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Federal personal income tax liabilities and payments: revised and updated estimates, 1987-88.

Federal Personal Income Tax Liabilities and Payments: Revised and Updated Estimates, 1987-88

This article compares Federal personal income tax liabilities and payments for 1987-88. The liability series reflects final 1987 and preliminary 1988 data from Statistics of Income, Individual Income Tax Returns. The payment series, which appears in table 3.2 of the "Selected NIPA Tables," reflects estimates presented in the national income and production accounts (NIPA) revisions released in July 1990. The estimates for 1987 and 1988, along with those for 1981-86, are shown in table 1. Estimates for 1949-80 appeared in the May 1986 Survey of Current Business.

Table : [Tabular Data Omitted]

1. This series is derived by the Bureau of Economic Analysis based on data from Statistics of Income, Individual Income Tax Returns for 1981-87 and from Statistics of Income Bullettin (Vol. 9, No. 4) for 1988.

2. This series appears in the table 3.2 of the "Selected NIPA Tables."

3. This series appears in table 2.1 of the "Selected NIPA Ttables."

4. Annual totals appear in Statistics of Income, Individual Income Tax Return for 1981-87 and in Statistics of Income Bulletin (Vol. 9, No. 4) for 1988. Quarterly estimates are derived by the Bureau of Economic Analysis.

Differences between liabilities and payments

In the NIPA's, personal income taxes are recorded on a payment basis - that is, at the time tax payments are made by individuals. For many types of analysis, personal income taxes recorded on a liability basis - that is, at the time taxpayers earn their income and incur their tax liability - may be more appropriate.

The payment series consists of three parts: Withheld taxes; declarations and final settlements, referred to as "nonwithheld taxes"; and refunds. Withheld taxes are those withheld at the income source. Declarations are estimated taxes paid on incomes not subject to withholding, and final settlements are additional taxes paid either at the time of filing tax returns (when liabilities exceed payments) or as the result of audits. Refunds occur at the time of filing tax returns (when payments exceed liabilities).

For taxes withheld from wages and salaries, differences between liabilities and payments arise for several reasons. First, the withholding tables used by employers are constructed under the assumption that taxpayers use the standard deduction in calculating their income tax liabilities. Overwithholding results when taxpayers who itemize their deductions do not request enough exemptions for withholding purposes; underwithholding results when taxpayers claim too many exemptions. Second, withholding is based on the assumption that wages remain unchanged during the year. Overwithholding results when wages change from one pay period to another and are subject to different withholding rates. Third, changes in withholding rates may not always coincide with changes in liabilities; tax law provisions usually are effective on January 1, but corresponding changes in withholding rates sometimes occur later. Fourth, at the option of the employer, taxes withheld on income from bonuses, commissions, overtime pay, sick pay, and taxable fringe benefits may be based on a flat 20 percent rate.

For some types of taxable incomes, differences arise because taxes withheld have no direct relationship to corresponding liabilities. For interest, dividends, and certain other types of income, an arbitrary 20 percent is withheld if the recipient fails to furnish an accurate taxpayer identification number (this withholding was initiated in 1984 as a compliance measure). For pensions and annuities, withholding is at the option of the taxpayer.

For incomes not subject to withholding (primarily income from proprietorships, partnerships, and S corporations, capital gains, and taxable social security benefits), differences between liabilities and payments arise for two reasons. First, the proportion of the current year's liabilities that must be paid to avoid a penalty is less than 100 percent.(1) Second, the last installment of quarterly estimated taxes and the final settlements are made in the year following the liability year. As a result, payments of nonwithheld taxes during a tax year tend to be unrelated to changes in income in that year. Thus, when income growth accelerates liabilities tend to increase faster than payments.

Refunds arise from overpayment of taxes during the liability year. Actual refunds are recorded in the payment series as negative payments in the year they are made by the Treasury. Thus, refunds are unrelated to the current year's liabilities.

Differences for 1987-88

In 1987, payments exceeded liabilities by $17.8 billion. The excess reflects the final settlements of large 1986 capital gains tax liabilities. Because the Tax Reform Act of 1986 (TRA) repealed the preferential tax treatment of capital gains, many taxpayers accelerated their realizations of capital gains into 1986, thereby sharply increasing capital gains tax liabilities in 1986 and payments of capital gains taxes in 1987. (Most of these payments were made in the second quarter of 1987.)

In 1988, liabilities exceeded payments by $15.7 billion. The excess reflects, in part, a large increase in incomes for which taxes are not withheld, largely incomes of partnerships and S corporations; these incomes were affected by the TRA's phasing out of passive losses beginning in 1987. (1.) The Tax Reform Actt of 1986 increased the proportion of the current year's liabilities that must be paid through either withholding or estimated tax payments from 80 percent to 90 percent effective from tax year, 1987.
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Author:Park, Thae S.
Publication:Survey of Current Business
Date:Sep 1, 1990
Words:874
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