Who Pays What Taxes In The US

Tyler Durden's picture

Every presidential election brings with it a renewed debate on taxes: should tax rates be increased or decreased (which in turn forces economists to break out their textbooks to brush up on their Laffer curve definitions)? Traditionally, the question eventually boils down to one thing: what should the tax treatment of the "rich" be: should the wealthy pay more or less in taxes?

Why the particular focus on the rich? The answer is simple: while those American who declare $500,000 and above in income represent less than 1% of total tax returns, they account for a quarter of taxable income and - more importantly - are responsible for 37% of government revenues collected through individual income taxes.

And with approximately $1.55 trillion in individual income tax expected to be collected in 2016, this means that less than 1% of US taxpayers will be responsible for more than a third, or roughly $575 billion in government revenue, nearly double what corporate income taxes ($300 billion) are expected to bring in.

To any readers surprised by this, here are further details from the St Louis Fed's Fernando Martin and his recent note "A Closer Look at Federal Taxes"

* * *

The first table provides a snapshot of revenues collected by the U.S. federal government for fiscal year 2016. Total revenue was $3.3 trillion, or roughly 18 percent of gross domestic product (GDP). Almost half of this revenue comes from individual income taxes. About one-third comes from payroll taxes, which are collected to fund Social Security, Medicare, and other social insurance benefits. Only 9 percent of total revenue comes from corporate income taxes, while another 9 percent comes from various sources (e.g., excise taxes, estate and gift taxes, and custom duties). These proportions have been stable in recent years.

Given the prominent role individual income taxes play in financing the federal government, this essay inspects these taxes in more detail. The second table breaks down individual income taxes by adjusted gross income brackets and four categories. The first three are relative to total filings: the share of returns; the share of taxable income generated (note that about one-third of returns report zero taxable income); and the share of tax revenue collected. The final category is the implied average tax rate. The data are for fiscal year 2014, the latest available for tax revenue by income levels. Notably, the data do not distinguish between single or joint (filed with a spouse) tax returns.

The differences in individual income tax collection at the extremes of the income distribution are striking. Filers earning less than $50,000 annually account for nearly two-thirds of all tax returns but contribute 7 percent of total revenue. Around half of the filers in this group report zero taxable income4; for those with taxable income, the average income tax rate is 12 percent.5 In contrast, filers making at least $1 million annually account for 0.3 percent of all tax returns and contribute 27 percent of total revenue. Their average tax rate—31 percent—is almost triple that of filers in the lowest income bracket.

Due to the progressive nature of the U.S. income tax code, average tax rates increase up the income ladder. Each income group’s contribution to total revenue, however, depends not only on their tax rate but also on the number of filers in the group and how much income they generate. For example, tax filers earning between $100,000 and $199,999 annually face an average income tax rate of 17 percent but contribute 22 percent of revenue, very close to the proportion contributed by those earning $1 million or more. The reason is that there are many more filers in the former group (12 percent versus 0.3 percent), who together generate about one-quarter of total taxable income (versus 17 percent for the highest earners).

These properties of the income distribution have profound implications for the likely effects of tax reform. For example, tax cuts for the middle class, even minor ones, would imply big declines in revenue; and collecting significantly more revenue from the rich would necessitate large tax hikes.

To illustrate this point, consider a simple back-of-the-envelope calculation. Suppose the desire is to cover the deficit by increasing the tax rates of the top income earners. The current deficit estimate for fiscal year 2016 is $590 billion. Income taxes collected from filers earning $500,000 or more annually (the top 1 percent) add up to roughly the same amount as the deficit. The tax rate of this group would need to double to collect enough revenue from the group to cover the deficit. Specifically, their average tax rate would need to increase from 30 percent to around 60 percent. A tax increase of this magnitude, however, might decrease the incentives for high-income earners to work as hard and encourage them to seek new ways to shield their income. Hence, in practice, the tax rate may need to be raised further and even then might not be enough to raise all the additional revenue.

Individual income taxes only partially reveal how the burden of federal taxation is distributed among different income groups. For low-income earners, payroll taxes constitute a significant portion of tax liabilities. The current Social Security and Medicaid withholding rates are 6.20 percent and 1.45 percent, respectively (in addition, employers must also match these contributions). Thus, the average tax rate faced by an individual making less than $50,000 annually and reporting positive taxable income is 12 percent in income taxes plus 7.65 percent; that is, almost 20 percent of income. Since wages contribute less to total income for higher-income earners, payroll taxes play a less significant role at the top. In other words, payroll taxes are regressive. Note, however, that the benefits they provide are progressive, as-high income earners rely more heavily on other sources of funding for retirement and healthcare (e.g., a 401(k) retirement plan).

