed in this analysis that most of the tax is 

borne by capital income, which is a larger share of 

income at the top of the distribution. Under CBO’s 

assumption, the highest income quintile paid almost 

80 percent of the corporate income tax during the 2007–

2009 period. In 2009, the average corporate income tax 

rate (corporate taxes as a share of before-tax household 

income) was 0.5 percent for the lowest quintile, 0.6 percent for the middle quintile, and 2.3 percent for the 

highest quintile. The average rate fell between 2007 and 

2009, from 2.9 percent to 1.5 percent. Higher-income 

groups experienced a larger percentage-point decline in 

the tax. 

Excise Taxes. The effect of federal excise taxes, relative to 

income, is greatest for lower-income households, who 

tend to spend a large share of their income on such goods 

as gasoline, alcohol, and tobacco, which are subject to 

such taxes. Average excise tax rates changed little between 

2007 and 2009, however—no more than three-tenths of 

a percentage point for any income group.

Households’ After-Tax Income

Average federal tax rates rise with income, causing the 

distribution of after-tax income to be more even than 

that of before-tax income.5

 In 2009, households in the 

bottom four quintiles of the before-tax income distribution each received a share of after-tax income that was 

about 1 percentage point larger than their share of 

before-tax income (see Figure 4 on page 11). In contrast, 

households in the highest quintile received 47.2 percent 

of after-tax income and 50.8 percent of before-tax 

income. 

0

10

20

30

40

50

60

70

Top 1 Percent

81st to 99th

Percentiles

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile

Federal Taxes

Before-Tax Income

5. This report includes only federal taxes. CBO did not include state 

and local taxes in this analysis because of the difficulty of estimating them for individual households.
10 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Figure 3.

Average Federal Tax Rates, by Income Group and Tax Source, 2009

(Percent)

Source: Congressional Budget Office.

Notes: Average tax rates are calculated by dividing tax liabilities of each type by total before-tax income for each income group.

Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs. For more detailed definitions of income, see the appendix.

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Declines in after-tax income between 2007 and 2009 

were heavily concentrated at the top of the income distribution (see Table 3 on page 12). After-tax income fell by 

37 percent for the top 1 percent of households and by 

about 5 percent for households in the 81st to 99th percentiles. Households in the middle three quintiles of the 

income distribution experienced more modest declines 

(1 percent to 2 percent), and after-tax income increased 

slightly for households in the lowest quintile. As a consequence of those changes, the share of after-tax income 

accruing to the top percentile of the distribution fell by 

5.2 percentage points. The share earned by each of the 

bottom four income quintiles rose between 0.6 and 

2.0 percentage points, and the share earned by the 81st 

to 99th percentiles rose 1.0 percentage point. 

Changes in the distribution of market income were 

responsible for much of the shift in the distribution of 

after-tax income between 2007 and 2009. Large declines 

in sources of market income that tilt heavily toward highincome households—such as capital gains and interest—

caused the large decline in top incomes; for households in 

the highest percentile, average market income dropped 

36 percent between 2007 and 2009. 

Although market income was the primary factor causing 

the shift in the distribution of after-tax income, federal 

taxes and government transfers also contributed. Transfers were flat, in real terms, for the highest income 

quintile but rose for all other income groups. And average 

federal tax rates rose slightly for the top 1 percent of 

households but fell for all other groups, with the largest 

decreases experienced by those at the bottom of the 

income distribution. Thus, the downward shift in the distribution of income after federal taxes and transfers was 

larger than the downward shift in market income.

Historical Trends

Many of the changes in average federal tax rates and aftertax income in 2008 and 2009 are notable when viewed 

from a longer historical perspective: 

Individual Income Taxes Social Insurance Taxes Corporate Income Taxes Excise Taxes

12

10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

Lowest

Quintile

Second

Quintile

Middle

Quintile

Fourth

Quintile

Highest

Quintile
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 11

CBO

Figure 4.

Shares of Before- and After-Tax Income, by Income Group, 2009

(Percent)

Source: Congressional Budget Office.

Notes: Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs.

After-tax income is the sum of market income and government transfers, minus federal tax liabilities.

For more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Federal taxes include individual and corporate income taxes, social insurance (or payroll) taxes, and excise taxes.

 The overall average federal tax rates of 18.0 percent in 

2008 and 17.4 percent in 2009 were the lowest in the 

1979–2009 period (see Figure 5 on page 14) and were 

well below the previous low of 19.4 percent in 2003 

and the average of 21.0 percent over that period. 

 The average federal individual income tax rate also 

reached a new low in 2009, at 7.2 percent of household income, falling below previous low marks in 

2008 and 2003. The average individual income tax 

rate fell below the average social insurance tax rate for 

the first time in the 31 years covered by this analysis.

 The average federal corporate income tax rate also 

approached the lowest level in the 1979–2009 period.

 The decline in after-tax income for the highestincome households reversed a substantial portion of 

the sharp rise in their income between 1979 and 2007 

(see Figure 6 on page 15).

Average Federal Tax Rates, by Source

The 2009 overall average federal tax rate (household tax 

liabilities divided by before-tax income) was the lowest 

observed in the 1979–2009 period, falling from 22.0 percent in 1979 to 17.4 percent in 2009 (see the top panel of 

Figure 5 on page 14). The rate declined in the early 

1980s, then rose through much of the 1980s and 1990s. 

It peaked at 22.7 percent in 2000 and then fell sharply 

following the 2001 recession and tax legislation enacted 

in 2001 and 2003, reaching just under 19.4 percent in 

2003. The rate rebounded somewhat over the next few 

years as economic conditions improved, before dropping 

substantially in 2008 and 2009.

The average individual income tax rate peaked at 

11.9 percent of household income in 1981, then fell as 

the reduction in tax rates enacted in 1981 took effect. 

Legislation enacted in 1993 and rapidly rising incomes 

pushed the rate up again in the late 1990s—to 11.7 percent in 2000, close to its highest level. The rate then fell 

to 8.3 percent in 2003 as a result of the 2001 and 2003 

0

10

20

30

40

50

60

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile

Top 1 Percent

81st to 99th

Percentiles

Before-Tax

After-Tax
12 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Table 3.

