. 

1. 

INDIVIDUAL INCOME TAXATION 1947-79 

Eugene Steuerle 

U.S. Treasury Department 

Michael Hartzmark 

University of Chicago 

OTA Paper 48 April, 1981 

OTA Papers are circulated so that the preliminary findings of 

tax research conducted by staff members and others associated 

with the Office of Tax Analysis may reach a wider audience. 

The views expressed are those of the authors, and do not 

reflect Treasury policy. Comments are invited, but OTA 

Papers should not be quoted without permission from the 

authors. Managing editors are Michael Kaufman and 

Gary Robbins. 

Office of Tax Analysis 

U.S. Treasury Department, Room 1116 

Washington, D.C. 20220 

Issued: April, 1981 

L 
TABLE OF CONTENTS 

. 

ABSTRACT ........................................ i 

I. INTRODUCTION .................................... 1 

11. THE INDIVIDUAL INCOME TAX IN THE FEDERAL SYSTEM

OF TAXATION ................................... 3 

A. Exclusions...............eb 6 

B. Deductions, Exemptions, and Other 

Nontaxable Adjusted Gross Income........ 12 

C. Aggregate Reductions in the Tax Base...... 17 

D. Tax-Exempt Levels of Income............... 19 

IV. TAX RATES ....................................... 25 

V. CONCLUSION ...................................... 30 

VI. APPENDIX ........................................ 32 
ABSTRACT 

Between 1947 and 1979 the average rate of Federal 

individual income tax has varied within a fairly narrow band. 

Nonetheless, that rate is currently approaching a new high 

and, combined with the average rate of State individual 

income taxation, did reach a new high in 1979. Much more 

significant have been the changes in the base and the 

effective rate structure of the tax. While the tax base has 

always been one-half or less of personal income, its size and 

composition since 1947 have been altered by two opposing sets 

of influences. First, increases in exclusions, itemizations, 

standard deductions and credits have reduced the tax base by 

an additional 18 percent of personal income. Second, the 

base has been increased by 24 percent of personal income, 

principally because of a substantial decline in the relative 

amount of personal exemptions and adjusted gross income of 

nontaxable persons. With regard to the rate structure, in 

the early 1960's only 10 percent of tax returns faced a 

positive tax rate other than in the 20-22 percent range: by 

1979, marginal tax rates had become substantially higher for 

tax returns above the median marginal rate and lower for 

taxable returns below the median. 

r. 

. 

c 
INDIVIDUAL INCOME TAXATION, 1947-79" 

Eugene Steuerle 

Michael Hartzmark 

I. INTRODUCTION 

Since the end of World War I1 there have been numerous 

revisions in the laws governing the individual income tax. 

During the last decade alone, there were at least five major 

"revenue," "tax reform," or "simplification" acts. Not only 

has each revision affected the base of the individual income 

tax through various changes in allowable exclusions 

exemptions, deductions and credits, but the rate schedules 

applying to the tax base have been occasionally altered as 

well. These tax laws have been further modified and 

interpreted through an expanding set of regulations, rulings, 

and court decisions. 

* The authors are indebted to Jack Blacksin, Seymour

Fiekowsky, Harvey Galper, Michael Kaufman, Ben Okner, Peter 

Sailor and Emil Sunley for helpful comments, to Stuard Gates 

for excellent graphics work, and to Adoncia Bratcher, Nancy

Kawtoski, Amie Powell and Eunice Taylor for assistance in 

preparation of the manuscript. Special thanks are due to 

personnel of the Bureau of Economic Analysis, in particular,

Thae Park, who provided much of the data from which Tables 

A-2 and A-3 were constructed. For a related use of that 

data, see Park (1981). 
-2-

Legislative, executive, and judicial actions have not 

been the only causes of changes in the rates and base of 

individual income taxation. Since 1947, individuals have 

altered the distribution of their earnings between nontaxable 

and taxable sources, and they have reallocated their 

expenditures among various excludable (or deductible) and 

nonexcludable items. These modifications of earning and 

expenditure patterns may be the result of several factors, 

including growth in per capita income, redistribution of 

income shares, as well as incentives and disincentives 

written into the Internal Revenue Code. 

Since the schedules of tax rates in the individual 

income tax laws are progressive, a rise in money incomes 

because of inflation or real growth in the economy tends to 

push individuals into higher marginal tax rate brackets and 

to increase average tax rates as well. However, whether 

actual rates rise over a given period is also dependent on 

legislated tax changes enacted over the same interval. 

Thus, changes in the economy interact with the actions 

of individuals and Congress to produce an individual income 

tax structure that is itself constantly changing. The 

purpose of this paper is to examine the net effect of these 

various changes by presenting historical data on aggregate 

measures of the burden of the individual income tax, 

J 

L 

.. 

* 
-3-

including the size of the tax base relative to personal 

income and the distribution of marginal tax rates faced by 

individuals. Where trends are apparent, they are also noted 

and discussed in the text. 

