The CBO’s estimates are based on Internal Revenue Service data from individual income tax returns.

Tax rates are calculated by dividing tax liabilities by before-tax income. When refundable tax credits, such as the earned income and child tax credits, exceed tax liabilities of the households in an income group, those households are said to have a negative average tax rate. (Refundable tax credits are not limited to the amount of income tax owed before they are applied.)

Tax liabilities are the amount of taxes a household owes based on income earned in a year, regardless of when the taxes are paid. Individual income taxes are allocated directly to households paying those taxes. Social insurance, or payroll, taxes are allocated to households that pay those taxes directly or indirectly through their employers. Excise taxes are allocated to households according to their consumption of the taxed good or service. Corporate income taxes are allocated to households according to their share of capital and labor income.

Before-tax income is the sum of market income and government transfers. Market income includes labor income, business income, capital gains, capital income other than capital gains, income received in retirement for past services, and other sources of income.  Government transfers are cash payments from Social Security, unemployment insurance, Supplemental Security Income, Temporary Assistance for Needy Families (and its predecessor, Aid to Families with Dependent Children), veterans’ programs, workers’ compensation, and state and local government assistance programs. They also include the value of in-kind benefits, such as Supplemental Nutrition Assistance Program vouchers (formerly known as food stamps), school lunches and breakfasts, housing assistance, energy assistance, and benefits provided by Medicare, Medicaid, and the Children’s Health Insurance Program. (The value of health insurance is measured on the basis of the Census Bureau’s estimates of the average cost to the government of providing such insurance.)

Income categories are defined by ranking all people by income, adjusted for household size—that is, divided by the square root of the number of people in a household, which consists of the people who share a housing unit, regardless of their relationships. Quintiles, or fifths, contain equal numbers of people, as do percentiles, or hundredths. If a household has negative income (that is, if its business or investment losses are larger than other income) it is excluded from the lowest income category but included in totals.