Distribution of Before- and After-Tax Income and Federal Taxes, by 

Income Group, 2007 to 2009

Continued

Before-Tax

Income Group

Lowest Quintile 23,500 200 23,300

Second Quintile 43,400 2,900 40,500

Middle Quintile 64,300 7,200 57,100

Fourth Quintile 93,800 14,100 79,600

Highest Quintile 223,500 51,900 171,600

All Quintiles 88,400 15,300 73,100

81st to 90th Percentiles 131,700 24,700 107,000

91st to 95th Percentiles 175,800 37,000 138,700

96th to 99th Percentiles 271,800 65,600 206,200

Top 1 Percent 1,219,700 353,000 866,700

Lowest Quintile 23,500 300 23,200

Second Quintile 43,800 3,200 40,600

Middle Quintile 65,400 7,600 57,900

Fourth Quintile 95,700 14,900 80,700

Highest Quintile 246,600 58,300 188,300

All Quintiles 93,600 16,900 76,700

81st to 90th Percentiles 135,000 25,800 109,200

91st to 95th Percentiles 180,500 39,100 141,400

96th to 99th Percentiles 290,500 71,600 218,900

Top 1 Percent 1,558,900 438,300 1,120,500

Lowest Quintile 23,900 1,200 22,700

Second Quintile 45,600 4,700 40,800

Middle Quintile 67,600 9,500 58,100

Fourth Quintile 98,400 17,200 81,200

Highest Quintile 273,000 67,400 205,600

All Quintiles 101,000 20,100 80,900

81st to 90th Percentiles 138,000 28,400 109,600

91st to 95th Percentiles 187,300 42,100 145,200

96th to 99th Percentiles 315,800 80,100 235,700

Top 1 Percent 1,917,200 543,400 1,373,700

Average Amount (2009 dollars)a

2009

Before-Tax Income Tax Liability After-Tax Income

Federal

2008

2007
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 13

CBO

Table 3. Continued

Distribution of Before- and After-Tax Income and Federal Taxes, by 

Income Group, 2007 to 2009

Source: Congressional Budget Office.

Notes: Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs.

After-tax income is the sum of market income and government transfers, minus federal tax liabilities.

For more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

a. Income amounts have been rounded to the nearest $100.

Before-Tax

Income Group

Lowest Quintile 5.1 0.3 6.2

Second Quintile 9.8 3.8 11.1

Middle Quintile 14.7 9.4 15.8

Fourth Quintile 21.1 18.3 21.6

Highest Quintile 50.8 67.9 47.2

All Quintiles 100.0 100.0 100.0

81st to 90th Percentiles 14.9 16.1 14.6

91st to 95th Percentiles 10.1 12.2 9.6

96th to 99th Percentiles 12.5 17.3 11.4

Top 1 Percent 13.4 22.3 11.5

Lowest Quintile 5.0 0.4 6.0

Second Quintile 9.4 3.8 10.6

Middle Quintile 13.9 8.9 15.0

Fourth Quintile 20.1 17.4 20.7

Highest Quintile 52.8 69.2 49.1

All Quintiles 100.0 100.0 100.0

81st to 90th Percentiles 14.3 15.1 14.1

91st to 95th Percentiles 9.8 11.8 9.4

96th to 99th Percentiles 12.6 17.3 11.6

Top 1 Percent 16.0 25.0 14.1

Lowest Quintile 4.8 1.2 5.6

Second Quintile 9.0 4.7 10.0

Middle Quintile 13.3 9.4 14.3

Fourth Quintile 19.1 16.8 19.6

Highest Quintile 54.6 67.8 51.4

All Quintiles 100.0 100.0 100.0

81st to 90th Percentiles 13.7 14.2 13.6

91st to 95th Percentiles 9.5 10.7 9.2

96th to 99th Percentiles 12.7 16.2 11.8

Top 1 Percent 18.7 26.7 16.7

2007

Before-Tax Income Tax Liability After-Tax Income

Share of Total Amount (Percent)

2009

2008

Federal
14 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

tax cuts and the recession in 2001. Rates fell again in 

2008 and 2009, to a new low of 7.2 percent of household 

income, largely because of declines in income and 

changes in tax law, as discussed earlier.

The average social insurance tax rate rose from 6.8 percent in 1979 to 8.0 percent in 2009. The rate rose 

throughout the 1980s because of legislated increases in 

the cap on earnings subject to the Social Security payroll 

tax and because of legislation enacted in 1983 that 

accelerated previously scheduled increases in the Social 

Security payroll tax rate. Subsequent legislation in the 

early 1990s first increased and then eliminated the cap 

on earnings subject to the Hospital Insurance payroll tax 

(which is used to finance a portion of Medicare). The 

payroll tax rate declined in the late 1990s and early 2000s 

as labor income grew more slowly than other income 

sources and as earnings above the maximum level subject 

to Social Security taxes grew more rapidly than earnings 

below that level. Those trends reversed in 2008 and 

2009, causing the average payroll tax rate to rise.

Average Federal Tax Rates, by Income Group

For most income groups, the 2009 average federal tax 

rate was the lowest observed in the 1979–2009 period 

(see the bottom panel of Figure 5). The pattern in the 

intervening years is more varied, reflecting the interaction 

of numerous changes to tax law and changes in the composition and distribution of income. For the lowest 

income group, the average rate fell from 7.5 percent in 

1979 to 1.0 percent in 2009. Almost two-thirds of that 

decline came between 2007 and 2009, largely as a result 

of new refundable tax credits, as discussed earlier. 

Declines in earlier years were mainly caused by increases 

in the earned income tax credit, especially in the 1990s. 

Payroll tax rates rose steadily for the lowest income group, 

offsetting some of the decline in their individual income 

tax rates.

Households in the middle three income quintiles saw 

their average tax rate fall by 7.1 percentage points over 

30 years, from 19.1 percent in 1979 to 12.0 percent in 

2009. That decline was due primarily to declines in individual income taxes. The average tax rate for that group 

fell somewhat in the early 1980s and then fluctuated 

within a fairly narrow band through the 1980s and 

1990s. Between 2000 and 2003, the rate declined by 

3.1 percentage points, reflecting numerous changes in 

Figure 5.

