Who Pays Taxes in the USA
My friend Thomas Ryan Stone has a nice blog entry on the topic of who actually pays the vast majority of the taxes in the United States. He provides a link to a two-page report (PDF) from the congressional Joint Economic Committee.
From Tom’s summary:
- The top 50% of income earners pay a whopping 96.5% of federal income taxes, while the lower 50% pay just 3.5%.
- The top 25% pay 83.88% of federal income taxes
- The top 10% pay 65.8% (these are people with an adjusted cross income of about $95,000 or higher)
- The top 5% pay 54.4%
- The top 1% pay 34.3% (these are people with an adjusted gross income of about $300,000 or higher)
So keep these numbers in mind the next time a politician (or anyone else) bemoans the lack of “progressivity” of the Federal Income Tax. Ask them what percentage of federal income taxes they want the top 1/5/10% of earners to pay, what is their ideal amount? Should the top 1% pay over 50% of the total collected? Should only the top 10% of earners pay any federal income tax at all? Is that what they want to see? Nail them down on their numbers.
While you’re at it, ask them what they think rich people do when they get a tax cut. Do they reinvest that money into their businesses, hire more employees, purchase goods and services that keep poor- and middle-class people employed, or give more money to charity? From the debate on tax cuts for the rich — from those against them — one gets the sense they never do these things… they instead hoard this money in a sack under their bed, or burn it, or put it in an offshore account that in no way helps the US economy. In reality of course, the opposite is true almost 100% of the time.
Well said, Tom.
A progressive tax structure means that the rich pay more as a percentage of their income, not just that they pay more overall. Without looking at what percentage of overall income each group makes, its impossible to judge whether the tax structure is truly progressive or not.
I imagine the tax system is overall progressive. I know the basic tax bracket structure is, and I doubt theres enough to accounting tricks available to totally overcome that even among the wealthiest. But I imagine the system is much less progressive than these figures would indicate.
While we’re talking about taxes, let’s not forget that the bottom 50% of wage earners bear the brunt of payroll taxes to fund Social Security and Medicare; this makes these taxes regressive. These programs will go broke unless we shore them up by changing how they are funded.
I particularly like the way the FairTax pays no attention to income and wealth, making taxation zero up to poverty level for everyone and proportional to spending above the poverty line. Traditionally, a sales tax is considered regressive, but the FairTax renders these textbook definitions of progressive and regressive insignificant.
I like the sound of this fairtax but am unclear on a few things. The fairtax website says you keep 100% of your paycheck… then I read where you will pay state taxes. Which is it?
What if you are divorced and have shared custody. How does the prebate work then? Who gets the check?
What do the makers of new products think of this? the Ford’s, GM’s, Big Box stores of the world?
Greg, buy The FairTax Book. It explains everything.
Lets be honest about income taxes in America. I a high wage earner with over $2 million in tax free investments pay much less taxes percentage wise then the poor worker making 50K a year. As Warren Buffet, 2nd richest American says he pays 17% on his millions of income a year and his employees making 60K a year pay 28% on there wages this is not right. Let us be honest and be fair in taxation. The more we make the higher our tax bracket shoud be without special deductions. Of course our politicols, the scum bags they are, do not want to pay there fair share. So as long as we keep re electing the rich pols the average working guy can watch his family sink into the quicksand while the rich get richer. And oh, by the way did you folks know that on average the middle class donates a much higher percentage of there wages to charities then the rich. Something to think about.
What seems to be overlooked is that the top 1% of Americans OWN 40% of the wealth in America.
The bottom 80% of Americans own 10% of wealth in America.
Of course the wealthy pay more, they own more and make more than the bottom 80% of Americans.
Let the Democrats pay the taxes and spend the money.
“Of course the wealthy pay more, they own more and make more than the bottom 80% of Americans.”
..and employ more.
What the statistic’s above don’t say is: What is the income needed to be in the top 50% of income earners? We can conclude that the top 10% and the top 1% are part of the top 50% so what is the income level of the other 39%? (Personal attack statement removed by moderator)
i paid over $200,000 in federal taxes last year. i get nothing for what i paid. the roads suck. people are getting checks, not me. it is all bull shit. we just learned the lower income earners pay virtually nothing. i use to be one, but i got a job and make money and now i pay. i don’t want to hear about people who pay shit in taxes and expect me to pay more. how much did you pay???