11. THE INDIVIDUAL INCOME TAX IN THE FEDERAL SYSTEM OF 

TAXATION 

The Federal individual income tax is the largest single 

source of tax revenues in the Federal tax system. Since 

1947, "effective" tax rates, i.e., Federal individual income 

tax receipts as a percent of personal income, -1/ have varied 

between 7.4 percent and 12.1 percent (see Figure 1). -2/ If 

the early postwar years are ignored, the band has been even 

more narrow; excluding years before 1951, the effective rate 

has varied between a low of 9.2 percent (in 1964) and a high 

-1/ Effective tax rates can be measured in several ways. Tax 

burdens can be based upon receipts or liabilities, while 

income can be approximated by any bne of several measures 

such as personal income or national income, as defined by the 

Bureau of Economic Analysis. Figure 1 presents tax burdens 

on a receipts basis because "liabilities" are not measured 

for some of the taxes under consideration here. Since later 

parts of this study use personal income as the measure of the 

income of individuals, consistency dictated its use in Figure

1 also. Some taxes, such as corporate profits tax, are 

usually measured as a percent of national income (BEA counts 

corporate dividends, but not profits, as part of personal

income). Nonetheless, the trends presented in Figure 1 would 

vary little if alternative measures of tax burdens or income 

were chosen. 

-2/ Further detail is provided in Table A-1 in the Appendix. 
-4-

Figure 1 

Tax Receipts as a Percent of Personal Income 

50 

40 

:

8 

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0 Other Federal, SI te & Local Taxes c 

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0)

2 

Q, 2c

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State Individual Income Taxes 

1c 

-

Federal Individual Income Tax 

C 

1945 1950 1955 1960 1965 1970 1975 1980 
-5-

4 

. 

. 

of 12.1 percent (in 1969). While the range has been limited 

over these years, the peaks have occurred during the Korean 

and Vietnam conflicts. However, projections generally show 

that by 1981 this ratio could rise above the previous high if 

there are no tax reductions enacted for that year. 

Federal individual income tax receipts have generally 

comprised about one-third of total Federal, State and local 

tax receipts. Compared to individual income tax receipts, 

however, total receipts increased more rapidly and steadily 

from 1947 to 1979, although, like individual income tax 

receipts, total receipts as a percentage of personal income 

reached a high in 1969. From 1969-1979, the range of total 

receipts relative to personal income has been quite narrow, 

varying between a low of 33.1 percent and a high of 36.0 

percent. 

The composition of total receipts has changed more 

dramatically than the amount of these receipts. While the 

Federal individual income tax remained a fairly constant 

percentage of personal income, social security taxes and 

State and local taxes increased substantially from 1947 to 

1979, more than offsetting declines in Federal corporate 

profits tax and other Federal taxes, chiefly excises. 

Increases in income taxes collected by State and local 

governments were one reason for the rise in total State and 

local taxes. These income taxes have comprised an 
-6-

increasingly larger share of personal income and total State 

and local taxes over the 1947-1979 period. When State and 

local income taxes are combined with Federal income taxes, a 

growth trend in individual income tax collections as a 

percentage of personal income becomes more apparent. Indeed, 

by 1979, this aggregate measure of income taxes paid by 

individuals had surpassed the previous high reached in 1969. 

111. THE TAX BASE 

Average tax rates give a misleading picture of the 

effect of governmental activity on the use of resources in 

the economy. Factor incomes "taken" and reallocated by the 

government are often measured differently depending upon 

whether a transfer or subsidy is accomplished through direct 

expenditures or tax reductions. Even if average rates stay 

constant, changes in exclusions, deductions, credits and 

marginal rates may cause a reallocation of resources by 

influencing individuals to engage in tax-preferred activity 

and by affecting their marginal decisions to work, save and 

invest. Therefore, it will be useful to look beyond changes 

in average tax rates to the more specific changes in the 

income tax base and in the rates of tax that apply to each 

part of that base. 

* T 

c 

. 

. 
-7-

A. Exclusions 

Over the last three decades there has been a large 

growth in the amount of income that is legally excluded from 

taxation, that is, income not required to be counted as 

adjusted gross income (AGI) on indrividual income tax returns. 

Table 1 presents the major items of personal income for which 

an exclusion is allowed either by law or by regulation. 

The net exclusions reported in this table are derived in 

various ways depending on the nature of the exclusions and 

how the Bureau of Economic Analysis (BEA) estimates personal 

income. For transfer programs such as social security, the 

BEA measures personal income on the basis of benefits 

received, but, in order to avoid double-counting of transfer 

income, does not include in personal income either employee 

or employer contributions. The income tax system, on the 

other hand, counts only employee contributions as subject to 

income tax, but excludes all benefits and all employer 

contributions from taxation. Therefore, to derive the net 

amount of social security incorn? included in personal income, 

but excluded from income taxation, the taxable payments made 

by employees must be netted from the nontaxable benefits. In 

a year in which receipts equal outlays, this net exclusion is 

approximately equal to the value of employer contributions 

which are nontaxable to employees. 
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-9-

On the other hand, both the BEA and Table 1 treat 

non-taxed employer contributions to private pension and 

profit-sharing plans, plus interest on pension reserves, as 

current income; to derive a figure for net non-taxable income 

c 

in this case, taxable benefits paid to plan recipients must 

be subtracted.?/ 

Public transfer payments have grown significantly since 

1947, primarily because of increases in payments for 

retirement and disability through social security and for 

health care through social security and supplementary medical 

insurance. The category, "other nontaxable transfers," which 

includes unemployment compensation, A/ veterans' benefits, 

food stamps, etc., has remained more stable in relation to 

personal income, although there have been changes in the 

composition of those transfers, e.g., increases in food stamp 

payments relative to veterans' payments. 