Average Federal Tax Rates, 1979 to 2009

(Percent)

Source: Congressional Budget Office.

Notes: Average tax rates are calculated by dividing tax liabilities of 

each type by total before-tax income for each income group.

Before-tax income is the sum of market income and 

government transfers. Market income is composed of labor 

income, business income, capital gains, capital income 

(excluding capital gains), income received in retirement for 

past services, and other sources of income. Government 

transfers are cash payments and in-kind benefits from social 

insurance and other government assistance programs. For 

more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by 

their before-tax income. Quintiles contain equal numbers of 

people.

For All Households, by Tax Source

By Income Group

1979 1984 1989 1994 1999 2004 2009

0

5

10

15

20

25

30

35

40

Top 1 Percent

81st to 99th Percentiles

Middle Three Quintiles

(21st to 80th Percentiles)

Lowest Quintile

1979 1984 1989 1994 1999 2004 2009

0

5

10

15

20

25

All Federal Taxes

Individual Income Taxes

Social Insurance Taxes

Corporate Income Taxes

Excise Taxes
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 15

CBO

law enacted in 2001—such as the expansion of the child 

tax credit, reductions in tax rates, and increases in the 

standard deduction for married couples—that lessened 

taxes for households in the middle quintiles. The average 

tax rate on the middle quintiles then rose slightly over the 

2003–2007 period, before falling 2.8 percentage points 

from 2007 to 2009. 

The average tax rate for households in the 81st to 99th 

percentiles of the income distribution also reached a low 

point in 2009, about 4 percentage points below its 1979 

level. That rate fell in the early 1980s and then crept up 

over the remaining part of that decade and the 1990s, so 

in 2000 it slightly exceeded its 1979 level. The average 

tax rate for that group fell 2.9 percentage points between 

2000 and 2003, crept up from 2003 to 2007, and then 

fell another 1.7 percentage points from 2007 to 2009.

In contrast, in 2009 the average tax rate for households in 

the top 1 percent of the before-tax income distribution 

was above its low point, reached in the early 1980s. The 

average tax rate for those households fell in the early 

1980s and then rose following enactment of the Tax 

Reform Act of 1986. The average tax rate for that group 

then fell somewhat again in the latter half of the 1980s 

before climbing, on balance, in the 1990s. That upward 

movement reflected changes in law that raised tax rates 

for that group as well as rapid increases in their income, 

which caused their average tax rate to rise as more income 

was taxed in higher tax brackets. Tax rates for households 

in the top percentile declined after 2000. The decline was 

especially rapid in 2003, when a reduction in the tax rate 

for the top tax bracket enacted in 2001 took effect and 

further changes in law reduced tax rates on dividends 

and realized capital gains. The tax rate fell again in 2007, 

mostly because of declines in corporate income taxes, 

then rose somewhat from 2007 to 2009, as sharp declines 

in capital gains income caused a larger portion of the 

income of that group to be subject to the ordinary 

income tax rates.

The decline in after-tax income between 2007 and 2009 

was much larger at the top of the income distribution 

than further down the distribution. The decline in 

income for the highest-income households reversed a 

substantial portion of the sharp rise in their income 

between 1979 and 2007 (see Figure 6). The closest historic parallel is the 2001 recession, which, like the most 

recent recession, was accompanied by a large drop in the 

value of assets. After-tax income for households in the 

Figure 6.

Cumulative Growth in Average 

After-Tax Income Adjusted for 

Inflation, by Income Group, 

1979 to 2009

(Percentage of 1979 income)

Source: Congressional Budget Office.

Notes: After-tax income is the sum of market income and government transfers, minus federal tax liabilities. Market income 

is composed of labor income, business income, capital 

gains, capital income (excluding capital gains), income 

received in retirement for past services, and other sources of 

income. Government transfers are cash payments and inkind benefits from social insurance and other government 

assistance programs. For more detailed definitions of 

income, see the appendix.

Quintiles, or fifths, are created by ranking households by 

their before-tax income. Quintiles contain equal numbers of 

people.

Federal taxes include individual and corporate income taxes, 

social insurance (or payroll) taxes, and excise taxes.

top percentile of the before-tax income distribution fell 

28 percent from 2000 to 2002 and then began growing 

quickly, surpassing the 2000 level in 2005. Partial evidence, discussed in the next section, indicates that 

income at the top of the income distribution rebounded 

somewhat in 2010 from its 2009 level. In prior recessions, declines in income for the highest-income 

households were less severe than in the two most recent 

recessions. After-tax income for households in the top 

1 percent of the before-tax income distribution fell 

15 percent between 1989 and 1991 and, during the 

recessions of 1980 and 1981–1982, barely fell from its 

level in 1979. 

Top 1 Percent

81st to 99th

Percentiles

Middle Three Quintiles

(21st to 80th

Percentiles)

Lowest Quintile

1979 1984 1989 1994 1999 2004 2009

-50

0

50

100

150

200

250

300

350
16 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

2010 and Beyond

Although the detailed data that form the basis of CBO’s 

estimates in this report are available only through 2009, 

other data can provide some insight into changes in the 

distribution of income and federal taxes in 2010 and 

2011. Those data suggest that overall income continued 

to grow slowly in 2010 and 2011 and that income for 

households toward the higher end of the distribution 

increased more rapidly than income for households elsewhere in the income distribution in 2010. Average federal 

tax rates probably remained near their post-1979 low levels in both 2010 and 2011.

The Bureau of Economic Analysis (BEA) estimates that 

real per capita personal income grew by 1.1 percent in 

2010 and 1.8 percent in 2011.6

 Personal income excluding transfer payments grew a little more slowly than 

personal income including transfer payments in 2010 

and a little more rapidly in 2011. 

In contrast, data from the Current Population Survey 

(CPS) have led the Census Bureau to estimate that real 

mean household income fell 2.3 percent between 2009 

and 2010. In the CPS data, the decline in income was 

greater for households at the bottom of the income 

distribution than for those at the middle and the top.

