Office of Tax Analysis

Treasury’s Distribution Methodology and Results

July 2021

One of the principal tasks undertaken by the Treasury Department’s Office of Tax Analysis 

(OTA) is the analysis of the distribution of tax burdens. OTA’s distributional analyses show how 

federal taxes and proposed changes in tax law affect the distribution of after-tax income across 

families. Distributional analyses provide policy makers with guidance on the fairness of the 

current or proposed federal tax burden. Distributional analyses do not address economic 

efficiency, simplicity, or other important aspects of good tax policy.1

Distribution Methodology

Distributional analysis has several components, of which the major components are: 

Taxes Included: All federal taxes are included in Treasury’s analyses: individual and corporate 

income taxes, payroll taxes (Social Security tax, Medicare tax, and unemployment tax), excises 

and customs duties, and estate and gift taxes. Treasury analyses do not include state or local 

taxes. 

Covered Population: The population reflected in Treasury distributional analyses includes all 

citizens and residents of the United States and any non-citizens abroad who file U.S. income tax 

returns. U.S. residents include lawful permanent residents and persons who are present in the 

U.S. for a substantial period of time. Thus, the U.S. tax population includes certain foreign 

citizens and undocumented persons. It also includes institutionalized persons. Residents of U.S. 

territories who do not file U.S. income tax returns are not included in Treasury’s distributional 

analyses. The covered population includes persons who are part of this U.S. tax population but 

are not represented on a U.S. income tax return because, for example, their incomes are below 

the tax return filing requirement.

Unit of Analysis: The tax family is the unit of analysis. Tax families include all non-dependent 

tax returns and include non-filing tax units. Treasury uses families, as opposed to individuals, 

because families generally operate as an economic unit. The actions and resources of one family 

1 For a more detailed discussion, see Cronin (1999), “U.S. Treasury Distributional Analysis Methodology,” OTA 

Paper 85, September 1999.
2

member affect the resources and welfare of the entire family unit. Treasury uses families as 

opposed to households because multiple families living in one household is viewed as a way to 

reduce the prices faced by each family, not a preference independent of income. Most multifamily households are low-income.

Income Measure: Treasury uses a cash income measure. Cash income is a pre-tax, post-transfer 

income measure. Cash income consists of wages and salaries (not including excludable 

employee and employer contributions to employer-sponsored retirement accounts and individual 

retirement arrangements), net income from a business or farm, taxable and tax-exempt interest, 

dividends, rental income, realized capital gains, unrealized capital gains at death, cash and nearcash transfers from the government, retirement benefits (when distributed), and employerprovided health insurance and other employer benefits. Employer contributions for payroll taxes 

and the federal corporate income tax are added to place cash income on a pre-tax basis. In other 

words, because we assume that employees bear the full burden of payroll taxes and that laborers

and capital owners bear the burden of corporate income tax, we add to labor and capital income 

those taxes remitted by other entities on their behalf. Because it is a relatively broad measure of 

income, cash income more effectively captures a family’s relative economic well-being than a 

measure that, for example, excludes some components of income such as nontaxable transfer 

income or employer-sponsored health benefits.

Equivalency Measure: For the purpose of ranking families by ability to pay, Treasury adjusts

cash income for family size, by dividing income by the square root of family size. Larger 

families are assumed to require more resources to achieve the same level of welfare as smaller 

families. Without an adjustment for size, large families and single-person families with the same 

level of cash income would be ranked the same. Compared to dividing by family size (per capita 

income), the adjustment reflects the ability of larger families to economize on expenses, so that a 

family of four is considered half as well-off as a single person family with the same income, as 

opposed to a quarter as well off.

