For further details,

DISTRIBUTION OF TAXES AND TAXES PAID

Ninety-two percent of U.S. households paid one or more of the taxes covered in this study in 1983 (table E). This proportion showed no significant difference from 1982. In 1983, about 75 percent of all households paid Federal income taxes, 63 percent paid State income taxes, and 74 percent paid FICA payroll taxes. There was some evidence of a small increase in the proportion of households paying Federal income taxes between 1982 and 1983. The proportion of households paying State income taxes and FICA payroll taxes showed no statistically significant change. The proportion of households paying property taxes on their own homes (61 percent) remained unchanged from 1982.

The mean amount of taxes paid in 1983 ($5,890) was about $170 lower than in 1982, after adjustment for inflation. Mean Federal income taxes ($4,080) declined by $310 between 1982 and 1983. In contrast, State income taxes ($1,080) and FICA payroll taxes ($1,560) were higher in 1983 than in 1982.

The proportion of before-tax income paid in taxes averaged about 22 percent in 1983 for households paying at least one of the four types of taxes. The average for households paying Federal income taxes was about 13 percent, compared with only about 4 percent for State income taxes. Among households paying FICA payroll taxes, the average amount paid was about 5 percent of the average before-tax income. Property taxes accounted for about 2 percent of the beforetax income of households paying this tax.

Fifty-seven percent of the $463 billion in taxes paid in 1983 were Federal income taxes. FICA payroll taxes accounted for

homeowner property taxes made up 12 and 8 percent of the total, respectively.

The after-tax income data also provide information on the average amount of taxes paid and the percentage of income paid in taxes for households at different positions along the income distribution. The percentage of average income paid in taxes, as shown in table F, gives a good approximation of the effective average tax rates by income interval. Generally, the proportion of income paid in taxes in 1983 was slightly lower than that paid in 1982. The overall tax rate decreased by about 4 percent, as shown in table F. Households in all income categories experienced a statistically significant decline in the percent of income paid in taxes.2

LIMITATIONS ON THE ESTIMATES OF AFTERTAX INCOME

The estimates of after-tax income shown in this report were derived by simulating the amount of taxes paid by sample households on the March Current Population Survey (CPS) data file. The tax simulation procedures were based on a "statistical" combination of data from the Internal Revenue Service (IRS), summary of State individual income tax regulations, data on the characteristics of persons paying FICA payroll taxes from the Social Security Administration, property tax information from the Annual Housing Survey (AHS), and the March CPS microdata file. In order to combine these data sets in the estimation process, important assumptions were made that may have affected the after-tax income estimates.

"There was some evidence of a decline in the tax rate of households

INTRODUCTION

This report is the fourth in a series presenting estimates of after-tax household income and taxes paid by households. Previous special studies released by the Census Bureau contained estimates of after-tax household income for 1974 and 1980, 1981, and 1982. Data from the Annual Housing Survey, the Income Survey Development Program, and the Internal Revenue Service were combined with the March 1984 Current Population Survey (CPS) data to derive the estimates shown in this report. The main purpose of this report is to provide a better measure of year-to-year changes in household purchasing power and of differences in purchasing power between subgroups of the population. Four types of taxes were simulated and subsequently deducted from the total money income received by households in order to estimate after-tax income: Federal individual income taxes, State individual income taxes, FICA and Federal retirement payroll taxes, and property taxes on owner-occupied housing. A discussion of the important limitations of the simulation procedures and underreporting of income in the CPS is contained in the limitations section. A detailed description of the tax simulation methodology can be found in appendix A, along with comparisons of the results of the tax simulation with data from the Internal Revenue Service and other administrative sources. The procedures used to develop the estimates in this report are based on revisions to those used in previous years. The section on revisions to the tax simulation methodology describes the revised procedures.

HIGHLIGHTS

• Mean household income after taxes was $20,000 in 1983, up by 2.4 percent over the 1982 figure after accounting for the 3.2-percent rise in consumer prices. This increase follows a 1.7-percent increase between 1981 and 1982. (The rates of change for 1982 and 1983 are not statistically different from one another.)

• Mean household income before taxes ($25,400) increased between 1982 and 1983 by 1.2 percent after adjusting for inflation.

• Taxes absorbed about 21 percent of the total money income received by households, down slightly from 22 percent in 1982. In 1981, 23 percent of the total income received by households went to pay taxes.

• Households paid an average of $5,890 in taxes in 1983, about $170 lower than those paid in 1982 after adjusting for price change.

• The mean after-tax income of households in the Northeast, South, and West Regions increased in 1983. Households in the Midwest (formerly the North Central Region) showed no statistically significant increases in after-tax income.

• Married couples with children recorded a real increase of 2.6 percent in mean after-tax income.

• Married couples without children had after-tax incomes that were 3.3 percent higher in 1983. This increase was not significantly different than that for married couples with children.

• The mean income after taxes for households with a householder age 65 years and over showed no statistically significant increase in 1983. In 1982, their mean income rose by 5.2 percent.

AFTER-TAX INCOME

After accounting for taxes and the 3.2-percent increase in consumer prices, average household income rose by about 2.4 percent between 1982 and 1983. The average income for 1983 was $20,000, compared with $19,540 in 1982. The extent of this increase was clearly associated with the 10-percent reduction in 1983 Federal income tax rates as household income before taxes rose by only 1.2 percent and average amounts of State income taxes and payroll taxes were higher in 1983. The 1983 Federal income tax reduction was the third of four annual tax rate reductions scheduled by the Economic Recovery Tax Act of 1981. The increase in average household income after taxes in 1983 was not significantly different from the 1.7-percent increase in real terms recorded between 1981 and 1982.