Just as payments to public retirement and health plans 

are the major sources of nontaxable transfer income, payments 

to private retirement and healtn pians are the major sources 

of nontaxable labor-related income. From 1947 to 1979 the 

-3/ For further details, see Appendix Table A-2. 

-4/ Beginning in 1979 a small portion of total unemployment

compensation will be subject to income tax. The exclusion 

will phase out for a single return with an adjusted gross

income, plus unemployment compensation, in excess of $20,000 

($25,000 for joint returns). 
-10-

net exclusion resulting from the tax treatment of pension, 

profit-sharing and health plans (primarily the employee 

exclusion of employer payments to these plans) has risen 

steadily from .7 percent to 4.2 percent of personal income. 

By the end of the 1960's the exclusion of health insurance 

benefits had become as important as the exclusion applying to 

pension and profit-sharing plans. 

The increased tendency of employees to receive labor 

compensation in the form of fringe benefits is reflected not 

only in the growth of retirement and health plans. 

Non-taxable "other labor compensation" (e.g., group life 

insurance) also demonstrates fairly continuous growth 

relative to personal income, 

"Other statutory exclusions" include tax-exempt interest 

income and most items listed on individual tax forms as 

adjustments from gross income to adjusted gross income, e.g., 

moving expenses. On the whole, these other exclusions show 

mixed trends since 1947, although there appears to be a 

slight growth relative to personal income since the late 

1950's. Even though new types of exclusions have been 

adopted over time, the amount excluded through existing 

provisions often grew slower than personal income because 

maximum exclusion amounts (e.g., for dividends or 

contributions to individual retirement accounts) remained 

fixed during extended periods of income growth. -5/ 

w 

L 

5/ For 1981 and 1982 there will be a new exclusion of $200 

per taxpayer for interest and dividend income. See the Crude 

Oil Windfall Profit Tax Act of 1980. 
-11-

Finally, there appears to have been a fair amount of 

cyclical movement in the net amount of exclusion resulting 

from "other differences." This variable includes those 

exclusions not discussed thus far, plus several different 

items which are necessary to recD?cile personal income and 

adjusted gross income. For instance, "other differences" not 

only includes the exclusion arising from the nontaxation of 

imputed rental income, but also subtracts income treated as 

adjusted gross income, but not as personal income (e.g., 

realized capital gains). Therefore, this measure should be 

interpreted with caution. 

Although different historical trends apply to different 

exclusions, total exclusions have grown over the last 30 

years from about 11 percent to 19 percent of personal income. 

These exclusions apply to a broad group of individuals; 

indeed, as workers receiving pension and health benefits or 

as participants in the social security system, there are few, 

if any, taxpayers who do not "benefit" from exclusions. 

For many taxpayers, however, h;?lchbenefits may be 

largely illusory. To the extent that the government raises 

the same level of revenues, the elimination of tax on some 

income means a higher rate of tax on other income. g/ For 

instance, in 1979 exclusions were about 18.4 percent of 

. 

-6/ Of course, the distribution of tax burdens could differ 

even if the amount of tax collections were the same. 
-12-

personal income. While the average Federal tax rate on 

personal income was about 11.6 percent, on adjusted gross 

income the rate was 14.2 percent, or 22.5 percent higher. By 

the same token, marginal tax rates were higher than they 

would have been if excludable income had been taxable. These 

higher marginal tax rates may act not only as a disincentive 

to the taxpayer to work and save, but, when he works and 

saves, as a further incentive to obtain income in excludable 

form. The effect may build upon itself. As an example, 

excluding employer payments for medical insurance leads to a 

higher tax rate on other types of income (revenues being held 

constant), which in turn provides future incentives for 

individuals to take more of their income in the form of 

employer-provided medical insurance. This increase in the 

demand for such insurance (along with a possible increase in 

the price of medical care) increases the amount of excludable 

employer payments for medical insurance, and the process 

continues. -7/ 

B. Deductions, Exemptions, Credits and Other Nontaxable 

Adjusted Gross Income 

4 

3

To determine the percentage of personal income which c 

actually comprises the tax base, it is necessary not only to 

take into account the amount of exclusions from adjusted 

-7/ See Steuerle and Hoffman (1979). 
-13-

gross income, but also the deductions, exemptions, and 

similar exceptions by which the taxpayer reduces taxable 

income and tax liabilities. 

Unlike exclusions, the totci.l.va1:ie of these other 

exceptions have declined relative tc~personal income over 

time (see Table 2). One reason for this decline is that, 

relative to personal income, the adjusted gross income of 

nontaxable individuals (unfortunately, this amount cannot be 

measured separately from other differences between BEA and 

IRS measures of AGI) decreased substantially from 1947 to the 

end of the 1960's and then remained relatively constant 

during the 1970's. -8/ Because wages and incomes of 

households have grown faster than tax-exempt levels of income 

(discussed below), the decrease in the relative amount of AGI 

of nontaxable individuals is explained in part by the 

-8/ Ideally, one would like to separate the AGI of nontaxable 

individuals from other differences between BEA and IRS 

measures of AGI. However, while ir is possible to identify

the adjusted gross income of ncr,tz:qable filers, the adjusted 

gross income of nontaxable nonfilprs is unknown and is 

treated by BEA as part of a final "unexplained difference" or 

"reconciliation" between the BEA and IRS measures of AGI. 