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HenryHall's picture

And what proportion of those with a worldwide net worth of more than $100,000,000 have less than $500,000 in declared income?

swmnguy's picture

A pretty fair proportion.  Our tax system punishes work and rewards ownership and rent-seeking.  It's not possible to gain a net worth of more than $100,000,000 by working, except for a tiny handful of people like professional athletes, movie stars, etc.  Far more likely to be hit by a meteorite for most people.

To get that wealthy, you have to have other people making your money for you, through rents derived from ownership.  That revenue is typically not "income."  So it's entirely possible to have a net worth of over $100,000,000 and no net income, thus no personal federal tax liability.

johngaltfla's picture

Ok President to be Trump, I'm ready to do my share and pay more. Up my gas tax 5 cents per gallon to pay for this, which has to be built asap to protect America:

Screw Mexico, America Needs a Northern Wall with Canada
Xena fobe's picture

Canada must oay for that.  If it wants to keep freeloading job stealing Americans out.

RAT005's picture

Looks like $200k is the sweet spot. 

Nemontel's picture

America is suffering financially because of millions of freeriders. Throw them out and the nation would be much better off financially. http://www.truthjustice.net/politics/the-us-would-be-running-budget-surp...

HenryHall's picture

Are there really milions of freeriders (people with a worldwide net worth of more than $100,000,000)?

I suppose there might be, but how does throwing them out help?

Escrava Isaura's picture

Nemontel: America is suffering financially because of millions of freeriders.

America is suffering financially of three reasons, mainly:

1- Its dirty-nasty people and its elites, especially, lives way beyond their means.

2- Its dirty-nasty people surpluses and labor filters to the top—to the elites—through all kind of financial schemes.

3- Growing demographics while the US land remains the same size. Also, whatever is in that land is finite, even the ground nutrients/minerals to grow food.

 

Escrava Isaura's picture

I guess, again, that you have nothing to add…………….Not that it came as a surprise to any of us here.

 

SweetDougisaTwat's picture

No, actually he is correct.  You do sound stupid albeit in a "trying to sound intelligent manner".

And, as for the repeated insult of "dirty-nasty", well hell, that could just as easily describe your mother's crotch.

ATM's picture

Or simply end the Government as Charity farce once and for all and force them to either work or find actual charitable donors rather than hostage citizens to support their lifestyles.

WorkingFool's picture

Amen.  We're not livestock.  We need to rededicate the government to it's limited original purpose - protecting the God given rights of individuals.  Fuck the corrupt, hate spewing, theiv'n collectivists

A Nanny Moose's picture

We want them to leave....just like they promised before Donald was elected.

gmak's picture

Lol.  As a Canadian, could I ask you to build part of that high wall all the way around our Prime SJW?  Thanks in advance.

RiverRoad's picture

Would like to see some tables, if any, re the increasing number of folks taking their income as cash off the "books".  That puts an even greater tax burden on the middleclass.

swmnguy's picture

Sure, I'd be interested in that.  My personal knowledge of people doing that leads me to think the impact isn't much on personal Federal Income Tax, but might be significant on Payroll Tax (Social Security, Medicare).  But yes, I'd be interested in a link, for sure.

That's another point; you only pay personal Federal Income Tax if you're above a certain threshold, depending on number of dependents, etc.  Every penny you earn from wages is subject to Payroll Tax.  It's misleading to say "47% of Americans pay no income tax," because they are paying Payroll Tax.  Even when I was making barely above Minimum Wage, I generally received about 75% of my gross wages x hours in a paycheck.

Personally, I favor more taxation on wealth and less taxation on wages.  I think the first $30,000 or so a worker earns should be tax-exempt.  I realize that the median income from a wage-paying job is around $33,000, so that's that same 47%, more or less, but I think the 7.65% employee portion of payroll tax should be subject to that floor also.  People earning that little spend every penny.  If they paid no taxes on their income at all they'd still spend every penny, but might be able to gain a little financial security.  The majority of people collecting food stamps work, often full-time.  They just make so little they're eligible for assistance, and they sure as hell need it.  If you work full-time, you should be able to live on your own; I don't think that's unreasonable.

