[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

decade resulted in improvements? During the past quarter century, the U.S. income
tax system has undergone five major reforms, in 1981, 1986, 1993, 1997, and 2001. The
announced intent of each was to make the system more efficient, more fair, and
administratively more simple. But trade-offs always had to be made, and the reforms
approached them differently; indeed, each tended to undo what was widely viewed
as the excesses of its predecessor. Meanwhile, worries about soaring government
expenditures limited the extent to which various social goals could be pursued
through new programs. Hence, government instead used tax expenditures—such
as tuition tax credits and deductions—to pursue these objectives in the tax bills of
1993, 1997, and 2001, inevitably complicating the tax system greatly.
Fairness As noted, the U.S. federal income tax system is, overall, progressive.
Low-income individuals are exempt from paying any income tax whatsoever. Beyond
a certain level of income (depending on family size—for a family of four, the critical
level in 2004 was $22,100), the tax rate is then 10 percent. Thus, for each $100 an
individual earns, he must pay an extra $10 of taxes; this is his marginal tax rate. At
higher levels of income, the marginal tax rate increases further, eventually reaching
39.1 percent on incomes above $315,900 (for a family of four).
The average tax rate gives the ratio of taxes to taxable income. While the marginal
tax rate shows big jumps, the average tax rate increases smoothly. Figure 17.3
shows the 2000 marginal and average income tax rates for a typical family of four
that did not itemize its deductions.
45
40
Marginal
tax rate
35
TAX RATE (%)
30
25
20
15
Average
tax rate
10
5
0
50,000
100,000 150,000 200,000 250,000 300,000 350,000 400,000
INCOME ($)
Figure 17.3
MARGINAL AND AVERAGE
FEDERAL INCOME TAX RATE
Marginal tax rates change by jumps, as shown in the table, but average tax rates
increase gradually.
SOURCE: Tax Relief Act of 2001.
384 ∂ CHAPTER 17 THE PUBLIC SECTOR