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Federal personal income tax liabilities and payments: revised and updated estimates, 1959-91.

This article presents estimates of Federal personal income tax liabilities and payments for 1959-91 (table 1). The estimates of liabilities and payments have been revised for 1959-88 and extended to 1991. They incorporate the results of the comprehensive revision of the national income and product accounts (NIPA'S) released in December 1991, revised estimates of the NIPA's for 1989-91 released in July 1992, and recently available data from the following Internal Revenue Service (IRS) sources: Statistics of Income, Individual Income Tax Returns (SOI), Annual Reports for 1988-90, and unpublished information on individual income tax collections for liability year 1991. [TABULAR DATA 1 OMITTED]

This article first presents an overview of the tax liabilities and payments measures and the reasons why they differ. It then discusses the differences for 1986-91 and the sources of revision to the estimates for 1959-88.


In the NIPA's, personal income taxes are recorded on a payment basis -- that is, at the time tax payments are made by or on behalf of persons.(1) For certain types of analysis, personal income taxes recorded on a liability basis--that is, at the time persons earn their income and incur their tax liability--may be more appropriate.

The payment series, which appears in table 3.4 of the "National Income and Product Accounts Tables,"(2) consists of three parts: Withheld taxes; declarations and final settlements, or "nonwithheld taxes"; and refunds. Withheld income taxes are those withheld at the income source. Declarations are estimated taxes paid quarterly, largely on income not subject to withholding, and final settlements are additional taxes paid either at the time of filing tax returns or as the result of audits. Refunds, made when payments exceed liabilities, occur at the time of filing tax returns.

The liability series is derived from SOI estimates of total income tax; BEA adjusts these estimates to take account of earned income credits, fiduciary income tax, unrelated business income tax of exempt organizations, and audit assessments. When the SOI estimates of total income tax are not available, the liability series is derived from unpublished information on individual income tax collections.

For taxes withheld from wages and salaries, differences between tax liabilities and payments arise for several reasons. First, prior February 1992, overwithholding was built into the withholding tables used by employers; withholding was computed on the amount of total wages less one personal exemption for each withholding allowance claimed. Second, the withholding tables 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. Third, 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. Fourth, 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. Fifth, 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 the 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, from capital gains, and from taxable social security benefits), differences arise because the proportion of the current year's liabilities that must be paid to avoid a penalty is less than 100 percent and because the last installment of quarterly estimated taxes and any final settlements are made in the year after the liabilities were incurred. As a result, payments of nonwithheld taxes during a tax year do not always reflect that year's income. Thus, when incomes not subject to withholding are increasing, payments tend to lag liabilities.

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

Differences for 1986-91

For 1986, liabilities exceeded payments by $ 25.1 billion. This substantial difference reflected unusually large taxable capital gains declared that year; these gains increased from $68.3 billion in 1985 to $132.8 billion in 1986, when the preferential tax treatment of long-term capital gains was repealed by the Tax Reform Act of 1986 (TRA). Under the TRA, capital gains are taxed at the same rate as ordinary income, except that in 1987 the top rate was limited to 28 percent. Under the previous law, long-term capital gains were taxed at only 40 percent of the ordinary income tax rates, which put the top rate at 20 percent. Many taxpayers, faced with the higher rates, accelerated realizations of capital gains into the fourth quarter of 1986; as a result, liabilities increased sharply for 1986, and payments increased sharply for 1987. Because capital gains are not subject to withholding, 1986 payments were affected little by the accelerated realizations.

For 1987, payments exceeded liabilities by $14.9 billion. The excess reflected the final settlements of the 1986 capital gains tax liabilities, which increased payments, particularly in the second quarter of 1987.

For 1988, liabilities exceeded payments by $17.2 billion. The excess partly reflected a large increase in the incomes of partnerships and of S corporations, for which taxes are not withheld. The large increase in these incomes -- from $24.3 billion in 1987 to $57.1 billion in 1988 -- was affected by the TRA'S phasing out of passive losses beginning in 1987.

For 1989-91, payments exceeded liabilities in each year. In the absence of major changes in tax law affecting personal income tax liabilities, excess payments are expected because of the overwithholding inherent in the withholding system. New withholding rates that went into effect in February 1992 are expected to reduce excess payments in the future.

Sources of revisions for 1959-88

Table 2 shows the revisions in the annual estimates of the liability and payment series for 1959-88. The annual estimates of liabilities are revised for 1977-79 and for 1987-88 to reflect revised IRS data; the quarterly liability estimates are revised for all years to reflect the incorporation of revised data from the comprehensive revision of the NIPA'S.(3) For payments, the revisions for 1959-88 in both the annual and quarterly estimates also reflect the incorporation of the comprehensive NIPA revision. [TABULAR DATA 2 OMITTED] (1)In the NIPA'S, persons consist of individuals, nonprofit institutions that primarily serve individuals, private noninsured welfare funds, and private trust funds. (2)These tables are published annually in the Survey of Current Business, they appeared most recently in the July 1992 issue. (3)The revision is described in "The Comprehensive Revision of the U.S. National Income and Product Accounts: A Revisions and Major Statistical Changes," Survey 71 (December 19910; 24-42.
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Author:Park, Thae S.
Publication:Survey of Current Business
Date:Aug 1, 1992
Previous Article:National income and product accounts.
Next Article:Fixed reproducible tangible wealth in the United States, 1988-91.

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