Chances are, you feel like taxes are unfair. You believe that you pay too much in taxes, believe that others do not pay their fair share, or maybe both. Most people feel downright anger and contempt toward income taxes and find lots of reasons to “justify” their beliefs. A simple belief that is shared by millions in this country is that the rich do not pay their share of the taxes. In fact, many people believe that most rich people don’t pay taxes at all. Either they “write it off” or they find “tax loopholes” to hide all of their income. Most of these thoughts are not based on facts, but have still become so widespread that no one questions these ridiculous notions when they are spoken in public.
We believe that if you are going to have an opinion on who pays the majority of taxes, then at least your information should be based on facts. For that reason, we’ve compiled data from the Internal Revenue Service and have converted the data into easy to read charts that give you some real data points on the distribution of taxable income, taxes paid, and effective tax rates.
All figures below are based on figures from the IRS and are based on adjusted gross income, which is income after excluding such things as tax-deferred retirement contributions. Also, these figures represent federal income tax, and do not include state income taxes, social security, self-employment, unemployment, sales tax, property taxes, use taxes, or any other taxes that do not fit these categories. Now that we’re clear on what these figures present, let’s look at the data.
Who Pays Most of the Taxes?
This is easy to answer with facts. The top 1% of taxpayers pay 38% of the total taxes, the top 5% pay 58%, the top 10% pay 70%, the top 25% pays 87% and the top 50% pay over 97% of the total taxes. This clearly answers the question of who pays the most taxes, as over half of all taxes are paid by the top 5%. Here is a chart that shows the distribution of federal income taxes paid by taxpayers in different earnings percentile. It shows the percent of income earned and the percent of taxes paid for each percentile.
Do the Wealthy Get More Tax Breaks?
Tax breaks come in many sizes and shapes. High income earners generally have more complicated taxes, more business expenses, and more expenses that are eligible for itemizing and capitalizing to a business. Low income taxpayers are typically eligible for tax credits such as earned income credits and credits for children and childcare. Also, federal income tax rates are bracketed, with higher earners having higher percentage tax rates. Let’s look at what the facts say about the amount of tax breaks that these classes get. This can help answer the question as to whether or not the “rich” pay their fair share. If the top percent of taxpayers have a lower effective tax rate, then we’d guess they get more breaks.
Here are the facts: The top 1% of taxpayers earn 20% of the nation’s income but pay 38% of the taxes. The bottom 50% of taxpayers earn 13% of the overall income, and pay just 2.7% of the taxes. The average tax rate paid by the top 1% is 24% while it is only 2.6% for the bottom half of taxpayers. Furthermore, between 35 and 45% of American households pay no federal income tax. And, in 2009, that percent was 51%. This data leads us to believe that the tax breaks for the bottom half greatly outweigh the tax breaks for the “rich”.
Who Pays the Highest Tax Rates
Another common assumption that many people use when complaining about taxes is that the “rich” don’t pay high tax rates. This is another assumption that can easily be debunked with facts. We’ve computed the effective tax rates based on adjusted gross income for the many percentiles of taxpayers and put it in the chart below. As you can see, the high income taxpayers pay significantly higher tax rates, averaging 23%. Compare this to the less than 3% average tax rate for the bottom half of all income taxpayers.
So What is the Truth About Who Pays their Fair Share of Taxes?
Well, the answer to this question is one that can’t be answered with facts. Most people have already justified and answered these questions themselves. The majority of people truly believe that the “rich” do not pay their fair share of taxes. For whatever reason, most people consider anyone that earns more than them as “rich”, and so almost everyone can justify such a response. One should look at the facts when forming their opinion. They should also look at other factors such as cost of living. The top 5% earn $159,000 or more per year. Although this sounds like a lot, many of these families live in areas such as San Francisco or New York City where rent can be $4,000 per month and other expenses are also much higher. Add in all of the other taxes that must be paid on state and local income, sales taxes, real estate taxes, tolls, transportation, and all of the taxes on products like gas, cars and cell phones; and many of these people do not fit into the “rich” category.