Who Pays the Most Taxes?

And is This a 'Fair' System?

A politician counting money in front of the US Capitol Building
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Who really pays the most taxes? Under the U.S. income tax system, most of the taxes collected are supposed to be paid by the people who make the most money, but does that reflect reality? Do the rich really pay a “fair” share of taxes?

According to the Office of Tax Analysis, the U.S. individual income tax system should be “highly progressive,” meaning that largest share of individual income taxes paid each year should be paid by a small group of higher-income taxpayers. Is that happening?

In a November 2015 poll, the Pew Research Center found that 54% of Americans surveyed felt the amount of taxes they paid was “about right” compared to what the federal government does for them, while 40% said they paid more than their fair share. But in a spring 2015 survey, Pew found that 64% of Americans feeling that “some wealthy people” and “some corporations” do not pay a fair share of taxes.

In an analysis or IRS data, Pew did find that corporate taxes are, indeed, funding a smaller share of government operations than in the past. In fiscal 2015, the $343.8 billion collected from corporate income taxes represented about 10.6% of the government’s total revenue, compared to from 25% to 30% in the 1950s.

Wealthy People Do Pay a Larger Share

The Pew Center’s analysis of IRS data showed that in 2014, people with an adjusted gross income, or AGI, above $250,000 paid 51.6% of all individual income taxes, even though they accounted for only 2.7% of all returns filed. These “wealthy” individuals paid an average tax rate (total taxes paid divided by cumulative AGI) of 25.7%.

By contrast, while people with adjusted gross incomes below $50,000 filed 62% of all individual returns in 2014, they paid only 5.7% of total taxes collected at an average tax rate of 4.3% per person.

However, changes in the federal tax laws and the national economy cause the relative tax burdens borne by different income groups to change over time. For example, until the 1940s, when it was expanded to help fund the World War II effort, income tax was generally paid only be the wealthiest Americans.

Based on IRS data covering tax years 2000 through 2011, the Pew analysts found:

  • People with incomes between $100,000 and $200,000 paid 23.8% of the total taxes collected in 2011, up from 18.8% in 2000.
  • People with incomes between $50,000 and $75,000 paid 12% of the total taxes collected in 2000 down from only 9.1% in 2011.

In fiscal 2015, just less than half – 47.4% -- of all federal government revenue came from individual income tax payments, a figure largely unchanged since World War II.

The $1.54 trillion collected in fiscal 2015 made individual income taxes the federal government’s single largest source of revenue. Additional government revenue comes from:

  • corporate income taxes;
  • payroll taxes that fund Social Security and Medicare; and
  • excise taxes such as those on gasoline and cigarettes, estate taxes, customs duties and payments from the Federal Reserve.

According to the IRS’ most recent analysis of the distribution of the income tax burden, the top one percent of income earners paid 37 percent of all income taxes in Tax Year 2016. This was nearly twice as much as their 19.7 percent share of income. Breaking this down, the top 25 percent of earners paid nearly 86 percent of all income tax. Overall, the top 50 percent of earners paid 97 percent of all income tax collected. The reaming 3 percent of taxes is paid by the lower income 50 percent of filers.

The Non-Income Tax Burden

For the last 50 years, payroll taxes – the deductions from paychecks that pay for Social Security and Medicare -- have been the fastest-growing source of federal revenue. As the Pew Center points out, most middle-class workers pay more in payroll taxes than in federal income tax.

In fact, 80% of American families – all but the highest-income earning 20% -- pay more in payroll taxes every year than in federal income taxes, according to a Treasury Department analysis.

Why? The Pew Center explains: “The 6.2% Social Security withholding tax only applies to wages up to $118,500. For example, a worker earning $40,000 will pay $2,480 (6.2%) in Social Security tax, but an executive earning $400,000 will pay $7,347 (6.2% of $118,500), for an effective rate of just 1.8%. By contrast, the 1.45% Medicare tax has no upper limit, and in fact, high earners pay an extra 0.9%.”

But is this a ‘Fair and Progressive’ System?

In is analysis, the Pew Center concluded that the current overall U.S. tax system is “as a whole” progressive. The top-income 0.1% of families pay 39.2% of their income, while the bottom 20% get back more money from the government than they pay in the form of refundable tax credits.

Of course, the answer to the question of whether the federal tax system is “fair” or not remains in the eye of the beholder, or more correctly, the eye of the payer. Should the system be made even more steeply progressive by increasing the tax burden on the wealthy, or is an evenly-distributed “​flat tax” a better solution?

Finding the answer, as Jean-Baptiste Colbert, Louis XIV’s finance minister can be challenging. “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

The Tax Cuts and Jobs Act of 2017

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) which made major changes to the individual income tax. While the law imposed new limits on itemized deductions, the individual standard deduction was near doubled and most income tax rates were reduced. Since raising the standard deduction eliminated the need for millions of households to itemize their deductions, filing individual income tax returns was greatly simplified.

Unless extended by Congress, most of the TCJA’s changes to the individual income tax will revert to pre-TCJA status after December 31, 2025. If Congress allows this sunset provision to stand, most households would see tax increases beginning in 2026. Until then, however, households from top to the bottom of the income spectrum should pay substantially lower individual income taxes.

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Longley, Robert. "Who Pays the Most Taxes?" ThoughtCo, Aug. 26, 2020, thoughtco.com/who-pays-the-most-us-income-tax-3321637. Longley, Robert. (2020, August 26). Who Pays the Most Taxes? Retrieved from https://www.thoughtco.com/who-pays-the-most-us-income-tax-3321637 Longley, Robert. "Who Pays the Most Taxes?" ThoughtCo. https://www.thoughtco.com/who-pays-the-most-us-income-tax-3321637 (accessed March 6, 2021).