RiverRoad's picture

Am beginning to think that less taxation on wages works from a purely practical standpoint re the seemingly growing underground "cash" economy and the extra burden this puts on the tax-paying wage earner.

Do you think we may eventually end up with a consumption tax or some type of value-added tax?  (IRS tax on the back of a postcard doesn't get much play these days.) Perhaps this move against cash lately by the banks is to capture proceeds from this cash-based underground economy.  I imagine the ultra rich would rather that than have to cough up more themselves.

swmnguy's picture

I really don't know, and don't have much of a gut feeling on the topic.  My suspicion is that there's too large an industry of tax evasion in the US to ever permit any simplification or rationalization of the tax system.  The ridiculousness and complexity works for too many entrenched interests.

As an aside, ever try to figure out basic rules for a Health Savings Account (HSA)?  I have and it's enough to drive you nuts.  I'm married, with two kids.  I'm self-employed.  My wife is conventionally employed, and her employer offers an extremely generous health insurance benefit for employees.  For dependents, the employer chips in nothing, so if she coverd us all she wouldn't get a paycheck.  So I have a $10,000 deductible policy, which I've had for nearly a decade, that covers me and our two kids.  According to several accountants and tax attorneys, since my wife isn't on the policy and her employer does offer dependent care, I can only use the "Individual" rules for HSA contribution and tax deductibility, not the "Family" rules.  And I may not even be able to add money to my HSA or deduct from my taxes at all.  Nobody seems sure.  The IRS rules don't cover this rather simple and (I'd think) quite common coverage scenario.  I sure don't plan to call the IRS and ask them.  My strategy now is to just wait and see what President Trump does to muddy these waters further, and keep saving in the pickle jar or sunken canoe.

My point being, the tax rules are so complex even attorneys and accountants can't figure them out, so it all comes down to interpretation, thresholds of pain, and who can afford to out-litigate whom.

That serves the interests of those who can afford to keep attorneys on retainer, so I doubt it will change.  Rather, I'd expect taxes to get even more Byzantine and nonsensical, related not to policy but to relative advantage.

RiverRoad's picture

Yes.  Presently "serving the interests of those who can afford..." and "relative advantage" are the operative words here.  Those who can pay for higher end tax advice are able to utilize HSAs and numerous other ins and outs of the tax code.

One day the very byzantine-ness will consume itself when J.Q. Public puts up with it no longer.

WorkingFool's picture

The problem is not taxes.  It's the fucking government has taken on the role of God.  It needs to be dramatically reduced.  And if we want to talk about taxes being "fair" then everyone should pay the same rate.  That will force more accountability (DemocRATs may have to look that word up). 

WorkingFool's picture

The problem is not taxes.  It's the fucking government has taken on the role of God.  It needs to be dramatically reduced.  And if we want to talk about taxes being "fair" then everyone should pay the same rate.  That will force more accountability (DemocRATs may have to look that word up). 

swmnguy's picture

I'd amend that to read, "everyone should pay the same rate...above a pre-determined survival threshold."  The reality for those of us who grew up poor is that none of this matters if you can barely keep living indoors.  

I've heard the wealthy and their media housepets talk like idiots about how the poor are "lucky ducks" to not pay taxes, and are irresponsible because they have no skin in the game.  This completely, intentionally, misses the point that they don't pay taxes because they don't have any money.  

Corporate finance capitalism such as practiced in the US is great at generating wealth from finance, but absolutely terrible at distributing that wealth.  Wealth used to be redistributed organically in regular, recurring collapses every 7-20 years.  The wealthiest didn't like that risk, so they introduced the Federal Reserve system so they'd have their employees regulating the system and giving them access to the Treasury to bail themselves out in the event of a crash that wasn't prevented.  So the natural redistribution system was blocked, leading to the extreme and growing inequalities we see, along with the reduced social mobility and entrenched generational poverty.

"Accountability" means something entirely different when you can't make your housing payment (be it rent or mortgage), can't pay an attorney, can't fix your car.  And "Accountability" means something yet again totally different in corporate America, or if you can afford to pay an attorney; then it means "I'll do whatever it takes to make sure nobody can blame me and I can point the finger at another scapegoat."  And that's fine by the wealthy; after all, they're the ones saying money is free speech, so all's fair.

csmith's picture

The key is "net" income. Typically large landlords (one example) have very large gross rent income, but are also highly levered, so they have high interest and depreciation expenses as well, resulting in a much reduced "net" income for tax purposes.

swmnguy's picture

That's very true.  Landlords, as an example, typically barely cash-flow their business but make their bank when they sell off assets.  That money isn't income, it's a capital gain.

