The Truth on Who Pays Taxes

by on November 22, 2011

Have you wondered why there is always a heated debate on who pays the most taxes and if they are paying their fair share? Most people have their mind made up as to the answer they believe.  For some reason, almost everyone believes that they are overpaying for their taxes while everyone who makes more than them are not paying their fair share of taxes.  Many people are even convinced that rich people don’t pay any taxes at all.

Since we’re sticking to the facts in this article, we can’t say who is paying their “fair share” in taxes, but what we can tell you is that the majority of taxes are paid by the few percent of higher earners.  And furthermore, these higher earners pay a significantly higher tax rate than their lower earning counterparts.  Also, the bottom half of all taxpayers pay an average of less than 3% effective tax rate.  Here are some shocking but truthful facts, as reported by the Internal Revenue Service.  Study them before you jump to conclusions or before you believe one of those politicians who knowingly distorts these figures.

Also, please note that these figures represent only federal income taxes.  Other taxes that are not accounted for in these statistics include state income taxes, local income taxes, social security taxes, unemployment taxes, real estate taxes, sales and use taxes, and any taxes imposed on goods or services purchased that do not fit into these categories.  Also, these figures are calculated based on adjusted gross income, which is less than the actual salary earned by the average taxpayer, as it excludes payments made to tax-deferred retirement accounts and other income adjustments from the federal income tax forms.

The Top 1% Pay The Most in Taxes

The facts:  The top 1% of taxpayers pay 38% of all federal income taxes.  They produce 20% of the nation’s income and pay 38% of the nation’s taxes. Their effective federal income tax rate is 24%.  The top 1% earn an adjusted gross income (AGI) of $380,000 or more.

The takeaway:  It is clear that the top 1% of taxpayers pay the most in taxes, on both a percent basis and the highest income tax rate.  This is to be expected.  Whether you believe they should pay more usually depends on whether or not you fall into this category yourself.

The Majority of Taxes are Paid by the Top 5%

The facts:  The top 5% of taxpayers pay 58% of all federal income taxes.  They produce 35% of the nation’s income and pay 58% of the nation’s income taxes.  Their effective federal income tax rate is 21% and they earn $159,000 or more.  Taxpayers in the 2-5% range earn 15% of income and pay 21% of taxes at an effective rate of 17%.

The takeaway:  Over half of all taxes are paid by the top 5% of earners.  These taxpayers consist largely of business owners that are also responsible for hiring workers and helping the economy grow.  Raising taxes is an option for this group, but it could come at the cost of slowing job growth.  Furthermore, the adjusted gross income for this group starts at $159,000.  Although this sounds like a lot of money, in high cost areas like New York City and San Francisco, this would be considered barely enough for a family to get by.

The Top 50% of Taxpayers Pay Almost All of the Taxes

The facts:  The top 10% pay 70% of taxes at an effective rate of 19% and earn $114,000 or more. The 6-10% range earns 11% of income and pays 11% of taxes at an effective tax rate of 12%.  The top 25% pay 87% of the nation’s taxes at an effective rate of 16% and earn $67,000 or more. The 11-25% range earns 22% of income and pays 16% of taxes at a 9% tax rate.  The top 50% of earners pay 97.3% of the nation’s taxes at an effective rate of 14% and earn $32,000 or more in adjusted gross income. The 26-50% range earns 20% of income and pays 11% of taxes at an effective rate of 7%.

The takeaway:  If half of the taxpayers pay almost all of the taxes, then why is everyone complaining?!  You shouldn’t be allowed to complain if you don’t pay any taxes.  Also, realize that as the income levels fall, the effective tax rate decreases rapidly, the top of this group pays a 24% tax rate and the bottom of this group pays an average tax rate of 7%.

The Bottom Half of Taxpayers Hardly Pay Taxes

The facts:  The bottom 50% of taxpayers pay 2.7% of the nation’s taxes. They earn 13% of the nation’s income and pay 2.7% at an effective income tax rate of 2.6%.  Furthermore, in 2009, 51% of households paid no federal income tax.  This rate was higher because of the high unemployment rate, but typically runs in the 35 – 45% range.  This figure does not correspond exactly to the figures from the IRS because the IRS only counts tax returns with positive AGI.  People that do not file tax returns or have negative income are not included in the IRS statistics.