Tabulations by the Internal Revenue Service of individual 

income tax returns filed for 2010 tell another, slightly 

different, story. Real income per return rose more than 

2 percent from 2009 to 2010—a gain that exceeds the 

change in income in either the BEA or CPS data—

perhaps because income from capital gains, which is 

excluded from those other measures of income, rose rapidly.7

 Income went up more rapidly for higher-income 

taxpayers than for other taxpayers—by more than 

10 percent for those filing returns with income in the top 

1 percent of the distribution of all returns. The share of 

total before-tax income reported on those tax returns rose 

by 1.5 percentage points, with capital gains accounting 

for much but not all of that gain. That increase reversed 

about one-third of the 2007–2009 decline in the share of 

income reported to the IRS on returns with income in 

the top 1 percent of all returns.

Total federal tax revenue grew slowly in 2010 and 2011. 

Receipts in fiscal year 2010 were 15.1 percent of gross 

domestic product (GDP), matching 2009 as the lowest 

share of GDP since 1950. They rebounded slightly in 

fiscal year 2011, to 15.4 percent of GDP. Those figures 

imply that average federal tax rates probably did not rise 

much in 2010 or 2011.

Differences with Earlier Estimates

This report makes two significant changes to the methodology that CBO previously used in estimating average 

federal tax rates. The agency has changed: 

 Its allocation of the incidence of the federal corporate 

income tax, and 

 Its method for valuing government-provided health 

insurance. 

Those changes alter CBO’s estimates somewhat: The 

change in the assumed incidence of the corporate income 

tax makes the federal tax system appear a bit less progressive, and the change in valuing government-provided 

health insurance increases the measured level and growth 

of income for many households with low income. However, those methodological changes do not alter this 

report’s basic findings about the distribution of income 

and federal taxes.

CBO has also changed the way in which it adjusts for 

inflation. The agency now uses the personal consumption 

expenditures (PCE) price index, also referred to as the 

PCE deflator, rather than the consumer price index. 

The PCE price index generally shows slightly less inflation than does the consumer price index, making 

measured growth in real income larger for all income 

groups.

Incidence of the Corporate Income Tax

In previous reports, CBO allocated the entire economic 

burden of the corporate income tax to owners of capital 

6. BEA’s measures of income are different from those used by CBO. 

Personal income, as defined by BEA, is the income that people 

receive in return for their provision of labor, land, and capital used 

in current production plus net current transfer payments they 

receive from business and government.

7. Income is measured here as income from taxable sources plus taxexempt interest and some nontaxable Social Security benefits. 

That is the broadest measure reported on tax returns, but it omits 

several nontaxable sources of income that are included in CBO’s 

measure of before-tax income, such as employer-sponsored health 

benefits and payments from the Supplemental Nutrition 

Assistance Program.
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 17

CBO

in proportion to their capital income. CBO has reevaluated the research on that topic, and in this report it 

allocates 75 percent of the federal corporate income tax to 

capital income and 25 percent to labor income.

The incidence of the corporate income tax is uncertain. 

In the very short term, corporate shareholders are likely 

to bear most of the economic burden of the tax; but over 

the longer term, as capital markets adjust to bring the 

after-tax returns on different types of capital in line with 

each other, some portion of the economic burden of the 

tax is spread among owners of all types of capital. In addition, because the tax reduces capital investment in the 

United States, it reduces workers’ productivity and wages 

relative to what they otherwise would be, meaning that at 

least some portion of the economic burden of the tax over 

the longer term falls on workers. That reduction in 

investment probably occurs in part through a reduction 

in U.S. saving and in part through decisions to invest 

more savings outside the United States (relative to what 

would occur in the absence of the U.S. corporate income 

tax); the larger the decline in saving or outflow of capital, 

the larger the share of the burden of the corporate income 

tax that is borne by workers.

CBO recently reviewed several studies that use so-called 

general-equilibrium models of the economy to determine 

the long-term incidence of the corporate income tax. 

The results of those studies are sensitive to assumptions 

about the values of several key parameters, such as the 

ease with which capital can move between countries. 

Using assumptions that reflect the central tendency of 

published estimates of the key parameters yields an estimate that about 60 percent of the corporate income tax is 

borne by owners of capital and 40 percent is borne by 

workers.8

However, standard general-equilibrium models exclude 

important features of the corporate income tax system 

that tend to increase the share of the corporate tax borne 

by corporate shareholders or by capital owners in general.9

 For example, standard models generally assume that 

corporate profits represent the “normal” return on capital 

(that is, the return that could be obtained from making a 

risk-free investment). In fact, corporate profits partly 

represent returns on capital in excess of the normal 

return, for several reasons: Some corporations possess 

unique assets such as patents or trademarks; some choose 

riskier investments that have the potential to provide 

above-normal returns; and some produce goods or services that face little competition and thereby earn some 

degree of monopoly profits. Some estimates indicate that 

less than half of the corporate tax is a tax on the normal 

return on capital and that the remainder is a tax on such 

excess returns.10 Taxes on excess returns are probably 

borne by the owners of the capital that produced those 

excess returns. Standard models also generally fail to 

incorporate tax policies that affect corporate finances, 

such as the preferences afforded to corporate debt under 

the corporate income tax. Increases in the corporate tax 

will increase the subsidy afforded to domestic debt, 

increasing the relative return on debt-financed investment in the United States and drawing new investment 

from overseas, thus reducing the net amount of capital 

that flows out of the country. In addition, standard models generally do not account for corporate income taxes in 

other countries; those taxes also reduce the amount of 

capital that flows out of this country because of the U.S. 

corporate income tax.

Those factors imply that workers bear less of the burden 

of the corporate income tax than is estimated using standard general-equilibrium models, but quantifying the 

magnitude of the impact of the factors is difficult. CBO 

chose to allocate 25 percent of the burden of the corporate income tax to workers and assigned that amount to 

households in proportion to their labor income.CBO 

allocated the remaining 75 percent to owners of capital 

and assigned that tax to households in proportion to their 

income from interest, dividends, adjusted capital gains, 

8. Jennifer Gravelle, Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis, Congressional Budget Office 

Working Paper 2010-03 (May 2010).

9. For a detailed discussion of many of these features, see Alan 

Auerbach, “Who Bears the Corporate Tax? A Review of What 

We Know,” in James M. Poterba, ed., Tax Policy and the Economy, 

vol. 20 (MIT Press, 2006).