This reconciliation includes income of taxable filers and 

nonfilers which should have been reported, but was not 

(nonreported income). When the AGI of nontaxable filers is 

combined with this reconciliation, as in the second column of 

Table 2, the AGI of nontaxable filers alone comprises at 

least 30 percent of the total. Like the total, the AGI of 

nontaxable filers declines relative to personal income; it is 

reasonable to assume that the AGI of all nontaxable 

individuals shows a similar trend. 
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-15-

simultaneous decrease in the percentage of households with 

AGI below tax thresholds. 

The amount of exemptions and deductions relative to 

personal income has also decreased since 1947. This 

shrinkage is due almost entirely to the drastic reduction in 

the relative value of personal exemptions. On taxable 

returns, these exemptions have decreased since the early 

1950's from over 24 percent to 9.3 percent of personal 

income. g/ 

Standard deductions (or zero bracket amounts for 

nonitemizers) also fell in relative value during the 1950's 

and 1960's, but then rose in the 1970's from less than 

2 1/2 percent to a high of 7.3 percent in 1977. By 1979, 

this percentage had dropped to 6.5 because prices and incomes 

rose faster than the zero bracket amount, which was increased 

slightly in 1979. 

c 9/ - In 1979, the personal exemption was increased from $750

to $1,000, but the value of this increased exemption was 

largely offset by the elimination of a "general" tax credit 

available to all taxpayers for the years, 1975-1978. 
-16-

Since 1947 there has also been an increase in the amount 

of expenditures that have been itemized on tax returns. 

Itemizations grew from 3.7 percent of personal income in 1947 

to 10.1 percent in 1969, -10/ then declined slightly to 9.0 

percent by 1979. Accompanying this decline throughout the 

early and middle 1970's, however, were the legislated 

increases in the value of the standard deduction, and a 

corresponding increase in the number of non-itemizers. 

Indeed, the decline in itemizations from 1969 to 1979 equaled 

only 1.1 percent of personal income, while the increase in 

standard deductions was 4.1 percent. 

A final way to reduce individual income tax liability is 

through the use of credits. By "grossing up" the tax offset 

by the credit, it is possible to estimate an equivalent 

amount of income which is made nontaxable. -11/ While credits 

offset only 1.4 percent of personal income in 1979, that 

percentage was still substantially higher than any percentage 

that applied before the 1970s. From 1975 to 1978 a general 

tax credit was provided to taxpayers in a manner somewhat 

similar to the personal exemption, that is, it was available 

to all taxpayers rather than limited to groups of taxpayers 

-10/ A high of 10.4 percent was reached in 1970. 

-11/ See footnote -c/ to Table A-5 in the Appendix for further 

details. 

t 

- c 
-17-

t 

P 

L 

with specific characteristics or particular expenditures 

(e.g., cre3it for the elderly, child and dependent care 

credit). Income offset by all credits was at its highest 

level during that period. 

C. Agqreqate Reduction in the II-Tax Base 

When the exclusion amounts listed in Table 1 are 

combined with the amount of deductions, exemptions, etc. 

detailed in Table 2, they result in 49 percent to 66 percent 

of personal income being excepted from taxation for each year 

of the period, 1947 to 1979 (see Figure 2). Thus, no more 

than 51 percent of personal income was ever in the tax base 

and taxed at a positive rate. This income taxed at a 

positive rate (or, excluding income offset by credits, 

taxable income) actually grew as a percentage of personal 

income through the 1950's and 1960's, reaching a high in 

1969. From 1970 to 1977, there was a decline in the tax base 

as a percentage of personal income to about the level 

applicable in the early 1960's, although the trend has been 

upward again since 1977. 

More dramatic than the overall trend has been the 

combination of factors which produced this movement. For 

instance, from 1947 to 1979, the tax base increased (or 

income excepted from taxation decreased) by 6.3 percent of 

personal income because a decrease of 24.3 percent of 
-19-

personal income principally in the value of personal 

exemptions and the AGI of nontaxable individual more than 

offset an increase of 18.0 percent of personal income in the 

amount of exclusions, standard deductions, itemizations and 

credits (see Table 3). 

D. Tax-Exempt Levels of Income 

Exclusions, deductions, exemptions and credits not only 

reduce the income tax base of taxpayers with positive tax 

liability, but they also determine the tax-exempt levels of 

income or the minimum levels of income for which taxpayers 

bear any tax liability at all. Since exclusions and most 

credits are available to only some taxpayers (the general tax 

credit of 1975-78 being an exception), minimum tax-exempt 

levels for most people are determined by the standard 

deduction (or zero bracket amount), the personal exemption 

and the general tax credit. -12/ 

Figure 3 presents data on tax-exempt levels of income 

for the years, 1947-79, and compares these tax-exempt levels 

.- to income and poverty levels for the same years. l3/ Three 

12/ - Tax-exempt levels for certain groups of taxpayers may be

much higher. For instance, taking into account the tax 

credit for the elderly, in 1979 the tax exempt level for an 

elderly couple without social security income ($10,802) was 

about twice that of a non-elderly couple ($5,400). If the 

elderly couple had social security income, their tax-exempt

level would be even higher. 