ScotlandTheBrave's picture

"swmnguy" must have studied Tax law at Karl Marx Tech. Rental income, though not treated like "earned income", is subject to the same "ordinary income" tax rates that earned income is subject to. It's the capital gains, when one sells the property, that are treated at more favorable capital gain rates.  Capital gains are not guaranteed (where the selling price exceeds the purchase price  - unless you are Hillary Clinton placing bets on rigged commodities market) nor are rents that exceed the operating cost of owning the property.  I can assure you that the local tax authorities look on your property with relish at the property taxes you will be paying. It's not uncommon for "commerical" property taxes to equal 3-4% of the value of the property itself YEAR AFTER YEAR.

  It's also a practically false ascertion that someone worth over $100m can have no net income and thus no fedtax liability.  For them to do that they would either have to be totally invested in nothing but municipal bonds in a state where they live where the interest is not subject to tax or they would have to own nothing but non-rental property (meaning it generates no return/rents) and all this person has is expenses out that ass and doesn't trust the banks nor investments so hold his/her excess cash in jars on their property. Even in the later, they would have local property taxes out the ass with all their money tied up in TPP (tangible personal property) and not sitting in a bank or investment account earning TAXABLE returns. Both of these scenarios are rediculous.

As to how to gain a net worth north of 100m...swmnguy is right that it's practically impossible for someone using their own labor to do that unless you are in one of the classes of labor he mentions. "swmnguy" goes ALL MARXIST when he states the following Agiprop: "To get that wealthy, you have to have other people making your money for you, through rents derived from ownership. That revenue is typically not "income.""  This is bullshit and straight from the Marxist playbook. You can also get really weathy through making things that people want or providing services that people want.  There is no doubt that there is a class of old money wealthy in this country that retain their wealth through property ownership and rents, but the new money wealthy comes from making things people want to buy or services that they want to consume.

 

manofthenorth's picture

Probably most. You will not see royals and sheiks as the highest income earners yet they are the wealthiest by far.

In the US, the top 1% has amassed nearly half of the wealth of the nation's total,

the bottom 80% has held on to only about 7% of total wealth.

The most discouraging aspect of those numbers, for those paying attention, is that the trend of trickle up has not only continued but ACCELERATED over the last 20 years.

The "middle class" is now almost "poor".

jerry_theking_lawler's picture

The middle class is almost poor now....because it is almost dead. For there to be a thriving middle class there has to be ownership of businesses and properties in this class. The .gov has created an environment where the assets are funneled up the ladder to the upper class while they farm out some of their work to us below...but we only 'manage' their property and not own it....this has happened more and more frequently to the point that almost all of the assets have been funneled into corporations that are controlled by the wealthy and uber wealthy.

Handful of Dust's picture

Obama enriched the middle classes in other countries, espically China while impoverishing the middle class in America and making blacks even poorer.

 

Some blacks woke up this election and voted for Trump. Every black minister in my city supported Trump for the above reasons.

Most others did not.

Escrava Isaura's picture

Not Obama, but private power. Obama, like Bush, just follow orders —precedents of previous rules.   

 

bada boom's picture

"1% has amassed nearly half of the wealth of the nation's total" --> By using the government as a tool to help accomplish this.

Even if the 1% pay more in taxes, it won't stop the continued enslavement of the masses.

 

CunnyFunt's picture

>50% of income here

A fucking waste and great motivation killer

drug dealer, bookie or pimp sounds more appealing every day

Tallest Skil's picture

Become a bookie who places bets on which whore ODs first. You'll be rolling in dosh!

flaunt's picture

It's truly disgusting how the government can get away with such robbery

gatorengineer's picture

I know I am in the >50, when you include the local, township, municipal, county, state, tolls and gas taxes....  and for where i live I dont even meet the old definition of middle class (2 cars, vacation every year, secure retirement, paid for kids to college (this is where i fail)......)

Miffed Microbiologist's picture

My thought as well every day as I drive to work. Why am I wearing this yoke of oppression? Would a life as Diogenes be so bad?