10. William M. Gentry and R. Glenn Hubbard, “Distributional 

Implications of Introducing a Broad-Based Consumption Tax,” 

in James M. Poterba, ed., Tax Policy and the Economy, vol. 11 

(MIT Press, 1997); Eric Toder and Kim Rueben, “Should We 

Eliminate Taxation of Capital Income?,” in Henry J. Aaron, 

Leonard E. Burman, and C. Eugene Steurle, eds., Taxing Capital 

Income (Urban Institute, 2007); and Julie-Anne Cronin and 

others, Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology, Office of Tax Analysis Technical Paper 5 

(Department of Treasury, Office of Tax Analysis, May 2012).
18 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

and rents.11 (The agency used capital gains scaled to their 

long-term historical level given the size of the economy 

and the tax rate that applies to them—called “adjusted 

capital gains”—rather than actual capital gains so as to 

smooth out large year-to-year variations in the total 

amount of gains realized.)

Because the share of labor income received by higherincome households is smaller than the share of capital 

income received by those households, CBO’s revision to 

the allocation of the federal corporate income tax shifts 

more of that tax to households who are lower in the 

income distribution. For 2009, the change in methodology reduced the share of the corporate tax paid by 

households in the top percentile of before-tax income by 

12 percentage points. The estimated share of the corporate tax in that year paid by the rest of the top quintile 

rose by 3 percentage points, and the estimated shares paid 

by the lowest quintile through the fourth quintile rose by 

1, 2, 3, and 4 percentage points, respectively. 

The change in the allocation of the corporate tax has a 

larger impact on the average tax rate for households in the 

top percentile than for households in other income 

groups. For 2009, that change lowered the average tax 

rate by 1.0 percentage point for the top percentile and 

raised it by 0.2 to 0.3 percentage points for the rest of the 

top quintile and for the other four quintiles (see Table 4). 

Because CBO includes corporate income tax payments in 

before-tax income on the basis of the households to 

which those corporate taxes are assigned (increasing each 

household’s income by the amount of corporate income 

tax that the household is estimated to pay), changing the 

allocation of the corporate tax affects that measure of 

income. For 2009, that change raised average before-tax 

income by less than $50 for the lowest quintile, by 

roughly $100 for the second and middle quintiles, and by 

$300 for the fourth quintile. In contrast, the change lowered average before-tax income for the highest percentile 

by more than $14,000.

Valuation of Government-Provided 

Health Insurance 

Health insurance provided though Medicare, Medicaid, 

and the Children’s Health Insurance Program (CHIP) 

represents a significant and growing portion of government transfers. CBO assigned a higher value to that 

insurance for the estimates in this report than in previous 

analyses of the distribution of household income and 

federal taxes

Receiving health insurance enhances the economic wellbeing of recipients, enabling them to obtain health care 

services at a reduced out-of-pocket cost and thereby to 

consume more health care without giving up other forms 

of consumption. Accordingly, CBO includes estimated 

values of health insurance—whether provided by an 

employer or the government—in its analyses of household income. However, assigning a value to health 

insurance is difficult because it is unclear how much 

households would be willing to pay for that insurance.12

Some recipients of health insurance might prefer to 

receive a cash payment equal to the employer’s or government’s cost of that insurance because then they could 

choose whether to use all of that cash payment to purchase insurance on their own or to use some or all of it 

for other purposes. Therefore, the value of the health 

insurance to some recipients is lower than the cost of 

providing it, particularly for some low-income recipients, 

whose consumption of other goods and services is tightly 

constrained by their lack of resources. For other recipients, though, the value of health insurance is higher than 

the cost of providing it, because in many cases the bundle 

of services provided through insurance cannot be purchased by an individual household at a price equal to the 

employer’s or government’s cost. Determining how much 

the value of the insurance to recipients differs from the 

cost of providing it is impossible without knowing the 

preferences of individual recipients.

Analyses of the distribution of income differ greatly in 

their treatment of health insurance. The Census Bureau’s 

primary definition of household income excludes the 

value of health insurance, as do most studies based on 11. Although shareholders of corporations would bear the portion of 

the corporate tax that is a tax on excess returns, measures of that 

share of the corporate tax are imprecise, as are efforts to identify 

corporate shareholders in the available data. CBO did not try to 

differentiate among capital owners in assigning the portion of the 

corporate income tax that falls on capital owners.

12. For a detailed discussion of issues involved in valuing insurance, 

see Bureau of the Census, Conference on the Measurement of 

Noncash Benefits, vol. 1, Proceedings (1986), www.census.gov/

hhes/www/poverty/publications/measurementconf.pdf.
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 19

CBO

Table 4.

Effects of Changes in Methodology on Estimates of the Distribution of 

Income and Average Federal Tax Rates, 2009

Source: Congressional Budget Office.

Notes: CBO has revised its allocation of the incidence of the corporate income tax and its method for valuing government-provided health 

insurance. In this analysis, CBO has allocated 75 percent of corporate income taxes to capital owners and 25 percent to workers. Also, 

CBO has valued government-provided health insurance at the average cost to the government (total cost to the government divided by 

the number of program participants) of providing that insurance, as estimated by the Census Bureau. Those revisions are discussed in 

more detail in the report.

Before-tax income is the sum of market income and government transfers. Market income is composed of labor income, business 

income, capital gains, capital income (excluding capital gains), income received in retirement for past services, and other sources of 

income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance 

programs. For more detailed definitions of income, see the appendix. 

Quintiles, or fifths, are created by ranking households by their before-tax income. Quintiles contain equal numbers of people.

Federal taxes include individual and corporate income taxes, social insurance (or payroll) taxes, and excise taxes.

* = between -$50 and $50; ** = between -0.05 percentage points and 0.05 percentage points.

a. Income amounts have been rounded to the nearest $100.