The takeaway:  It is a fact, not a distortion of facts, that half of Americans pay no federal taxes.  That doesn’t mean that they don’t pay taxes.  These people may still pay state taxes, sales taxes, property taxes and any excise or use taxes for any products or services that they purchase.  The takeaway is that these people that do not pay any taxes still feel slighted and are some of the angriest citizens, demanding that others do not pay more taxes.  Perhaps a solution to this problem would be to raise the taxes on the higher earners but remove tax incentives that cause the bottom half to not pay taxes.  Maybe something like this could spread the tax burden a little more evenly.

Herein Lies the Problem With Democracy and Taxes

The entitlement issues of America continue to grow.  For some reason, most people feel strongly that everyone else should be paying more taxes than them.  People constantly take out their frustrations on “the rich”, and without knowing the facts, blame them for not paying their fair share.  Why is this a problem for democracy?  Because if you allow the majority to dictate who pays taxes, the majority, who pay almost no taxes already, will vote for others to pay a larger and larger share of the taxes, while at the same time also voting for more and more entitlements and subsidies for themselves.  While it makes sense that wealthier people should pay more taxes, there is a point where the taxes get too high and new development and growth is stifled because the high earners decide that it is not worth it to try to earn more money.  As long as Americans continue to feel entitled to government subsidies and feel slighted by their government with respect to taxes, this fiery debate over who pays their fair share of taxes is going to continue.

Have any opinions yourself?  Feel free to post your comment below.

Source:  Internal Revenue Service using 2010 data

{ 3 comments… read them below or add one }

Edog December 23, 2011 at 3:38 pm

Good article; I can not confirm or dispute the Facts stated, but the Takeaways are helpful and interesting.

Reply

Martin Koster January 4, 2012 at 10:31 am

During the past century our nation has not only expanded entitlements and subsidies, but we democratically decided to lower every tax bracket. We want more from the government but we don’t want to pay for it. After six decades of fairly controlled national debt, we chose to step on the accelerator during the 1980s. From my experience operating a business, I can’t see that lowering tax rates spurs investment or creates jobs. If I can take comfortable profits off the table without taxation, what is my incentive to expand the business? Why add an employee or make a capital investment if I can just pay myself more? I know that’s just self interest, but hey, I’m a capitalist!

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James Kiefer February 14, 2012 at 6:45 pm

While the article is full of facts, the takeaways are full of opinion.
Not facts: “The takeaway: It is clear that the top 1% of taxpayers pay the most in taxes, on both a percent basis and the highest income tax rate. This is to be expected. Whether you believe they should pay more usually depends on whether or not you fall into this category yourself.”
…The majority of wealthy people think they should be taxed more.

Not facts: “The takeaway: It is a fact, not a distortion of facts, that half of Americans pay no federal taxes. That doesn’t mean that they don’t pay taxes. These people may still pay state taxes, sales taxes, property taxes and any excise or use taxes for any products or services that they purchase. The takeaway is that these people that do not pay any taxes still feel slighted and are some of the angriest citizens, demanding that others do not pay more taxes.”
…I don’t know where you get your data that the non taxpayers are the angriest and feel slighted? Mostly these people have little power and are unable to demand much at all.
…In addition everyone making less than $106,000 pays lots of Social security and the thing we here is the wealthy are trying to reduce that.

Not facts: “Herein Lies the Problem With Democracy and Taxes
The entitlement issues of America continue to grow. For some reason, most people feel strongly that everyone else should be paying more taxes than them.”
…We aren’t paying our national bills. They need to be paid.
“People constantly take out their frustrations on “the rich”, and without knowing the facts, blame them for not paying their fair share. Why is this a problem for democracy? Because if you allow the majority to dictate who pays taxes, the majority, who pay almost no taxes already, will vote for others to pay a larger and larger share of the taxes, while at the same time also voting for more and more entitlements and subsidies for themselves.”
…I wish this were true. It’s not. Tax rates are currently at historical lows. If what you write were true, our country would be in better shape.

“While it makes sense that wealthier people should pay more taxes, there is a point where the taxes get too high and new development and growth is stifled because the high earners decide that it is not worth it to try to earn more money.”
…What? again? It’s not worth making more money? It’s always worth making more money.

“As long as Americans continue to feel entitled to government subsidies and feel slighted by their government with respect to taxes, this fiery debate over who pays their fair share of taxes is going to continue.”
…People feel entitled to their entitlements because they paid into them.

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