2

Incidence Assumptions: The individual income tax is assumed to be borne by payers. Payroll 

taxes (employer and employee shares) are assumed to be borne by labor (wages and selfemployment income). The share of the corporate income tax that represents a tax on supernormal 

returns is assumed to be borne by shareholders. The share of the corporate income tax that 

represents collections from a cash flow tax is assumed to have no burden in the long run, and the 

remainder of the corporate income tax, the share imposed on the normal return to investing, is 

assumed to be borne equally by labor and positive normal capital income.3 Excise taxes are 

assumed to be borne by labor and capital income. In addition, excise taxes are assumed to raise 

the price of taxed goods relative to other goods, thereby increasing tax burdens for consumers of 

taxed goods and lowering tax burdens for consumers of untaxed good. The estate and gift taxes 

are assumed to borne by decedents.

2 For further discussion, see Cronin, DeFilippes and Lin (2012), “Effects of Adjusting Distribution Tables for 

Family Size,” National Tax Journal, December 2012, 65(4), 739-758. 3 For definition of supernormal returns and further discussion, see Cronin, Lin, Power and Cooper (2013), 

“Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology,” National Tax Journal, March 2013, 

66(1), 239-262.
3

Time Period of Analysis: Treasury creates tables showing the distribution of the tax burden in 

two time periods – the short run and the long run. Both are single year snapshots of tax burdens, 

as opposed to lifetime measures of tax burdens. They are based on annual measures of income 

levels and on demographic characteristics present in the first year of the Budget period (also 

referred to as the “current” year), assuming the current tax law for that year. Short run tables 

measure tax burdens in the first year of the Budget period. Long-run tables measure tax burdens 

under “fully phased-in law” which is generally the law as it will apply in real (inflation indexed) 

terms at the end of the Budget period. While many tax provisions are constant over time, current 

and proposed changes in tax law often include provisions whose effects vary over time: some are 

explicitly temporary, some not indexed for inflation, while others are delayed or phased in.

Using fully phased-in law provides a measure of tax burdens under the law as it will operate at 

the end of the Budget planning horizon, which should most fully reflect the long-run, permanent, 

distributional consequences of legislation.

Static Income: In general, Treasury assumes that income is unchanged or static. Treasury’s 

distribution estimates are intended to measure the change in tax burden due to a tax proposal. 

The burden, or benefit, of a tax proposal may not be properly measured by the change in tax 

payments if income is allowed to change. Although Treasury generally assumes total family 

income is static, Treasury does allow income to shift between taxable and tax-free forms. For 

example, a proposal to allow more tax-free fringe benefits, might shift taxable wage income into 

tax-free fringe benefits.

Distribution Results

The Distribution of Cash Income and its Components

The components of cash income can be divided into labor, capital, and transfer income. At 2022

income levels, cash income totals $18.5 trillion, of which $13.3 trillion (72 percent) is labor 

earnings, $3.3 trillion (18 percent) is returns to capital, and $1.9 trillion (11 percent) is transfer 

payments.4 Labor earnings include wages, the employer share of payroll taxes, employerprovided fringe benefits (primarily health insurance), the labor component of retirement 

distributions, the labor component of self-employment income (from sole proprietorships, 

partnerships, and subchapter S corporations), and the labor component of corporate income tax 

payments. Returns to capital include realized capital gains, unrealized capital gains at death,

dividends, interest (taxable and tax-exempt); the capital component of retirement distributions;

the capital component of passthrough income from partnerships and S corporations; and the 

capital component of corporate income tax payments. Transfer payments include Social Security 

benefits, Supplemental Security Income, Temporary Assistance for Needy Families, Low 

Income Home Energy Assistance, certain veterans' benefits, workers' compensation, 

unemployment compensation, other general cash assistance, Supplemental Nutrition Assistance,

the insurance value of Medicaid and Medicare, and alimony. 

4 The corporate income tax has been split between capital income (81.5 percent) and labor income (18.5 percent).

Without the corporate income tax, capital and labor income would have been higher. Cash income is a pre-tax 

concept.
4

Cash income is concentrated among high-income families. At 2022 levels, the lowest decile of 

families in the income distribution receives less than 1 percent of total cash income and the 

bottom 50 percent of families receives 14 percent of total cash income. In contrast, the highest 

decile of families receives 45 percent of total cash income and the top 1 percent of families 

receives 19 percent of total cash income. 

