What percentage of Americans actually pay taxes?
Getting the Facts Straight on America’s Tax Burden
White House Communications Director Dan Pfeiffer takes on some myths about who is paying what share of the taxes in America.
Last week, the President put forward a detailed plan for jobs, controlling our deficit, and comprehensive tax reform. The President’s tax reform plan will abide by the principles of cutting rates, getting rid of inefficient and unfair tax breaks, and observing the Buffett rule – a simple rule of simple fairness that no household making over $1 million annually should pay less in federal taxes than middle-class families pay.
Yesterday in an interview with Senior Adviser David Plouffe on Fox News Sunday, host Chris Wallace used misleading statistics to argue against the President’s efforts to level the playing field for middle class Americans by requiring that the wealthiest pay their fair share. In an effort to falsely assert that the President’s plan would place an unfair tax burden on the wealthiest Americans, Wallace said that, “1 percent of households with the highest incomes pay 38 percent of federal income taxes. The top 10 percent pay 70 percent of federal income taxes. Meanwhile, 46 percent of households pay no federal income tax at all.”
These statistics are misleading and don’t tell the whole story. They leave out payroll taxes that every worker pays to make sure they will have Social Security and Medicare when they retire, which fall disproportionately on the middle class. And they don’t mention that the share of the nation’s income going to the highest earners grew rapidly in the past two decades – at the same time tax rates fell for the highest earners.
In fact, because of growing income inequality, the top 10 percent of American earners now earns 42 percent of the nation’s income, and when correctly calculated, pay about 50 percent of the federal income and payroll tax burden — not much larger than their share of earnings.
As we continue to have a robust discussion about the President’s plans across our country, it’s important to understand exactly how they will affect Americans – from the middle class to the highest earners.
We already took on several tax myths here (see “Buffett Rule Facts and Fictions,” by NEC Director Gene Sperling) but given that more misleading information continues to make the rounds, it is important to set the record straight.
Claim: The top 10 percent wealthiest Americans pay 70 percent of federal income taxes.
Fact: This statistic presents a deeply misleading picture of the actual federal tax burden because (1) it fails to include payroll taxes, which every worker pays, and which fall disproportionately on the middle class, and (2) because it doesn’t reflect that high-income Americans earn a disproportionate share of income.
- Payroll taxes account for 34 percent of federal revenues. They only apply to income earned on the job – not income from capital gains on investments, which make up a much greater share of the income of the top 10 percent. And payroll taxes for Social Security are capped at $106,800.
- For both of these reasons, wealthier Americans face a disproportionately lower burden from payroll taxes. According to the independent, non-partisan Congressional Budget Office, the wealthiest 10 percent only pay 25 percent of all payroll taxes.
- Counting both payroll and income taxes, the top 10 percent only pay about 50 percent of that tax burden – not much larger than their share of our nation’s income (around 42 percent).
- The top 10 percent (households earning an average of nearly $400,000) has been earning a larger and larger share of our nation’s income. Twenty years ago, they accounted for 34 percent of our nation’s income. In the past twenty years – as tax rates have fallen for the highest earners – the income share of the top 10 percent has grown to 42 percent of our nation’s earnings.
- This aggregate figure also masks the fact that certain high-income Americans pay far less than others—and less than the middle class. That’s what the Buffett Rule is meant to address.
Claim: The 1 percent of households with the highest incomes pay 38 percent of federal income taxes.
Fact: This statistic again ignores the payroll taxes that every working American pays, and the fact that incomes of the top 1 percent have increased rapidly in recent years.
- As with calculations about the tax burden of the top 10 percent, this claim ignores payroll taxes that every American worker pays, but fall much less on the highest earners.
- In fact, the top 1 percent of all Americans only pay 4.1 percent of the nation’s payroll taxes. Overall, they pay about one-quarter of federal income and payroll taxes.
- While this may seem like a high share, consider that over the past twenty years, the portion of our nation’s income going to the top 1 percent (households earning an average of nearly $2 million) has nearly doubled – from 11 percent in 1987 to 19 percent in 2007 (the latest year for which the CBO publishes tax burden data).
- While the top 1 percent pays about one-quarter of our federal income and payroll tax, they also earn 19 percent of our nation’s income.
Claim: 46 percent of households pay no federal income tax at all.
Fact: Around 82 percent of Americans pay income or payroll taxes, and those who don’t are mostly elderly people.
- Ignoring payroll taxes presents a particularly misleading picture for middle income taxpayers.
- In fact, according to the independent, non-partisan Tax Policy Center, around 82 percent of Americans pay income or payroll taxes.
- As confirmed last week in a “Reality Check” article by the Washington Post, of the remaining 18 percent, 10 percent are elderly people who generally don’t earn salaries or wages, and 7 percent are people with incomes under $20,000 per year. As the article explains, of the people who pay no federal income or payroll taxes, “most are low-income workers or elderly living only on Social Security.”
Claim: The average taxes paid by millionaires is high enough to make the Buffett Rule unnecessary.