-13/ See Table A-4 in the Appendix for further details. 

4 
-20-

Table 3 

............................................................. 

AGGREGATE CHANGE IN THE TAX BASE, 1947-79 

(As a Percentage of Personal Income) .

P 

............................................................. 

Increases in Tax Base Due to Decreases In: 

Personal Exemptions 14.0% 

AGI of Nontaxable Individuals, Nonreported

AGI & Reconciliation 10.3 

Total Increase .................................. 24.3 

Decreases in Tax Base Due to Increases In: 

Net Exclusions 9.5% 

Itemizations 5.3 

Standard Deductions 2.1 

Income Offset by Credits -

1.2

Total Decrease ................................. 18.0 

Net Increase in Tax Base (or Decrease in 

Income Excepted from Taxation) ................ 6.3% 

r 
-21-

general trends can be detected. First, tax-exempt levels for 

families of four have remained fairly close to official 

poverty levels for the entire period. This is not 

coincidental, at least not since 1964. "Congress has used 

the standard deduction or (the minimum standard deduction) 

and the personal exemption to establish a tax-free income 

level approximating the poverty level. This policy began with 

the Revenue Act of 1964." E/ 

Second, tax-exempt levels have increased at the same 

rate or at a slightly higher rate than the increase in prices 

since 1947, but at a rate lower than the rate of increase in 

income or minimum wage. In part, this is a result of the 

connection made between official poverty levels and 

tax-exempt levels of income. Official poverty levels are 

redetermined each year merely by multiplying the previous 

year's poverty level by the percentage change in the consumer 

price index (CPI) between the two years. E/ Since incomes 

14/ - General Explanation of the Revenue Act of 1978,

pp. 38-39. 

15/ The history of the poverty "line" can be found in 

Eshansky (1975). Related to its development was the "War on 

Poverty," officially announced in the Economic Report of the 

President, January, 1964. Quasi-official poverty levels were 

designated as an "official" statistical series by the Budget . 

4 Bureau in 1969. 
-18-

Figure 2 

1oc 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

From Personal Income to the Tax Base 

t 

The Tax Base 

Taxah Income -

*\4 - / L- Income Offset by 

! 

L 

1945 1950 1955 1960 1965 1970 1975 1980 
-22-

Figure 3 

Income, Poverty Levels, & Tax-Exempt Levels of Income 

$10,000I 

I 

I

Maximum money income I 9,000 of lowest quintile of I income distribution I 

I \ 

8,000t Families 

7,000t 

6,000t 

5.000 

4,000 

3,000 

pow Maximum money

-zM+ 4 income of lowest 

quintile of income 

v 

.mu.... I .......~@ . I I 

distribution 

I 

1 1 1 1 1 " ' 1 1 " ' 1 ' 1 ' ' 1 ' 1 1 1 1 ' 
-23-

and wages have usually increased faster than prices, 

tax-exempt levels of income have excluded smaller and smaller 

proportions of the population over time, For instance, the 

maximum money income of a family in the lowest quintile of 

the income distribution (i.e.! the income level exceeded by 

exactly 80 percent of families) grew 512 percent from 1947 to 

1979, while tax-exempt levels for families of four increased 

by only 233 percent over the same period. E/ These data 

help to explain one of the trends noted previously: the 

decline in the adjusted gross income of nontaxable 

individuals as a percentage of personal income. 

Finally, there has been a substantial shift in the 

distribution of benefits arising from the standard deduction 

and the personal exemption away from families with dependents 

and toward single persons and couples without dependents. 

Since 1947, tax-exempt levels have risen 494 percent for 

single persons, 386 percent for couples without dependents, 

but only 233 percent for couples with two dependents. The 

percentages are even lower for couples with more than two 

dependents. 

16/ Similarly, per capita personal income and minimum wages

have increased faster than tax-exempt income levels. See 

Table A-4 in the Appendix. 

I 
-24-

This redistribution of benefits arose for two related 

reasons. First, in 1964, the minimum standard deduction for 

a single person was raised above one-half the level for a 

married couple. Thus, single persons began to receive 

increases in the standard deduction at a faster rate than 

that applied to married couples. This structural change 

emanated in part from the notion, adopted in 1964, that 

tax-exempt levels should approximate the poverty level. Since 

the poverty level for a single person was at a level higher 

than one-half the level for a couple, the tax-exempt level 

for a single person needed to be raised to a level more than 

one-half that of a couple. -17/ 

A second cause of the redistribution of benefits toward 

singles and married couples without dependents has been the 

reduction in the importance of the personal exemption 

relative to the standard deduction. Increases in the amounts 

of standard deduction are the same for couples with and 

without dependents, while increases in exemption levels are 

worth more to couples with dependents. Thus, in recent 

decades tax-exempt levels of income for families without 

dependents have moved closer and closer to tax-exempt levels 

for families with dependents. 

. 