As a few people above have mentioned, quoting 50% of the people pay 96.5% of the taxes isn’t meaningful. What percentage of the income do they earn? As a very high wage earner who has gradually moved from high to higher end pay I have seen quite obviously that the overally percentage of my income I pay in taxes has gone down not up in this top tier and this is without fancy deductions or trusts. The plain reason is a lot of taxes phase out such as the payroll tax on social security which means as soon as I cap out there I’m taking more home? Why should I take home a higher percentage of my money simply as a fact of making more money? Even though I employ plenty of people I would not use this as justification, I pay them for their services, I’m not going to employ 10 times as many people if you just cut my taxes because for me and many businesses my margins are much higher than that so a tax cut just means more money in my pocket not necessarily more jobs.
“Well said, Tom.” – Really? I’m not sure it’s possible that Tom could have made a weaker argument. Several have correctly pointed out what’s wrong with the conclusion he derives from the data, I won’t rehash that.
Using the data alone, you could better extrapolate that 34%, if not much more, of America’s wealth is concentrated in the top 1%, while 3.5% is concentrated in the bottom 50%. If you believe that the top 1% pay less in taxes as a percentage of their income than the bottom 50% does, then the 34% concentration in wealth is much higher.
Something is sadly wrong with a country whose bottom 75% income earners can only attribute to 14% of federal income tax revenue. Would you disagree?
Brian,
I think you’re confusing wealth and income. They are two different things. However, I did quickly try to find some data on wealth distribution, and the numbers I found are pretty close at the top at least (which is all they had), http://sociology.ucsc.edu/whorulesamerica/power/wealth.html. Top 1% hold 33% of the net wealth and the top 20% hold 84%.
There is more to the story than just 75% can only contribute 14%. Congress could legislate that only the top 10% of wage earners contribute to income tax. It has nothing to do with ability to pay, but more to do with getting votes. (Remember Obama’s pledge that 90% will be betting tax cuts, so they should go ahead and vote for him.) Most tax policy is about extracting the most amount of revenue from the population, while being to stay in office.
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Progressive taxes and percentages are BS. No one should get anything they don’t pay for. No tax should be levied against me that I don’t get full value and benefit from. EVERYONE should pay the exact same tax for what they get… dollar amount, not percentage. That’s why user taxes, like the tax on gasoline are the most fair. If you earn it, it should be yours to keep. All of you keep forgetting about spending… who gets the taxes when they are collected? As your progressive tax goes up, conversely the benefit from the tax spent on you goes down. Damn the law, No one has a right to someone else’s income by forcing others to pay for what they get. With the Fair tax system, it’s still not perfect, but your Congressman can’t hide your tax increases… not even through issuing tax credits to select groups. And for once, everyone will pay taxes… bums and criminals alike. Wealth is earned, not taken from anyone. If you don’t like it that Wally is a Millionaire then stop shopping at Wally World, but don’t turn around and use the gun of government to Jack Wally’s wallet and then call yourself anything but what you are… a thief.
Id like to see some formula that taxes consumption on items such as$ 200 tennis shoes. I know it sounds crazy, but there are lots of people on welfare who have more exspensive clothes, tennis shoes than I do. They need government bailouts but dont blink at spending 120 dollar for long baggy shorts and oversize t=shirts. I also think there are a lot of cell phones being used by the “impoverished”. Im all for helping out the poor but not for buying cool clothes for them.
It is amazing these comments from average wage earners protecting and defending the inequity in America’s tax system. You poor smucks have no problem paying more taxes so you can give the wealthy more tax cuts. Are you fantasizing that one day you might be one of “them”?? Keep dreaming – that is not going to happen until you wake up and start fighting for more financial equality in our society.
while i notice at websites and on t v people making under $60k pay no taxes. we live like paupers, have no new furniture since 1975 live in a 1400sf house and make a litt le over $50k a year with quarterly estimates for state and federal taxes. am i mistakingly paying taxes i dont have to or what.
They’re likely talking about income taxes. Payroll taxes are a larger burden for the poor. But 60k a year is not poor.. that’s above average for a family. Even the poor in the US are richer than most people in the world. So, if you’re making that and living in a 1400sf house with 1975 furniture.. I have to think, what the you spending your money on… I had my first 1300sf house making $20,000 a year, car payment, supporting my wife, and still had enough to get by. Guess this may depend on where your living. Sounds like an odd example.
b regal,
Just as a sort of “sanity check”, if you make $50,000, you should be paying $320 per month in federal income taxes for a family of two, and $230 per month for a family of four. Plus you are contributing $318 per month to FICA. I don’t know where you live so can’t estimate State and Local taxes.
