REGENTS REPORT

It's Tax Time

Federal Income Taxes Paid by College Educated Taxpayers

There is plenty of evidence that higher educational attainment has a positive effect on income, which has a direct effect on the taxes paid by college educated taxpayers. A recent analysis of income taxes paid based on educational attainment shows some interesting trends. In 1994, 49% of all households were headed by persons with at least some college education and earned about 65% of all income in that year. These same families, headed by persons with college education, paid over 70% of all federal individual income taxes. The federal government has a growing dependence on taxes paid by college educated workers, yet in 1994 spent only 0.7% of all its expenditures on increasing opportunity in higher education.

A Look at Income Taxes: Who Pays?

To some it feels like they must pay all the taxes; however, in 1994, the federal government collected $473,353,000,000 from individual income taxes. That's a lot of money, it helps to see who pays how much of that $473 billion. Below is a chart that breaks down who pays individual income taxes by their educational attainment.

Percent of Federal Income Taxes Paid by Educational Attainment: 1994

SOURCE: Income, Poverty, and Valuation of Noncash Benefits: 1994 in Postsecondary Education Opportunity, July 1996

How Does This Affect the Taxes You Pay?

The proportion of federal individual income taxes paid by households headed by persons with some college has been steadily growing since 1970. In 1992, 46% of the households were headed by someone with college education and they paid almost 68% of all federal income taxes. The following table shows this trend.

Federal Income Taxes Paid by the College Educated Workforce: 1970-1992

In 1994, 71% of all federal individual income taxes were paid by household heads with some college education--a 30% increase since 1970. Interesting questions are raised when considering the heavy reliance of the federal government on the college educated workforce in America.

What If?

Increasing educational attainment from 1980 to 1994 added about 11% to total household income in 1994. What if higher educational attainment had not changed since 1980? What if higher education attainment increased even faster since 1980? These different outcomes could have drastically affected the income taxes that we have paid--and current policy may do so in the future.

If the levels of educational attainment had not changed since 1980, then in 1994 the federal government would have had to raise the (average) tax rate from 11.4% to 12.7% in order to collect the $473 billion actually collected in 1994. Such a tax rate would be near the peak rate of 1980 (12.95%).

If higher educational attainment had increased more rapidly since 1980, say a modest increase of 1% having attained a bachelor's degree in 1994 alone, then $8.4 billion could be added to total household income and the federal government would have had an $800 million surplus in 1994. This could easily translate into lower tax rates from less needed spending on social programs and a broader tax base.

Conclusion

A significant proportion of federal income taxes is paid by college educated taxpayers. In 1994, 49% of all American households were headed by a person with some college, accounting for 65% of all income earned for that year. These college educated taxpayers paid 71% of all federal income taxes in 1994, and this proportion has grown 30% since 1970. Yet, federal expenditures to increase opportunities in higher education have declined from 0.95% of total federal expenditures in 1980 to 0.70% of total federal expenditures in 1993. Investment in higher education has many social benefits--one of these could be lower tax rates.

WRITE US AT: info@bor.sd.state.us

Return to Table of Regents Reports