. 

c 

-17/ In the Tax Reform Act of 1969, the Congress also lowered 

the tax rates of single individuals without lowering the tax 

rates of married couples. One result of the restructuring of 

both standard deductions and tax rate schedules has been a 

"marriage penalty." See Stromquist (1979). 
-25-

IV. TAX RATES 

To complete the picture of the burden of the individual 

income tax over time, it is necessary to examine the changes 

in the marginal tax rates faced by individuals. To the 

extent that taxes produce distortions in the work, saving or 

investment behavior of individuals, it is marginal, not 

average, rates of tax that are generally considered 

responsible. l8/ 

. 

The distribution of returns and personal income by 

marginal rate of tax is presented in Figures 4 and 5. E/ 

Marginal tax rate information is not available before 1961. 

For 1979, the Treasury Tax Model was used to make the 

necessary calculations. -20/ 

-18/ See, for instance, Harberger (1966) or Taubman (1978). 

19/ Again, see Appendix for the details of the calculations. 

Note that marginal tax rates must be measured on a 

"liabilities" basis. In Figure 1, however, tax rates were 

measured on a receipts basis. Comparisons between these two 

figures will still be fairly accurate. 

-20/ Information on the years 1963 and 1974 are also shown in 

Table A-5 in the Appendix. In 1963, 1969 and 1974, effective 

tax rates (Federal income taxes as a percent of personal

income) peaked before heading back down again. Measuring 

"peak to peak" enhances the possibility that detected trends 

upward or downward do not merely reflect cyclical changes in 

rates of tax. 

c 
-26-

The structure of tax rates has changed significantly 

since 1961. In the early 1960's most individuals faced an 

essentially constant, rather than progressive, schedule of 

tax rates. For instance, in 1961 only 10 percent of tax 

returns had a positive marginal tax rate other than 20-22 

percent (see Figure 4). By 1969 the tax structure had become 

much more progressive. z/Tax rates in the first bracket 

were lowered from 20 to 14 percent in the Revenue Act of 

1964, while at the top end of the scale, growth in incomes 

began to push individuals into higher marginal rate brackets. 

By 1979, the effective structure of.rates had become more 

progressive still, with roughly half of all returns at higher 

marginal tax rates than in 1961 and three-tenths at lower 

rates (two-tenths remained nontaxable). -

22/ Some of the

greatest differences occurred for tax returns with the 

highest marginal rates of tax. For instance, for returns at 

the 95th percentile, the marginal tax rate increased from 26 

percent in 1961 to 32 percent in 1969 to 38 percent in 1979. 

-21/ Some of the 1969 increase was due to the 10 percent

surcharge in effect for that year. See Appendix for details 

of marginal rate calculations for that year. 

-22/ The story does not change much if only joint returns are 

examined. Despite the fact that marginal tax rates for 

single returns are higher than those for joint returns at a 

given income level, the distribution of single returns by

marginal tax rate resembles closely the distribution of joint 

returns by marginal tax rate, after account is made for the 

larger relative number of nontaxable single returns. The 

median joint return has a marginal tax rate equivalent to the 

rate applying at about the 60th percentile for all returns. 

At the 95th percentile, marginal tax rates have been close to 

identical. 

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-28-

A slightly different perspective is obtained from 

Figure 5, which shows the percentage of total personal income 

(rather than the percentage of returns) taxed at or below 

various rates of tax. Taxpayers pay tax on their income not 

only in their highest marginal bracket, but in each lower 

bracket as well. Because many of the changes in the 

distribution of personal income by rate of tax resemble 

changes in the distribution of returns by marginal rate of 

tax, there is a counter-clockwise rotation over time in the 

curves in both Figures 4 and 5. 

Figure 5 provides a quite useful summary of other 

sections of this paper as well. First, the tax base 

(determined by the exclusions, deductions, exemptions, etc. 

discussed in the previous section) is shown in the figure as 

the percentage of personal income taxed at a positive rate. 

Second, the average rate of tax on all personal income is 

equal to the integral, or area, under each curve. By 

examining this area, we can understand how marginal rates of 

tax were able to rise for many individuals between 1969 and 

1979 even though the average rate for all persons in 1979 

remained below the 1969 high. The revenues gained by taxing 

some income at higher rates simply did not compensate for the 

revenues lost by taxing other income at lower rates and the 

reduction in the tax base over that period. 

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-30-

V. CONCLUSION 

Changes in the economy have combined with the actions of 

Congress, administrators and individuals to modify constantly 

the structure of the individual income tax. Despite these 

many changes, the average rate of tax has ranged between 

9.2 and 12.1 percent of personal income since 1951, although 

it is currently approaching a new high. More significant 

perhaps than any change in the average rate of taxation has 

been the shift in the means through.which much of income is 

excepted from taxation and in the rates of tax which apply to 

the base which remains. 

The amount of income excluded from taxation has been 

increasing steadily since 1947, indirectly raising the 

average tax rate on adjusted gross income even when the rate 

on personal income has remained relatively constant. 