Your effective tax rate would be 15.4% for a family of two, or 13.2% for a family of four. (Effective tax rate includes both FICA and income tax).
I’m inclined to agree with Morphh. Taxes aren’t your big problem. I wonder if whatever you read was talking about retirees? Turns out a retired couple could make $50,000 in SS pensions and investment income and not pay any federal taxes. But folks in your group are definitely paying some tax. You are not alone!
Hank,
I disagree with your 13.2% effective tax rate for a family of four. Did you neglect to account for $2000 for the child tax credit? (Is that credit still allowed?). Reducing the total tax by $2000 gives an effective tax rate of 9.25% and monthly federal tax payment of $66.46 for a family of four.
John
John,
Good catch–sort of? I did check the family of four eligibility for the refundable EITC, but they did not qualify. I forgot to add in the $1000 (per child) child tax credit, so, as long as the kids are under the age of 17, the family of four would owe no federal income taxes. Because the child credit is not refundable, they can reduce their income taxes to zero, but they would still owe FICA taxes of $1670, which comes to a total effective tax rate of 3.3%, I think.
In addition, in 2009 and 2010, we have the $400 Obama tax cut. b regal’s actual tax burden assuming two children would be $870 after getting the $400 per adult “Making work pay” credit. I guess that would mean that their effective tax rate, including income taxes and payroll contributions would be only 1.7%.
Of course, since b regal didn’t specify exactly how much his income was, and we don’t know how many children are involved, we really can’t figure out what his specific case might be. There should be little debate that taxes aren’t his budgetary problem. I wonder where the money went?
John,
Forget about the prior post. I can’t read my own notes, so really botched my reply.
After another Bud-Lite, I think the actual tax burden looks like this. Family of four, after adding the $2000- child credit would pay $765 less $800 for the “making work pay” credit for a net of a $35 income tax refund. In addition, they paid $3825 in FICA, so the net of all federal taxes would be $3790 which is an effective tax rate of 7.6%. Is that better?
Hank,
Maybe I need a Bud-Lite. The second one makes more sense. My spread sheet (which I set up sometime last year when you and I were discussing purchasing power) doesn’t account for Obama’s makeing work pay credit, so I get a different number. I arrived at Federal Income Tax liability of $797.50 for a family of 4 (assuming 2 children meet the qualifications for the $2000 child tax credit). This gives a total tax rate of 9.25%. Including the making work pay of $800 makes our numbers pretty darn close (I get 7.65% total tax rate).
I may not have the most current tax table….now that 2010 is here, I’ll check the rates for 2009.
John,
My spouse is an AARP volunteer tax preparer, so I used the latest IRS software. There are some changes for 2009 which you may not have used? Update to the 2009 data and we ought to be together on the results.
By the way, if readers of this blog haven’t filed yet, the AARP service is free, and available to anyone. Check your local area for an existing AARP group. They did 3 million returns nationwide last year, and you can’t beat the price!
Hank,
Thanks…after my last post I updated the rates in my spread sheet. When I account for the $800 “Making Work Pay” credit, I get a total tax liability of $3790 (matching your results) and a tax rate of 7.58% which rounds nicely to 7.6% in agreement with yours.
I’ve attempted to keep my spreadsheet balanced between simple but incorporating many of the the credits and exemptions. What’s difficult is to follow through on the details of how the credits and exemptions phase out as income increases. Why they make it so convoluted is beyond me.
John,
I’m glad we agree, and I’d like to hear from the family in question. A little more detail would go a long way, imho.
You know, if two expert “number crunchers” such as you and I can’t get a simple tax return right the first time, then maybe we really do need to replace the income tax and the tax code??? Stay tuned!
Hank,
Yes, I’m curious about the details of b regal’s situation.
It amazes me how numb our government is to the issue of tax complexity. Sure they all say the words and agree it’s too complex. But I don’t think they really care or maybe they care in the opposite sense…..meaning that they act sympathetic to their constituents but in private they are rubbing their hands and snickering to themselves “of course it’s too complex you twits, that’s how we get more of your money”. When so many of our public officials (including the ones who are directly involved in the ecomonic aspects of our government ….Geithner, Rangal come to mind) get caught messing up, it the system seems to just get more and more complex infuriates me.
