“Just the facts” Friday: U.S. Federal Income Tax – How Much and Who Pays?

U.S. taxpayers must file their returns by April 18 – not an occasion many people (if any) celebrate. How much are we paying? Who’s paying it? And how does this compare to the past and to other countries?  

How Much Are We Paying?

NOTE: Most of this data is from the IRS from 2008, the last full year for which data is available. If you’re bored and want to lose yourself entirely in numbers, as I did in putting this together, just go here.  

2008 was the first year in which the recession was felt so tax collections naturally dropped. Individual taxpayers paid $1,031.6 bil. in income taxes (yep, just over a trillion dollars), an average of $7,242 per return. This is a bit misleading, however, since 36.3% of returns had no tax liability. With these eliminated, the average is $11,379 per taxpayer.  

What’s the Rate?  

The statutory rates don’t really matter. What does matter is what people pay in reality. The rate in 2008 was 12.24%. It’s only been lower twice in the data the IRS makes available (since 1986): in 2003 (11.90%) and 2004 (12.10%) as a result of the Bush tax cuts.  

There are significant variations by income levels:  

  • Top 0.1% of taxpayers (adjusted gross income or AGI of $1.8 million or more): 22.70%
  • Top 1% (AGI of $380,354 or more): 23.27%
  • Top 5% (AGI of $159,619 or more): 20.70%
  • Top 10% (AGI of $113,799 or more): 18.71%
  • Top 25% (AGI of $67,280 or more): 15.68%
  • Top 50% (AGI of $33,048 or more): 13.65%

Who’s Paying?

The top 50% of taxpayers by AGI paid 97.30% of federal income tax collected in 2008. This isn’t surprising since this group accounted for 87.25% of total AGI reported. It gets really interesting when you look at the wealtheir groups. For example, the top 0.1% (equivalent to only 139,961 returns) paid 18.47% of federal income tax. The top 1%, 38.02%; the top 5%, 58.72%.  

Federal Receipts Are Near Historic Lows  

The Office of Management and Budget (OMB) provides tables that put the current tax burden into historic context. Federal receipts were at low levels (less than 10% of GDP) from 1930, when the records start, until 1941 when they first hit 10%. They shot up to over 20% in 1944 and 1945 during World War Two, then settled into a range of around 15-18% for several decades. For the last two years, federal receipts have been 14.9% of GDP, lower than any years other than the 1930s, 1941-43, and 1949-50.  

Total Tax Burden Is Low Compared to Other Countries  

According to the OECD, U.S. tax revenues (from all levels of government) were 26.1% of GDP in 2008 (and 24.0% provisionally for 2009). Of the 33 countries measured, only Mexico, Turkey and Chile had lower percentages. The Heritage Foundation (a rather biased source, although their data appear correct from my limited knowledge) compiles a more detailed list of 178 countries. On this list, the U.S. is 53rd.  

The Bottom Line  

Complicated topic! My brief conclusions:  

  • I don’t believe our taxes are high by any reasonable yardstick. When the actual rate for the top earners is still below 25%, I think we’re okay psychologically, ethically,  financially and economically.
  • People come up with completely different conclusions from the same data. Conservatives will say “Look, the top earners are already paying the vast majority of taxes. It’s not fair to make them pay more, and it will hurt economic growth.” Liberals will say “But their rates are still fairly low, we’ve got a huge deficit, and why should those who can least afford it bear the burden of cuts?” As for me, I think both sides miss the key point: it’s about income inequality, and that’s resulted from the creation of an economy in which education and knowledge are crucial, and in which the finance sector has far too much influence and can play a destructive role. Address these issues, and you address the revenue side of the equation.
  • While personal income tax is at or near historically low levels, part of the reason why we have a massive deficit (leaving aside the main reason – we spend too much!) is that there’s been a big drop in the percentage of revenue provided by corporate income tax. In 2008, only 8.9% of federal receipts came from corporate income tax. It’s ranged around 8-12% since 1980, although it was much higher prior, especially in the 1950s and early-1960s.

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