Every April, millions of Americans file their federal income taxes, helping to fund the government in the process. But since the late 1980s, the tax bill for most Americans has changed in a variety of ways. The result is that tax rates on income for most of the country are at historically low levels.
But how much taxes changed for families depended on factors like their income, whether they had children, or the unique economic conditions at the time policies were changed.
The average federal income tax bill is lower for low- and middle-income families with children after adjusting for inflation. Non-elderly families with no children also see lower tax bills. Families in the top 1% are one of the few groups to pay more in income taxes now compared with 1988.
Citing concern over the federal budget deficit, President George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1990. The law increased the top income tax rate from 28% to 31% and limited itemized deductions for high-income taxpayers. The law also increased payroll taxes on all workers.
Three years later, President Bill Clinton signed the Omnibus Budget Reconciliation Act of 1993. The law raised the top income rate again, this time from 31% to 39.6%. Medicare taxes on high-income workers also increased, as well as income taxes on Social Security benefits.
From 1988 to 1993, the average federal income tax bill for American families increased by over $1,000 in 2019 dollars. Families in the top 1%, the middle class and elderly families had increases in their federal income tax bills. But for middle-class families with children, tax bills over that time decreased.
The payroll tax changes caused the average payroll tax liability for employers and employees combined to increase by nearly $400. Payroll tax policy hasn’t changed significantly since the 1993 law.
In 1997, President Clinton and Congress passed the Taxpayer Relief Act of 1997. This law created the first child tax credit and the first education tax credits, while also reducing the tax rates for capital gains.
President George W. Bush’s first major piece of legislation was the Economic Growth and Tax Reconciliation Relief Act of 2001, which scheduled across-the-board reductions in tax rates and increased the child tax credit.
In 2003, another round of tax cuts was enacted and signed into law by President Bush. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated some of the provisions in the 2001 tax cut law and further reduced tax rates on capital gains and dividends.
Between 1996 and 2004, the average federal income tax bill for American families dropped by over $2,700 because of these three laws. Every income group saw some tax reduction, although in raw dollar amounts, the largest tax relief went to those at the upper end of the income distribution.
The federal income tax bill for the average family in the top 1% decreased by nearly $108,000 in 2019 dollars. The reduction was primarily due to the reduced tax rates for capital gains and dividends. Those two income sources disproportionately flow to upper-income Americans.
From 1996 to 2004, the federal income tax bill for Americans in the middle class decreased, too.
Single people in the middle class saw their average federal income tax bills decline by $679 from 1996 to 2004. At the same time, middle class married families with children saw their average income tax bills decline by $2,706. The decrease in taxes for families with children was driven partly by the creation and expansion of the child tax credit.
In the face of the 2008 financial crisis, Congress and President Barack Obama extended most of the provisions of the Bush tax cuts for another two years, including the tax reductions on high-income taxpayers. Following his successful reelection in November of 2012, President Obama and Congress agreed to make permanent most of the Bush tax cuts except for the reductions of the top two tax rates. Those returned to their pre-2001 levels of 36% and 39.6%. Also, the income tax rate paid by high-income taxpayers on long-term capital gains and qualified dividends was increased from 15% to 20%.
Taxes changed for Americans in two other ways during the Obama administration. In 2008, the American Recovery and Reinvestment Act stimulus bill contained temporary tax cuts to boost disposable income during the economic downturn. It also created new tax credits for higher education and expanded the earned income tax credit. In 2010, the Affordable Care Act was passed. The law made several changes to public and private health insurance in the US. It created health insurance exchanges in every state. It also created a tax credit for low- and middle-income families to help pay for insurance premiums. Part of the financing of the Affordable Care Act came from a new 3.8% tax on investment income imposed on tax returns with incomes exceeding $250,000, as well as a 0.9% payroll tax increase on the wages of high-income returns.
Between 2008 and 2014, the average income tax burden decreased across the board except for those in the top 5%. Again, those with children saw greater reductions in their income tax bills than those with no children. For the top 1%, however, their tax bills increased significantly -- by an average of $80,699.
In late 2017, President Donald Trump signed the Tax Cuts and Jobs Act of 2017 into law.
The law reduced most ordinary income tax rates and doubled the child tax credit from $1,000 to $2,000 for most children, including high-income children who may have been ineligible before. It continued the trend of major tax legislation providing the biggest benefits to families with children. The law also nearly doubled the standard deduction, resulting in a large decrease in the number of tax returns using itemized deductions.
Unlike the Bush tax cuts, the 2017 law also raised taxes for some families by capping the value of the state and local tax deduction. This impacted higher-income families in areas with expensive real estate the most.
The 2017 law reduced the average tax bill by around $900. Families with children in the middle 20% saved on average twice as much as single taxpayers in the middle class.
Just as was done during the financial crisis of 2008-09, Congress responded to the COVID-19 pandemic by creating many special tax provisions that directly affected American families' tax bills. This included large payments sent in advance to families based on their marital status and the number of children on their tax returns. Part of the third relief package, the American Rescue Plan, was another increase in the child tax credit that increased the credit to $3,000 for most children aged 6-17 and $3,600 for most children under 6 years of age.
Because of the increase in the child tax credit, the typical middle class married family with children saw a $2,000 reduction in their income tax liability from 2020 to 2021. Single parents with children saw similar reductions in their income tax liabilities. However, families with no children saw virtually no change in their income tax liability.
|Income group||All families||Non-elderly single with no children||Non-elderly single with children||Non-elderly married with no children||Non-elderly married with children||All elderly families|
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