Why should a billionaire and someone at the poverty line pay the same in taxes? A billionaire can pay the poor person’s salary in taxes and not even blink. The poor person can pay what the billionaire spends on shoes and will be hurting economically. I’m sorry, I refuse to feel bad for the wealthy. Oh poor you, keeping a million dollars instead of 1.2 million, how will you feed you family?! Top tax rate in this country (last time I checked) 33%. Top tax rates during WWII, 90%. So man up, whiny rich people and stop crying into your champagne. Nobody likes watery champagne.
To use only income tax an incomplete approach when dealing with earnings. A more balance approach regarding taxes is to include both income and payroll taxes. While income tax continues at an increased rate, most payroll taxes (social security stops being paid at $106,800). If your wages exceed the SS threshold, you pay no more tax which decreased the overall percentage paid in payroll taxes which roughly offsets the income tax burden borne by the highest income earners.
To use only income tax an incomplete approach when dealing with earnings does not give a complete picture of the impact on wages. A more balanced approach is to include both income and payroll taxes. While income tax continues at an increased rate, most payroll taxes (social security stops being paid at $106,800) are capped at an earnings threshold. If your wages exceed the SS threshold, you pay no more tax which decreases the overall percentage paid in payroll taxes which can offset most of the income tax burden borne by the highest income earners.
“Well said, Tom.” – Really? I’m not sure it’s possible that Tom could have made a weaker argument. Several have correctly pointed out what’s wrong with the conclusion he derives from the data, I won’t rehash that.
Using the data alone, you could better extrapolate that 34%, if not much more, of America’s wealth is concentrated in the top 1%, while 3.5% is concentrated in the bottom 50%. If you believe that the top 1% pay less in taxes as a percentage of their income than the bottom 50% does, then the 34% concentration in wealth is much higher.
Something is sadly wrong with a country whose bottom 75% income earners can only attribute to 14% of federal income tax revenue. Would you disagree?
A simple tax is a good tax is a fair tax … let logic work.
All who LIVE in the U.S. must contribute to the “team” – the U.S. team.
We have and will have illegals from all over, not just Mexico so let make it so ALL pay taxes because all get benefits.
Therefore, I cannot see any logic in any income tax system.
A USER tax or CONSUMPTION tax fits the bill and would generate the tax base that this country needs while making everyone a part of our (U.S.) team. If you make a lot, you buy a lot, you pay a lot in taxes. So a consumption tax is fair and is progressive and is logical and is GOOD FOR AMERCIA. Simple and good !
The “illegals” issue sure gets a lot of press, but I wonder if it is really as much burden as they say?
Actually ANY person working for unreported “cash money” is in an identical tax situation as “illegals”. Funny how I hear those american cash only earners bemoan those freeloading illegals.
I have heard that some employers have illegals on their payrolls that use OTHER social security numbers. Would’nt this mean that they withhold and PAY IN…yet NEVER COLLECT a refund?
Illegals also have to pay for housing, which those rents go to a landlord that pays state, county, and school property taxes.
This is not the primary topic of this thread, but just felt compelled to address it anyway. Oh, and by the way, I am american born white with no axe to grind either way.
Consumption taxes are idiotic. Rich people and poor people, doesn’t matter who, we all eat say 1 potato a week. But now the potatoes are $1.25 instead of $1.00. That’s a $13 annual increase in household spending on a single good. Doesn’t affect the rich at all, they have the money, but the growing impoverished class? Hurts a lot. Especially because, as I noted, that is just ONE good. What happens when a family of 4 is all eating 1 potato a week? $52 a year extra just in potato costs. Doesn’t hurt the rich at all, definitely hurts the poor. What if they actually eat a meal and not just barely survive on a single potato each per week? What if it’s $100 a week on groceries that, under your consumption tax, now costs $125 a week? That’s an extra $1300 a year in food costs. Outlandishly impacts the poor, doesn’t make a dent in the wealthy.
Thanks but no thanks.
I’m in the top 20% of earners, and I think consumption taxes are idiotic. My household consumes far less than the average, too, and I still think it’s idiotic.
The impoverished class wouldn’t pay tax on the potato due to the prebate. You can spend up to the poverty level tax free under the FairTax, which for your family of four would be about $29,500. They’d get almost $7,000 tax free. Lots of potatoes.
Regarding post 35 and 36,
Also, the consumer is no longer paying an income tax (which may not affect a low income earner), but will also no longer be paying SS and Medicare taxes, which gets them an immediate increase in take home pay of 8.28% (get back the 7.65% of their gross income being taken out for SS and Medicare taxes).