Washington (Aug. 18, 2004) -- Thanks to tax legislation enacted in 2001, 2002 and 2003 that is scheduled to phase in, phase out and "sunset" entirely after 2010, federal tax rules will differ in every year from 2001 through 2011 and, consequently, so will effective tax rates, notes a report released by the Congressional Budget Office.


Under current law, the total effective federal tax rate for all taxpayers drops from 21.5 percent in 2001 to 19.6 percent in 2004 before reversing course and climbing over the next decade, the CBO said in its report, "Effective Federal Tax Rates Under Current Law, 2001 to 2014."


The CBO analysis assumes that incomes grow at a constant rate between 2001 and 2014. The analysis of effective federal tax rates from 2002 through 2014, requested by ranking members of the Senate and House Budget Committees, the Senate Finance Committee, the House Ways and Means Committee and the Joint Economic Committee, uses data on incomes in 2001, the most recent year for which information is available.


From a 2004 low of 19.6 percent, the overall effective tax rate jumps to 21.4 percent in 2005 as most features of the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Job Creation and Worker Assistance Act of 2002 disappear, decreasing the child credit, lessening the relief from marriage penalties and raising the alternative minimum tax, CBO said.


The effective rate climbs to 22.1 percent in 2010, CBO said, primarily because the AMT affects more and more people and the growth of real incomes pushes taxpayers into higher tax brackets. The report notes that by 2014, nearly 22 million taxpayers will be subject to the AMT.


CBO said that the effective tax rate takes another jump to 23.6 percent in 2011 after the Economic Growth and Tax Relief Reconciliation Act of 2001 sunsets, and then resumes a slow climb, driven by continued real income growth and the widening reach of the AMT.


Overall, under current law, the effective federal tax rate will increase from 21.5 percent in 2001 to 24.1 percent in 2014. Because tax legislation enacted since 2001 focuses primarily on the individual income tax, CBO said, "the pattern of changes for the total effective tax rate over the 2001 to 2014 period derives almost entirely from changes in the effective individual income tax rate."


The full text of the report is available at www.cbo.gov.


-- WebCPA staff

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