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Federal personal income taxes; liabilities and payments, 1981-1983.

Federal Personal Income Taxes: Liabilities and Payments, 1981-83

THIS article presents revised quarterly Federal personal income tax liabilities for 1981-1982 and extends the series to 1983. The methodologies underlying this series and the payment series included in the national income and product accounts (NIPA's) were described in the January 1983 SURVEY OF CURRENT BUSINESS. Estimates for 1949-75, 1976-79, and 1980 are in the May 1978, January 1983, and April 1984 issues of the SURVEY, respectively.

Table 1 shows quarterly Federal personal income tax liabilities, payments, and the excess of liabilities over payments for 1981-83. In general, the payment series differs from the liability series for the following reasons: (1) payment of nonwithheld taxes--quarterly declarations and final payments--and the payment of refunds by the Treasury usually are not made in the period of the corresponding liabilities; (2) changes in withholding rates do not always coincide with changes in liabilities; (3) graduated withholding rates can result in changes in taxes withheld that are different from changes in liabilities if the income flow or deductions change during the tax year; and (4) withholding according to the withholding tables may result in overwithholding for some taxpayers. The tables are constructed under the assumption that taxpayers whose income is withheld use the standard deduction in calculating their income tax liability. Thus, unless taxpayers who itemize their deductions request additional exemptions for withholding purposes, use of the withholding tables will result in overwithholding.

Revisions in the liability series for 1981-82 primarily reflect revisions in tax returns data published by the Internal Revenue Service in 1984. Revisions in the payment series for 1981-82 reflect revisions in the NIPA estimates for 1981-83 published in July 1984. The specific factors affecting these series for 1981 and 1982 were described in the January 1983 and the April 1984 issues of the SURVEY, respectively. The specific factors affecting the 1983 series are described in what follows.

The decline in personal income tax liabilities in 1983 is attributable to the continued impact of the Economic Recovery Tax Act of 1981 (ERTA). The most important provision of ERTA, which resulted in the largest tax reduction in recent years, was a three-stage reduction in personal income tax rates: 5 percent in October 1981, 10 percent in July 1982, and another 10 percent in July 1983. The 1981 tax reductions, combined with increased defense spending and a recession in 1982, raised sharply the prospect of future budget deficits. In an effort to reduce those deficts, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).1 Despite TEFRA, personal income tax liabilities declined in 1983 as the final round of ERTA tax rate reductions took effect in July.

1. For detail, see Joseph C. Wakefield, "Federal Budget Developments,' SURVEY 62 (September 1982): 21-23.

Two provisions of TEFRA raised personal income tax liabilities substantially in 1983. First, the floor for deductible medical and dental expenses was increased from 3 percent to 5 percent of a taxpayer's adjusted gross income (AGI). In addition, the separate deduction for one-half (up to $150) of medical insurance premiums was repealed. Second, nonbusiness casualty and theft losses became deductible only to the extent that the total amount of such losses (after a $100 reduction for each loss) exceeded 10 percent of a taxpayer's AGI. The increase in liabilities in 1983 under these TEFRA provisions approximately offset the decrease in liabilities resulting from an ERTA provision that increased the deduction for two-earner married couples. This provision had increased this deduction from 5 percent in 1982 to 10 percent in 1983 of the lesser of $30,000 or the amount of the lower earning spouse's earned income. Thus, the $8.3 billion decline in personal income tax liabilities in 1983, shown in table 1, can largely be attributed to the final round of the ERTA tax rate reductions.

On a quarterly basis, personal income tax payments increased little in the first and second quarters of 1983, reflecting large refunds as a result of overwithholding in 1982. Both liabilities and payments declined in the third quarter of 1983, reflecting the final round of the ERTA tax rate reductions and the corresponding cut in withholding rates in July. As was the case in 1982, the cut in withholding rates in 1983 was less than the reduction in liabilities, and the excess of payments over liabilities was substantial in the second half.

Table: 1.--Federal Personal Income Tax Liabilities and Payments, 1976-83
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Author:Park, Thae S.
Publication:Survey of Current Business
Date:May 1, 1985
Words:738
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