The after-tax income of White households ($20,750) increased by 2.4 percent for 1983. The average for Black households ($13,670) showed some evidence of an increase. Spanish-origin households ($16,080) showed no statistically significant change from 1982 (table A).

After-tax incomes of households in the Northeast ($20,290), South ($19,470) and West ($21,150) Regions were higher in 1983. No statistically significant increase

units in which both spouses had earnings. Simulations for the other adjustments were not made. Had these adjustments been simulated, the estimated AGI levels from the CPS would have been lower resulting in slightly higher after-tax incomes. While the overall CPS-estimated AGI was about the same as the IRS figure for 1983, the CPS and IRS amounts differ considerably by income type as discussed later.

Second, an initial step in the tax simulation process is the formation of tax filing units using the survey information on household relationship, marital status, and dependency rules based on income. The CPS records this information for each "permanent"' household member as of the time of interview in March. The simulation of tax filing units does not, therefore, account for differences in household composition that may have existed during the year for which taxes were simulated. Because of the CPS household definition, it was also not possible to simulate dependents living outside the household. The exact effect of these limitations is difficult to estimate since some simulated tax units will have too few dependents (exemptions) and some will have too many. It seems likely that, overall, too few exemptions would be simulated. This situation probably results in a slight underestimate of aftertax income levels because all exemptions have not been accounted for.

The combination of IRS tax return statistics with the March CPS income data may have also affected the final estimates to a small degree because the IRS returns include units which are not contained in the CPS universe. These include 1) prior year delinquent returns, 2) returns of Armed Forces members living overseas or on base without families, and 3) returns

The procedures for simulating Federal and State individual income taxes tend to underestimate the actual variation in taxes paid by AGI level and, therefore, may tend to underestimate the variation in after-tax incomes. This occurs because the simulation procedures used, in some cases, averages to assign statuses and amounts to CPS tax filling units. For example, the amount of deductions for units assigned itemizing status was simulated using a matrix showing the IRS ratio of itemized deductions to AGI for all tax units by AGI interval, type of return, number of dependents, and presence of a home mortgage. The true variation in deductions was not simulated since all units within a specified matrix cell were assigned the same proportion of their AGI as deductions. The net effect of this aspect of the simulation procedure on the final after-tax income estimates is not known.

Comparisons of the distribution of AGI derived from the March CPS with that based directly on tax returns indicate significant differences and year-to-year variation in these differences. These differences for 1983 can be examined in table A-4 of appendix A. Year-to-year variations can be examined by referring to similar tables in previous reports. Of note is the change in the relationship between simulated and IRS data for the "$75,000 and over" category. In 1980, the simulated estimate for number of taxable returns in this AGI interval was 17 percent below the IRS figure. For 1983 the simulated number is 6 percent higher. This change along with others that have occurred from year to year may affect comparisons of after-tax data between years. The effect of these changes on the after-tax income estimates is not known.

Finally, another important limitation is the underreporting of money income in the survey. This is a common problem encountered in household surveys that attempt to collect income data. Underreporting results in a downward bias in the estimates of income from the March CPS. While income underreporting is a serious problem in household surveys such as the March CPS, its effect on measures of year-to-year change in levels of income and poverty is much less important because year-to-year variations in underreporting are relatively small. Estimates of underreporting are contained in appendix D.

REVISIONS TO THE TAX SIMULATION METHODOLOGY

Appendix A contains a detailed description of the methodology used to simulate Federal income taxes in 1983. Included in the appendix are descriptions of several modifications to the 1983 Federal tax simulation procedures. These modifications include expanding the matrix used to impute capital gains and losses. In previous years, capital gains and losses were imputed to tax filing units according to their adjusted gross income level. Beginning in 1983, the matrix used to impute capital gains and losses was expanded to include adjusted gross income, type of return, and age of tax filer. The matrix used to assign amounts of income itemized

ning in 1983, the matrix used to assign amounts of income itemized was expanded to include adjusted gross income, type of return, number of dependents, and presence of a home mortgage.

In addition, in 1983 the simulation was modified to assure that the amount of income itemized was equal to or greater than the sum of property and State income taxes paid by the tax filing unit. Also, all tax filers with property and State income taxes exceeding the minimum needed to itemize were assigned to be itemizing tax filing units. Previously, itemization status and amounts were assigned independently of State and property taxes.

Finally, in 1983 the dependent child care credit was imputed to Federal tax filers for the first time. Previously, the only credit simulated was the earned income tax credit.

Federal income taxes paid, however, because comparisons of 1982 and 1983 data were important the 1982 data published previously were revised based on the methodology implemented in 1983 to provide comparability. In this report, all comparisons between 1983 and 1982 were made using the 1982 revised simulation file. Consequently, the 1982 tax data shown in this report differ slightly from those previously published.

Table G shows the effect of revisions on the 1982 after-tax income figures. Overall, mean after-tax income changed very slightly, from $18,906 to $18,926. There were some types of households, however, with somewhat larger changes. The after-tax income of elderly households declined by 0.5 percent, from $13,767 to $13,698. This change was caused mainly by the inclusion of age as a variable in the matrix used

1 Persons of Spanish origin may be of any race.

20,277 20,320 13,767 13,698

0.2

-0.5

21,594

21,659

0.3

13,928 13,863

-0.5

to impute capital gains. The use of a variable showing presence of a home mortgage in the matrix used to impute amounts of income itemized was the main cause of the differences in the revised figures for owner- and renter-occupied households. The mean after-tax income of owner-occupied households increased by 0.3 percent, from $21,594 to

$21,659, while the after-tax income of renters declined by 0.5 percent, from $13,928 to $13,863. The addition of the child care credit was a factor in the 0.5 percent increase in the after-tax income of married couples with children, from $23,307 to $23,434.