Miffed

insanelysane's picture

With you Miff.  My idea is that people that go to work each day should just get taxed out of their paycheck and then that is it.  At least give the option.  Pay x% of every check and you don't need to file or pay y% every check and file a tax return.  Depending on x and y I would consider paying a bit of a premium to not file.

xythras's picture
xythras (not verified) insanelysane Nov 26, 2016 8:58 PM

Why should you pay taxes directly from your income? That's robbery!

Let the taxes be on gas, tolls, infrastructure so the ones using those should pay for them. The ones using the roads, bridges, etc should pay the cost of infrastructure and maintenance, not the ones working on a farm/on their home PC and driving around once in a blue moon. So the taxes should be on gas, tolls, etc so the more u use the infrastructure (by driving) the more you pay. FAIR ENOUGH

Handful of Dust's picture

I am a big supporter of Toll Roads for the reasons you mentioned.

Xena fobe's picture

Toll roads for privately built roads only with no public funding.  Our new lexus lanes in So Cal impede traffic flow at peak use hours as more travelers use the fewer free lanes available.  It's just a tax grab.  Need to fund benes for the illegals and pensions for fat cats in govt.

 

brooklinite8's picture

How about some public transportation or motorbikes to reduce congestion and make things lot better. I still wonder all the cars that go back and forth to work and home carry one person most of the time. How long can we sustain this carmageddon? I don't know why I feel like American obesity and food culture is beyond repairable. We got serious problems. When will the ponzi break? 

MEFOBILLS's picture

Toll roads for privately built roads only with no public funding

 

Roads are inelastic markets and are part of the commons, so they should be government funded.  

Georgist taxation schemes tax away the rent accrued to land.  This increase in land value has to be taxed away.  This is your funding mechanism.

Think of it as a time shift.  Government creates money to then build out infrastructure.  It is important that this new money sources debt free as sovereign money, which then will go on to become private savings (wealth accumulation).

This new money then builds roads.

The improved value of land around this new infrastructure is then taxed in proportion to its unearned increase.  The land must be taxed, as this taxes away the free lunch.  These tax dollars then flow back to the Treasury to replenish what was spent previously (building the roads).

Note that the cycle is virtuous.  No usury is paid to bankers for the "loan."  Labor is used to improve the commons.  Winners in the incremental improvement in land value surrounding the highway, are taxed away of their free winnings.  These winnings belong to the public as the roads were paid for by said public.

Georgists came to understand this mechanism during the Railroad Baron era.  The Railroads came to own the easements and took the rental increase in land value for themselves, thus becoming barons.  These barons turned to oligarchy and then tried to take over the U.S.

All proper taxation taxes away free lunch.  Taxing earned income (like income tax) is the height of idiocy, as it surpresses ones ability to earn wealth through honest labor.  

The U.S. has both a corrupt money system (private bank credit) and a corrupt taxation system.  Fiscal policy and monetary policy are flip sides of the same coin.

www.sovereignmoney.eu

 

motorollin's picture

Right, but then how could the government pay for Israeli aid and our wars?

TimeIsTheFire's picture

Progressive taxes make it impossible to institute such a simple system, as your income is paid monthly but tax is computed annually - so a person working for 6 months a year would pay way more than one working 50% for 12 months. Another reason why progressive taxes are shit. Make it a fixed percentage, taken from everyone equally, and abolish loopholes to side-step it like 401(k)s.

Escrava Isaura's picture

It’s not the taxes, stupid.

"All the perplexities, confusion and distresses in America arise not from defects in the constitution…, as much from downright ignorance of the nature of coin, credit, and circulation" -- John Adams, August 25, 1787.

 

Escrava Isaura's picture

Miffed Microbio: My thought as well every day as I drive to work. Why am I wearing this yoke of oppression?

LOL. You statement just show that you don’t know oppression, girlfriend. Go live in most of Europe, Greece anyone? Go live in Central and South America.

Africa and most of Asia?  Ouch.

 

CunnyFunt's picture

The existence of oppression is not contingent on it being superlative. Toleration of any oppression conditions the individual to accept greater oppression.

fattail's picture

Oppression may be relative, but it is still oppression.  The fact that we tolerate less of it here and the fact that individuals on other continents have acquiesed and abetted to their rulers' domination of themselves speaks to their flaws as a people and a culture.  Perhaps if theyemulated free people and abandoned relgion, superstition, tribalism, and their inferior cultures they would not be as easily divided and conquered.