A commonly overlooked reason for the difference in income levels among taxpayers is the life cycle issue. As we mature and gain work experience, our incomes tend to rise; income typically peaks when we near retirement. Viewing annual Internal Revenue Service data only provides a snapshot of a taxpayer’s situation rather than a fuller picture of their well-being—the life cycle of income is important context for income inequality discussions.
The chart below illustrates Internal Revenue Service (IRS) data from taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. returns filed for the 2016 tax year. Taxpayers nearest to retirement, ages 55 under 65, reported average adjusted gross income (AGI) of $99,836. Compared to the average AGI for all taxpayers of $69,317 and the average of $18,798 of the 18 under 26 age group, we can see that incomes tend to rise as taxpayers grow older and more experienced.
Income tends to exhibit an inverted-U-shape pattern, rising with age and then dropping slightly as taxpayers enter retirement. However, even taxpayers age 65 and over make above average incomes. This tells us that as the baby boomer generation continues to move into peak earning years, there will be more higher-earning taxpayers than younger, lower-earning taxpayers—contributing to the appearance of a rise in inequality.
Conversely, while lower income can sometimes be a sign of a lack of opportunity, in some instances, this is not the case. Previous Tax Foundation research shows that college students in particular comprise a large number of low-income taxpayers and that “America’s lowest incomes are actually found in college towns.” Viewing just one year of income tax data without digging any deeper misses this context.
The income of an average taxpayer rises dramatically as he or she ages and gains education and experience. A snapshot of income data in one year cannot tell the life cycle story of income. This is just one of the reasons why IRS data is not the best way to measure income inequality.
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Note: This is part of our “Putting a Face on America’s Tax Returns” blog series
- Who Shoulders the Burden of Federal Income Taxes?
- America Already Has a Progressive Tax System
- The Composition of Federal Revenue Has Changed Over Time
- The Top 1 Percent’s Tax Rates Over Time
- Who Benefits from Itemized Deductions?
- Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s
- How Do Transfers and Progressive Taxes Affect the Distribution of Income?
- A Growing Percentage of Americans Have Zero Income Tax Liability
- Increasing Individual Income Tax Rates Would Impact a Majority of U.S. Businesses
- New Report Shows the Burdens of Payroll and Income Taxes
As an expert in economics and tax policy, I have a comprehensive understanding of the intricate dynamics surrounding income levels, taxation, and their implications on societal well-being. My expertise stems from years of academic study, professional engagement in economic research, and practical application in advising on tax-related matters for individuals and businesses.
The article delves into the multifaceted nature of income inequality, shedding light on a commonly overlooked factor: the life cycle issue. I can affirm the significance of life cycle dynamics in shaping income levels among taxpayers. This phenomenon illustrates how income tends to follow an inverted-U-shape pattern throughout an individual's life, rising steadily with age and experience, peaking near retirement, and then slightly declining.
The data presented from the Internal Revenue Service (IRS) for the 2016 tax year offers a snapshot of income disparities among different age groups. Notably, taxpayers aged 55 to under 65 reported a substantially higher average adjusted gross income (AGI) of $99,836 compared to younger age groups, with those aged 18 to 26 averaging an AGI of $18,798. This disparity underscores the correlation between age, experience, and income.
Moreover, the article astutely highlights how focusing solely on annual income tax data fails to capture the broader context of income inequality. For instance, it mentions the prevalence of lower incomes among college students residing in college towns, indicating that low income in some cases doesn't necessarily reflect a lack of opportunity but rather a particular life stage.
The discussion extends to the future implications of the baby boomer generation moving into their peak earning years, thereby potentially skewing the perception of income inequality due to a higher number of higher-earning older taxpayers compared to younger, lower-earning ones.
The comprehensive understanding of income inequality requires a nuanced approach that considers various factors beyond a single year's tax data. This includes acknowledging the life cycle of income, the impact of education and experience on earnings, and the demographic shifts influencing income distribution over time.
Additionally, the article provides insights into various other aspects related to tax policies, progressive taxation, changes in federal revenue composition, the burden of federal income taxes, the impact on businesses, and more, making it a valuable resource for anyone seeking a deeper understanding of income inequality and taxation policies in the United States.
As an expert in this field, I emphasize the importance of examining long-term trends, policy implications, and broader socioeconomic contexts to gain a comprehensive understanding of income inequality and taxation dynamics.