Labor income is concentrated among upper middle- and high-income families, although it is the

major source of income for all families. At 2022 income levels, the lowest decile of families 

receives less than 1 percent of total labor income even though more than half of their income is 

from labor. The sixth decile’s share of total labor income is 7 percent and 77 percent of their 

income is from labor. The top decile’s share of labor income is 40 percent and 63 percent of their 

cash income is from labor.

Capital income is highly concentrated among high-income families and is only a significant 

source of income for families in the top deciles. At 2022 income levels, families in the bottom 

half of the income distribution receive 2 percent of total positive capital income and on average 

only about 3 percent of their cash income is from positive capital income. In contrast, families in 

the top decile of the income distribution receive 79 percent of total positive capital income and 

32 percent of their income is positive capital income. The top .1 percent is the only group to earn 

more income from capital than labor.

In contrast to labor and capital income, transfer income is more evenly distributed across income 

deciles. The largest transfers (Social Security benefits and the insurance value of Medicare) are

not means tested. As expected, transfers are a significant source of income for low-income 

families. Families in the lowest income decile receive about 3 percent of all transfer income, 

which accounts for 49 percent of their total income. 

The Distribution of Federal Taxes under Current Law

A progressive tax system is one in which average tax rates (tax divided by income) rise with 

income.

Total federal taxes are progressive, ranging from a combined average rate (total tax divided by 

total cash income, by income class) of less than 1 percent for the bottom decile of families to 26 

percent for the top decile of families and 32 percent for the top .1 percent in 2022. The highest 

decile pays 61 percent of the total tax burden relative to its 45 percent share of total cash income.

The second income decile, on net, pays negative taxes because it receives refundable credits (and 

hence has a negative tax rate), and has about 2 percent share of total cash income.

The individual income tax is progressive. The average individual income tax rates (individual 

income tax divided by total cash income) for the lowest 40 percent of the income distribution are 

negative because they benefit from tax credits that generate tax refunds in excess of individual 

income tax liability. Current law includes several refundable tax credits (the premium tax credit, 

the earned income tax credit, the additional child tax credit, and the American Opportunity Tax 

Credit) that can be used to reduce net tax liability below zero. The average individual income tax

rate for the lowest income decile is -8.5 percent and for the second lowest income decile, it is 
5

-13.9 percent. The average individual income tax rate for the top decile is 16.9 percent and for 

the top .1 percent it rises to 22.7 percent.

The corporate tax burden is also progressive. Because labor income bears a small fraction (18.5

percent) of the burden of the corporate income tax, the lower deciles do bear some of the burden 

of the corporate income tax. However, because capital income and in particular, supernormal 

capital income, bears the larger burden of the corporate income tax, high income families bear a 

large share of the burden of the corporate income tax. Average corporate income tax rates range 

from 1 percent or less for the bottom 90 percent of families to 3.0 percent for the highest decile, 

and 6 percent for the top .1 percent of families. The bottom 50 percent of families bear 4 percent 

of the burden of the corporate income tax and the top 10 percent of families bear 73 percent of 

the burden of the corporate income tax. The top .1 percent of families bears 31 percent of the 

corporate income tax.

The payroll tax burden is slightly progressive through most of the income distribution and 

regressive at the top end of the distribution. Average payroll tax rates (payroll tax divided by 

total cash income) rise as a share of income from the bottom decile through the ninth decile

because of the flat payroll tax rate on earnings under the OASDI wage cap and because earnings 

as a share of income rises through the ninth decile. However, average payroll tax rates fall in the 

tenth decile because the OASDI wage cap lowers the statutory payroll tax rate on earnings over 

the cap from 15.3 percent to 2.9 percent (3.8 percent for taxpayers subject to the additional 

Medicare tax) and because labor income is a smaller share of total income among the highestincome families. The average payroll tax rate (tax as a percentage of cash income) is 7 percent 

for the lowest decile, 9 percent for the second highest decile, 5 percent for the top decile and only 

1 percent for the top .1 percent. 

The estate and gift tax is highly progressive. Ninety-three percent of the estate and gift tax 

burden falls on the top .1 percent of families.