Before-Tax 

18,900 23,500 * 4,600

41,700 43,400 100 1,600

63,600 64,300 100 600

93,100 93,800 300 400

223,800 223,500 -500 200

All Quintiles 86,600 88,400 0 1,800

131,100 131,700 400 200

175,200 175,800 500 100

271,500 271,800 * 300

1,234,600 1,219,700 -14,500 -400

-0.2 1.0 0.2 1.0

6.8 6.8 0.3 -0.3

11.4 11.1 0.2 -0.5

15.1 15.1 0.2 -0.2

23.4 23.2 -0.1 -0.1

All Quintiles 17.7 17.4 0 -0.3

18.6 18.8 0.3 -0.1

20.9 21.1 0.2 **

24.1 24.1 0.1 -0.1

29.9 28.9 -1.0 **

Income Group

Lowest Quintile

Second Quintile

Middle Quintile

Methodology

Average Before-Tax Income (2009 dollars)a

Previous 

health insurance)

corporate income tax and

(New incidence of

 Corporate Income Tax 

Change from New

Current Methodology

Change from 

Highest Quintile

81st to 90th Percentiles 

91st to 95th Percentiles

new valuation of Valuation of

(Rates in percent; changes in percentage points)

government-provided Government-Provided New Incidence of

Health Insurance

Fourth Quintile

Highest Quintile

81st to 90th Percentiles 

91st to 95th Percentiles

96th to 99th Percentiles

Top 1 Percent

Average Federal Tax Rate

Lowest Quintile

Second Quintile

96th to 99th Percentiles

Top 1 Percent

Middle Quintile

Fourth Quintile
20 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

income tax returns, whereas the Census Bureau’s alternative definitions of income reflect the so-called fungible 

value of Medicare, Medicaid, and CHIP.13 That fungible 

value is designed to represent the amount of resources 

freed up for other uses by the government-provided 

health insurance, up to the average cost to the government of providing that insurance. Specifically, for each 

household, the Census Bureau compares the household’s 

income with an estimate of the cost to the household of 

meeting its basic needs for food and housing. If a household does not have enough income to meet those basic 

needs, the Census Bureau assumes that the household 

would spend nothing on health care in the absence of the 

government programs, and it sets the fungible value of 

health insurance for that household equal to zero. For 

households with some income above what is necessary 

to meet their basic needs, the fungible value is set equal 

to the amount of income above that basic standard, up to 

the average cost to the government of providing that 

insurance. One study used both the fungible value of 

health insurance from the CPS and measures of medical 

spending constructed from the Medical Expenditure 

Panel Survey (MEPS).14 Another study replaced the CPS 

measures of health insurance with its own estimates of the 

government’s average cost of providing that insurance, 

again derived from the MEPS.15

In previous reports, CBO included in before-tax income 

the so-called fungible value of Medicare, Medicaid, and 

CHIP as defined and estimated by the Census Bureau 

using data from the CPS. In this report, CBO instead 

included in household income the full value of Medicare, 

Medicaid, and CHIP, defined to equal the Census 

Bureau’s estimate of the average cost to the government 

of providing that insurance. CBO’s new treatment of 

government-provided health insurance is consistent with 

CBO’s long-standing treatment of employers’ contributions to health insurance, for which the full cost is 

included in before-tax income.16

The change in the valuation of health insurance provided 

through Medicare, Medicaid, and CHIP has a significant 

effect on measured income, especially for households near 

the bottom of the income distribution. The aggregate difference between the Census Bureau’s fungible values and 

the government’s average costs was roughly $200 billion 

for 2009. The change in valuation adds that amount to 

the before-tax income of households whose other beforetax income does not exceed the cost of meeting its basic 

needs for food and housing by more than the government’s average cost of providing that insurance. The 

change in methodology increased CBO’s estimate of average income for households in the bottom quintile of the 

before-tax income distribution by roughly $4,600 (or 

nearly 25 percent) and for households in the second 

quintile by roughly $1,600 (see Table 4 on page 19).

The average federal tax rate for the population as a whole 

is 0.3 percentage points lower because of the increase in 

measured household income. Although one might expect 

the change to lower average tax rates the most for households in the lowest income quintile, the change actually 

boosts the average tax rate for that group by a percentage 

point. That increase occurs because the higher valuation 

of government-provided health insurance causes about 

one-eighth of the households in the bottom quintile 

under CBO’s earlier methodology (roughly 3 million 

households) to be classified in the second quintile under 

CBO’s new methodology, and it causes a corresponding 

number of households to be classified in the bottom 

quintile rather than the second quintile. The households 

who moved out of the bottom quintile generally had 

much lower cash income than did those who moved into 

it: The average household in the bottom quintile under 

13. Arthur F. Jones Jr. and Daniel H. Weinberg, The Changing Shape 

of the Nation’s Income Distribution, 1974–1998, Current Population Reports, Series P60-204 (Census Bureau, June 2000); 

Michael Strudler and others, Analysis of the Distribution of Income, 

Taxes, and Payroll Taxes via Cross Section and Panel Data, 1979–

2004 (Internal Revenue Service, Statistics of Income Division, 

2006); and Thomas Piketty and Emmanuel Saez, “Income 

Inequality in the United States, 1913–1998,” Quarterly Journal of 

Economics, vol. 118, no. 1 (February 2003), pp. 1–39.

14. See Gary Burtless and Pavel Svaton, “Health Care, Health Insurance, and the Distribution of American Incomes,” Forum for 

Health Economics & Policy, vol. 13, no. 1 (2010), 

www.bepress.com/fhep/13/1/1.

15. See Richard V. Burkhauser and Kosali I. Simon, Measuring the 

Impact of Health Insurance on Levels and Trends in Inequality, 

Working Paper 15811 (National Bureau of Economic Research, 

March 2010).

16. The Census Bureau assigns the average cost of governmentprovided health insurance to beneficiaries on the basis of average 

expenditures by state and by risk class. It estimates the cost of 

employers’ contributions to health insurance on the basis of a separate survey of employers. A full description of the methods used 

to value noncash benefits is provided in Bureau of the Census, 

Measuring the Effect of Benefits and Taxes on Income and Poverty: 

1992, Current Population Reports, Series P60, No. 186RD 

(September 1993), pp. viii–ix and B-1 to B-5.
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 21

CBO

both methodologies had about $10,000 in cash wages, 

compared with $3,000 for the average household who 

moved out of the bottom quintile and $21,000 for the 

average household who moved into that quintile. Because 

households who moved into the bottom quintile had 

more income from taxable sources, their average tax rates 

were more than 5 percentage points higher, on average, 

than those of the households they replaced; as a result, 

the average tax rate for households in the lowest quintile 

rose. That reranking of households more than offset the 

decline in the average tax rate caused by the additional 

income for the bottom quintile.