Itemized and standard deductions, along with credits against 

tax, have also grown at a faster rate than personal income, 

further reducing the tax base. However, since 1947, these 

erosions have been more than offset by the decrease, relative 

to personal income, in the amount of adjusted gross income 

received by nontaxable individuals and, most importantly, in 

the amount of exemptions. 
-31-

Exemptions, standard deductions and the general tax 

credit determine minimum tax-exempt levels of income. 

Tax-exempt levels of income for couples with two children 

have consistently been quite close to official poverty 

levels; this relationship has been purposive at least since 

1964. Since incomes have grown faster than official poverty 

levels (or prices), this has meant over time that fewer and 

fewer individuals have been exempted from taxation on the 

basis of their total adjusted gross income. Additionally, 

the decreased importance of the personal exemption vis-a-vis 

the standard deduction, along with increases in the standard 

deduction, has caused an increase in the tax burdens of 

families with dependents relative to those without 

dependents. 

The rates of tax applying to various parts of the tax 

base have also been altered substantially. In the early 

1960's, only 10 percent of tax returns faced a positive 

marginal rate of tax other than 20-22 percent. Since then, 

the marginal rate of tax has risen for tax returns above the 

median marginal rate and fallen for taxable returns below the 

median. In general, over the past two decades the 

combination of tax increases resulting from higher money 

incomes and legislated tax reductions has resulted in a more 

progressive distribution of both personal income and 

individual tax returns by marginal rate of tax. 
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Footnotes to Table A-1 

-a/ Sources: U.S. Department of Commerce, Bureau of 

Economic Analysis. Benchmark revisions for 1980 have 

been incorporated. See Survey of Current Business, 

December, 1980. 

-b/ Includes Federal estate taxes, gift taxes, excise taxes 

and custom duties, plus employer contributions for 

Federal unemployment tax, railroad unemployment

insurance and Federal workmen's compensation. Excludes 

Federal nontaxes. 

-c/ Includes all State and local receipts from taxes and 

licenses. Excludes nontaxes, receipts from 

contributions to social insurance and receipts from 

Federal grants-in-aid. 

-d/ Preliminary Estimates. 

Footnotes to Table A-2 

-a/ Sources: See footnote a/, Table 1. Unpublished data 

furnished by Bureau of Economic Analysis. See also Park 

(1981) and acknowledgements at beginning of this 

manuscript. 

-b/ Federal transfers for retirement and disability through

social security, (OASDI) and railroad retirement, less 

personal contributions for same. 

-c/ Federal transfers of hospital and supplementary

medical insurance, less personal contributions to same. 

-d/ Total government transfers except military pay, taxable 

government pensions, and transfers for social security

and railroad retirement. Includes unemployment

compensation, workmen's compensation, food stamps and 

veterans' benefits. 

-e/ Employer contributions to pension and profit sharing,

plus imputed interest on private pension funds, less 

taxable private pension income received by individuals. 

f/ Employer contributions for private group health 

insurance. 
-38-

g/ Employer payments for group life insurance, workmen's 

compensation (private funds) , and supplemental

unemployment. 

-h/ This variable represents other personal income exempted 

or excluded from the calculation of adjusted gross

income: principally, payments to individual retirement 

accounts, exempt interest income, moving expenses, and 

certain business expenses treated as personal income by

the Bureau of Economic Analysis. 

-i/ This variable reconciles personal income, less items in 

previous columns, with adjusted gross income. Includes 

differences in accounting treatment, plus income 

received by non-individuals and items of imputed income 

not in previous columns (such as imputed rental income 

of homeowners), less items reported in adjusted gross

income, but not counted as personal income (such as 

capital gains). 

I/ Preliminary estimates. 

Footnotes to Table A-3 

I 

a/ Source: See footnote -a/, Table 2. 

Ib/ This variable includes adjusted gross income on 

nontaxable returns and the reconciliation of adjusted 

gross income as measured by BEA and adjusted gross

income as reported to IRS, including income of nonfilers 

and nonreported income of filers. 

-c/ After 1977, the standard deduction was converted to a 

zero bracket amount for all returns. Thus, after 1977, 

this variable equals zero bracket amount for 

nonitemizers only, that is, total zero bracket amount,

less amount used by itemizers (itemized deductions less 

excess itemized deductions) . Id/ The method for the derivation of income offset by

credits on both taxable -and non-taxable returns for the

years 1961, 1963, 1969, 1974 and 1979 is described in 

Footnotes to Table 5, footnote c. / For this column an 

average ratio of taxable income ofTset by credits on 

taxable returns was calculated for the pre-1964 period 

as well as the 1964-1979 period from the information 

gathered for the years in Table 5. The average ratios 

(pre-1964 = 4.684 and post-1963 = 5.731) were then 

multiplied by credits on taxable returns to estimate 

income offset by credits. Year-to-year changes in this 

column, for the most part, reflect the introduction and 

elimination of new tax credits (e.g. investment credit 

in 1962, general tax credit 1976-1978). 
-39-

-e/ Source of 1979 figures is the Treasury Tax Model. 

Footnotes to Table A-4 

-a/ Tax exempt levels are derived from exemptions, standard 

deductions and general tax credits. Estimates ignore

the effect of surcharges, or surtaxes and special

rebates, if any. 