The change in valuation also increases the measured longterm growth of income, especially for households near 

the bottom of the income distribution. The government’s 

average cost of providing Medicare, Medicaid, and CHIP 

has risen more rapidly than has household income from 

most other sources, and including that full cost in income 

leads to faster growth of measured income for households 

receiving those benefits.17

Supplemental tables, available on CBO’s Web site, show 

estimated household income and average federal tax rates 

using a measure of income that includes only the fungible 

value of Medicare, Medicaid, and CHIP.

Measuring Inflation

In this report, CBO adjusted household income for 

the effects of inflation using the personal consumption 

expenditures price index. That index is constructed by 

the Bureau of Economic Analysis as part of the national 

income and product accounts. Previously, CBO had used 

the Bureau of Labor Statistics’ research series of the consumer price index for all urban consumers (CPI-U-RS). 

The average annual inflation rate over the 1979–2009 

period was about 0.2 percentage points lower as measured by the PCE price index than as measured by the 

CPI-U-RS. In CBO’s judgment, the PCE price index is 

a more appropriate deflator for the measures of income 

used in this report because its scope includes health care 

services purchased by third parties on behalf of people 

(services that are included in the measures of income 

used in this report) and because it more fully accounts 

for the adjustments that consumers make to their spending patterns as some prices change relative to other 

prices.18

17. See Congressional Budget Office, Trends in the Distribution of 

Household Income Between 1979 and 2007 (October 2011), 

Appendix C.

18. For a more detailed discussion of alternative measures of 

inflation, see Congressional Budget Office, Using a Different 

Measure of Inflation for Indexing Federal Programs and the Tax Code

(February 2010). 

CBO

Appendix:

Methodology

In estimating the distribution of household income 

and federal taxes, the Congressional Budget Office 

(CBO) draws on various data sources and makes 

judgments about the best way to use those data. This 

appendix explains the methodology CBO used in this 

report.

Sources of Data

Information on household income for this analysis comes 

from two primary sources: the Statistics of Income (SOI), 

collected by the Internal Revenue Service, and the Current Population Survey (CPS), collected by the Census 

Bureau. The core data come from the SOI, a nationally 

representative sample of individual income tax returns 

that has increased in size from roughly 90,000 returns 

around 1980 to more than 300,000 returns in recent 

years. CBO used the full Individual Income Tax file, 

which contains more detail than the public-use version 

of the file. CBO supplemented those SOI data with 

data from the Annual Social and Economic Supplement 

to the CPS; those survey data contain information on the 

demographic characteristics and income of a large sample 

of households.

Both the SOI and the CPS lack important information 

needed for estimating and comparing after-tax household 

income over time. The SOI lacks information about couples and individuals who do not file a federal tax return; 

in addition, it does not report all income from government cash transfer programs, has no information on the 

receipt of in-kind transfers and benefits, and is organized 

by tax-filing units rather than households. The CPS lacks 

detailed information on high-income households, does 

not report capital gains, underreports other income from 

capital, and lacks information on the deductions and 

adjustments necessary to compute taxes.

To overcome the limitations of both data sources, CBO 

statistically matched each SOI record to a corresponding 

CPS record on the basis of demographic characteristics 

and income. Each pairing resulted in a new record that 

took on the demographic characteristics of the CPS 

record and the income reported in the SOI. (Some types 

of income, such as certain transfers and in-kind benefits, 

appear only in the CPS; values for those items were 

drawn directly from that survey.) Because not all households have to file tax returns, some households do not 

appear in the SOI. Therefore, after all SOI records were 

matched to CPS records, the remaining CPS records were 

recorded as households who did not file an income tax 

return, and their income values were taken directly from 

the CPS. CBO then estimated the tax liability for each 

record.

Who Pays Taxes?

In its analysis, CBO assumed that households bear the 

economic cost of the taxes they pay directly, such as individual income taxes and the employee’s share of payroll 

taxes. CBO further assumed—as do most economists—

that employers pass on their share of payroll taxes to 

employees by paying lower wages than they would otherwise pay. Therefore, CBO included the employer’s share 

of payroll taxes in households’ before-tax income and in 

households’ taxes.

CBO also assumed that the economic cost of excise taxes 

falls on households according to their consumption of 

taxed goods (such as tobacco and alcohol). Excise taxes 

on intermediate goods, which are paid by businesses, 

were attributed to households in proportion to their 

overall consumption. CBO assumed that each household 

spent the same amount on taxed goods as a similar household with comparable income is reported to spend in the 
24 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Bureau of Labor Statistics’ Consumer Expenditure 

Survey.

Far less consensus exists about how to allocate corporate 

income taxes (and taxes on capital income generally). In 

this analysis, CBO allocated 75 percent of the burden of 

corporate income taxes to owners of capital in proportion 

to their income from interest, dividends, adjusted capital 

gains, and rents. The agency used capital gains scaled to 

their long-term historical level given the size of the economy and the tax rate that applies to them rather than 

actual capital gains so as to smooth out large year-to-year 

variations in the total amount of gains realized. CBO 

allocated 25 percent of the burden of corporate income 

taxes to workers in proportion to their labor income.

Measuring Income

This analysis uses three measures of household income: 

market income; market income plus government transfers (referred to as before-tax income); and market 

income plus government transfers, minus federal tax 

liabilities (referred to as after-tax income).

Market income includes the following components:

 Labor income—Cash wages and salaries, including 

those allocated by employees to 401(k) plans; 

employer-paid health insurance premiums; the 

employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the 

share of corporate income taxes borne by workers.

 Business income—Net income from businesses and 

farms operated solely by their owners, partnership 

income, and income from S corporations.

 Capital gains—Profits realized from the sale of assets. 

Increases in the value of assets that have not been realized through sales are not included in market income.

 Capital income (excluding capital gains)—Taxable and 

tax-exempt interest, dividends paid by corporations 

(but not dividends from S corporations, which are 

considered part of business income), positive rental 

income, and the share of corporate income taxes borne 

by owners of capital.

 Other income—Income received in retirement for past 

services and other sources of income.

Government transfers consist of cash payments from 

Social Security, unemployment insurance, Supplemental 

Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent 

Children), veterans’ programs, workers’ compensation, 

and state and local government assistance programs. They 

also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly 

known as food stamps), school lunches and breakfasts, 

housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children’s Health 

Insurance Program. (The value of health insurance is 

measured on the basis of the Census Bureau’s estimates 

of the average cost to the government of providing such 

insurance.) 

After-tax income is the sum of market income and government transfers, minus federal tax liabilities. In assessments of the impact of various taxes, individual income 

taxes are allocated directly to households paying those 

taxes. Social insurance, or payroll, taxes are allocated to 

households paying those taxes directly or paying them 

indirectly through their employers. Corporate income 

taxes are allocated to households according to their share 

of capital and labor income, as described above. Federal 

excise taxes are allocated to households according to their 

consumption of the taxed good or service.

Adjusting Income for Differences 

Among Households

CBO used households as the unit of analysis for this 

report. A household consists of the people who share 

a housing unit, regardless of their relationships. The 

presumption is that households make joint economic 

decisions, although that may not be true in every case 

(in a group house, for example). Households may comprise more than one taxpaying unit, such as a married 

couple and their adult children living together.

Households with identical income may differ in ways 

that bear on their economic status. Importantly, a larger 

household needs more income to support a given standard of living than does a smaller household. However, 

economies of scale in some types of consumption—housing, in particular—mean that two people generally do 

not need twice the income to live as well as an individual 

living alone. Therefore, to rank households by their 

standard of living, it is probably appropriate to divide 

household income by an adjustment factor that is 
APPENDIX THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 25

CBO

between one (which would result only in household 

income and would not capture the greater needs of larger 

households) and the number of people in the household 

(which would produce household income per capita and 

would not capture the benefits of shared consumption). 

CBO chose to adjust for household size by dividing 

household income by the square root of the number of 

people in the household, counting adults and children 

equally.1 Households were then ranked by their adjusted 

income and grouped into quintiles that contain equal 

numbers of people. Because household sizes vary, different quintiles generally contain slightly different numbers 

of households.

Adjusting the income of households for other differences 

in their circumstances that affect their standard of living 

might also be desirable. For example, the prices of goods 

and services vary among locations, and households can 

incur different costs associated with working, such as the 

costs of commuting and child care expenses, depending 

on how many members of the household are employed. 

In this analysis, however, CBO did not attempt to adjust 

for those additional differences.

Types of Households

Supplemental tables, available on CBO’s Web site, show 

household income and average federal tax rates for three 

types of households: those with members under age 18 

(households with children), those headed by a person age 

65 or older and with no member under age 18 (elderly 

childless households), and all others (nonelderly childless 

households). The tables group households into quintiles 

by position in the income distribution across the full 

population, not by distribution within each type of 

household, so each type of household need not be evenly 

spread across the income quintiles.

1. That adjustment implies that each additional person increases a 

household’s needs but does so at a decreasing rate. For example, a 

household consisting of a married couple with two children and 

income of $80,000 would have an adjusted income of $40,000 

($80,000 divided by the sqaure root of 4) and would have the 

equivalent economic ranking of a single person with income of 

$40,000 or a married couple without children with income of 

about $56,600 ($56,600 divided by the square root of 2 is approximately $40,000). See Constance F. Citro and Robert T. Michael, 

eds., Measuring Poverty: A New Approach (National Academy 

Press, 1995).
26 THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009

CBO

Lists of Tables and Figures

Tables

S-1. Distribution of Federal Taxes and Household Income, by Income Group, 

2007 and 2009 ii

1. Distribution of Before-Tax Income, by Income Group, 2007 to 2009 4

2. Distribution of Federal Taxes, by Income Group, 2007 to 2009 6

3. Distribution of Before- and After-Tax Income and Federal Taxes, by 

Income Group, 2007 to 2009 12

4. Effects of Changes in Methodology on Estimates of the Distribution of 

Income and Average Federal Tax Rates, 2009 19

Figures

1. Average Federal Tax Rates, by Income Group, 2009 8

2. Shares of Before-Tax Income and Federal Taxes, by Income Group, 2009 9

3. Average Federal Tax Rates, by Income Group and Tax Source, 2009 10

4. Shares of Before- and After-Tax Income, by Income Group, 2009 11

5. Average Federal Tax Rates, 1979 to 2009 14

6. Cumulative Growth in Average After-Tax Income Adjusted for Inflation, by 

Income Group, 1979 to 2009 15
THE DISTRIBUTION OF HOUSEHOLD INCOME AND FEDERAL TAXES, 2008 AND 2009 27

CBO

About This Document

This Congressional Budget Office (CBO) report was prepared at the request of the Chairman of the 

Senate Finance Committee. In keeping with CBO’s mandate to provide objective, impartial analysis, 

the report makes no recommendations. 

Edward Harris of CBO’s Tax Analysis Division wrote the report, under the guidance of Frank 

Sammartino and David Weiner. Jessica Banthin, Linda Bilheimer, Jennifer Gravelle, Valentina 

Michelangeli, and William Randolph of CBO offered helpful comments. 

Several external reviewers also provided useful comments: Alan Auerbach of the University of 

California at Berkeley, Katherine Baicker of the Harvard School of Public Health, Gary Burtless of the 

Brookings Institution, James Nunns and Eric Toder of the Urban-Brookings Tax Policy Center, James 

Poterba of the Massachusetts Institute of Technology, Jonathan Skinner of Dartmouth College, 

Timothy Smeeding of the University of Wisconsin-Madison, and Alan Viard of the American 

Enterprise Institute. The assistance of external reviewers implies no responsibility for the final product, 

which rests solely with CBO. 

Sherry Snyder edited the study. Maureen Costantino designed the cover, and Jeanine Rees prepared the 

report for publication. An electronic version is available on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf 

Director

July 2012