-b/ Official poverty levels each year are recalculated 

merely by adjusting for changes in the consumer price

index (CPI). For years before the adoption of an 

official poverty level, therefore, levels are calculated 

by discounting by the change in the CPI. Sources: 

Characteristics of the Population Below the Poverty

Level: 1978, pp. 206-208; for 1979, estimated CPI is 

obtained from the Monthly Labor Review, June, 1980. 

-c/ Source: Money Income of Families and Persons in the 

United States: 1978, p. 65. For 1979, the percentage

growth over 1978 is assumed to equal the 1978-1979 

percentage growth in per capita personal income. 

-d/ Source: Hourly minimum wage from Minimum Wage

Commission. Estimate assumes 2,088 hours of pay

annually, including vacations and holidays. 

-e/ Source: See footnote -a/, Table 1. 

Footnotes to Table A-5 

-a/ Most of the information provided on Table 5 can be 

derived from data found in 1961, 1963, 1969 and 1974 

editions of the Statistics &Income: Individual Income 

Tax Returns (SOI). Beginning in 1961, the SO1 provided

information on the income subiect to tax and the tax,

classified by both the highest marginal tax rate and the 

tax computed at each rate. Estimates for the year 1979 

obtained from the Department of Treasury Tax Model. 

-b/ An adjustment was made to reported data for 1969 to 

account for a 10 percent surcharge imposed in that year.

Because of the phase-in of this credit by AGI, an 

approximation was made that taxpayers in the 14 to 16 

percent brackets faced no additional tax due to the 

surcharge, taxpayers in the 17 to 20 percent marginal

brackets paid an additional 20 percent on marginal

dollars of income, and taxpayers with marginal rates 

above 20 percent faced an additional burden of exactly

10 percent or an increase in rates of tax of 10 percent. 
-40-

-c/ Personal income taxed at a zero rate equals total 

personal income, less total income taxed at a rate 

greater than zero. 

Unlike SO1 data, income taxed at positive rate was 

adjusted to account approximately for credits against 

tax. Using the Treasury Tax Model, taxable income 

offset by credits could be derived fairly rigorously for 

1979. Credits essentially offset taxable income in the 

lowest brackets first. For example, if a taxpayer has 

$160 of credits, and if the bracket width is $1,000 for 

the first two positive rates of 14 percent and 15 

percent, then the taxpayer's credits offset $1,000 of 

income at. 14 percent and $133.33 ( = $20/.15) at the 15 

percent rate. 

For years before 1979, the credit-offset procedure was 

necessarily less rigorous because of limitations of the 

data. However, using the distribution of credits and 

offset income for 1979, the amount of income offset by

credits for these other years could be approximated.

The average rate of taxable income offset by credits to 

total credits equaled 4.684 for years before 1964 and 

5.731 for years after 1963. 
--- 

-41-

BIBLIOGRAPHY 

Advisory Commission on Interaovernmental Relations. "1980 

Chaiging Public Attitudei and Taxes." Washington, D.C. : 

1980. 

Annual Report of the Board of Trustees of the Federal Old Age

and Survivors Insurance _I_-and Disability Insurance Trust 

Funds, 1980. Washington, D.C.: Government Printing W Office, 1980. 

Goode, Richard. "The Individual Income Tax". 

Washington, D.C.: The Brookings Institution, 1976. 

Harberqer, Arnold. "Efficiencv Effects of Taxes on Income 

fr6m Capital." In Effectsaof Corporation Income Tax. 

Edited by M. Krzyzaniak. Detroit: Wayne State 

University Press, 1966. 

Joint Committee on Taxation. General Explanation of the 

Revenue Act of 1978. Washington: Government Printing

Office, 1979. 

Orshansky, Mollie. "Documentation of Background Information 

and Rationale for Current Poverty Matrix." Technical 

Paper #1 to The Measure of Poverty. Washington, D.C.: 

U.S. Department of Health and Human Services, 1977. 

Park, Thae S. "Reconciliation between Personal Income and 

Taxable Income, 1947-79." U.S. Department of Commerce,

Bureau of Economic Analysis. Survey of Current Business, 

forthcoming. 

Pechman, Joseph A. and Okner, Benjamin A. Who Bears the 

Tax Burden? Washington: The Brookings Institution, 

1973. 

Steuerle, Eugene and Hoffman, Ronald. "Tax Expenditures for 

Health Care." National -Tax Journal (June, 19791, pp.

101-115. 

Steuerle, Eugene. "Is Income From Capital Subject to 

Individual Income Taxation?" Office of Tax Analysis,

Paper #42. Washington, D.C.: The Treasury Department,

1980. 

Stromquist, Walt. "Federal Income Tax Treatment of Married 

and Single Taxpayers." Unpublished paper. Washington,

D.C.: Treasury Department, 1979. 

I 
-42-

Taubman, Paul J. "On Income Taxes." -In Federal Tax

Reform. Ed. by Michael Boskin. San Francisco: 

Institute for Contemporary Studies, 1978. 

U.S. Department of Commerce, Bureau of Economic Analysis.

The National Income and Produce Accounts of the United 

States 1929-74. Washington, D.C.: Government Printing

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U.S. Department of Commerce, Bureau of Economic Analysis.

Survey ofcurrent Business, various issues. 

U.S. Department of the Treasury, Internal Revenue Service. 

Statistics of Income =Individual Income.