Fact: This is misguided on several grounds.
Millionaires faced an average income tax rate of about 24 percent as of 2009 according to IRS data (and payroll taxes should add very little to that—in the range of 1 to 1.5 percentage points).
However, the Buffett Rule is not about all taxpayers or even the average taxpayer making over $1 million. Instead, it is about those who are able to pay lower taxes than middle-class families.
Take IRS data on the taxes paid by the 400 highest-income households in 2008, all making over $110 million per year and making an average of $271 million per year. Some of those 400 taxpayers do pay their fair share, but according to that data, one-third of this group pays less than 15 percent of their income in taxes and 85 percent pays less than 30 percent.
Indeed, a full 22,000 households making more than $1 million annually paid less than 15 percent of their income in taxes in 2009, according to analysis of the IRS 2009 Statistics of Income file by the Treasury Department’s Office of Tax Analysis. And 165,000 households making over $1 million paid less than 30 percent of their income in taxes.
Second, even looking at averages provides strong evidence of how unfair our tax code has become. That same IRS data shows that the average income tax rate for the most well off 400 earners was only 18.1 percent in 2008 and 16.6 percent in 2007. (This does not count the impact of the payroll tax, which is trivial for these taxpayers since only a tiny fraction of their income is subject to the payroll tax). These exceptionally low effective tax rates paid by the most well-off do violate the Buffett Rule because they are lower, and at times significantly so, than the amount some middle-class families may pay in income and payroll taxes. For example:
- A single, self-employed business owner earns $70,000. In income and payroll taxes, this middle class business owner pays about 28 percent of income in taxes. That’s 50 percent higher rate than the average tax rate on the top 400.
- And, at the margin, a middle-class family can pay 15 percent, 25 percent or 28 percent of what they earn in income taxes — plus additional payroll taxes on top of that. That’s far higher than the less than 15 percent of income in federal taxes that some of the most well-off Americans pay. Does it seem right that an American who makes over $110 million pays an effective tax rate of about 18 percent, but if they had a fire at their house, those who would be risking their lives to put the fire out, could be seeing far more taken out of their every additional dollar earned while they are risking their lives?
- For example, a nurse makes an average wage for her occupation of $68,000 and has one child. When she chooses to work overtime, her additional earnings are taxed at 25 percent by the income tax. And payroll taxes add even more.
Claim: This is a new tax rate on millionaires.
Fact: This is not a new tax rate on millionaires; instead the rule should be incorporated as part of fundamental tax reform that lowers overall rates. Currently, the highest-income Americans pay far less than the top marginal tax rate. Therefore, reform that meets the Buffett Rule should focus on limiting the degree to which the most well-off can take advantage of tax expenditures and preferences.
Dan Pfeiffer is White House Communications Director
51% of Americans Pay No Federal Income Taxes
Half of American tax payers owe no federal income tax, and most of those filers actually net tax benefits from federal income taxes, according to analysis from the Joint Committee on Taxation in a letter to the Republicans on the Senate Finance Committee.
This is the kind of statistic that is bound to get traction as Osama news subsides, and here are two ways to look at it.
THEY’RE STILL PAYING TAXES (MOST OF THEM, ANYWAY)
The majority of households who pay no income tax still pay net taxes to the IRS. Federal income taxes account for about 40 percent of total government receipts. Most of the rest comes from payroll taxes, which workers of all income levels do pay. Since every dollar up to $106,800 is subject to taxes, a typical middle class family pays payroll taxes on all its income while a millionaire employee pays payroll taxes on only a tenth of his income.
At the same time, there are Americans — millions of them — who really do pay practically zero overall taxes. About fifteen million American households, or 10 percent of all taxpayers, receive more cash from the IRS than they contribute in federal income taxes and payroll taxes. That’s thanks to «refundable credits,» tax credits that can bring your tax bill into negative territory. To some, these 15 million are low-income Americans benefiting from smart and targeted welfare run through the tax code. To others, they are unacceptable free riders, citizens with a vote but no stake in federal government.
THE TOP 20% EARNS 50% OF THE INCOME
The richest 20 percent of the country pays more than half of income taxes for two simple reasons: America’s wealthiest 20 percent earns half the nation’s income and their income is taxed at a higher rate. The Wall Street Journal brings the visuals:
The wealthiest quintile’s share of federal taxes has grown more rapidly than their share of income. This suggests that the rich are facing steeper taxes. Not so. Effective tax rates at the top have fallen in every decade since 1970. But since effective tax rates also fell for every other quintile, the share of taxes paid by the rich has increased.
I have a feeling we’re going to hear variations of the question: How can the rich be paying too much while income inequality is at an 80 year high? I think it’s better to see both stats as a part of the same story rather than two conflicting narratives. In the last 30 years, incomes have grown faster at the top than the middle. Over the same time, effective tax rates fell for every family. And because a four percentage-point tax cut means a 50 percent tax cut for the poor but only a 10 percent tax cut for the rich, the share of overall taxes paid by the middle- and lower-class has decreased faster than their share of pretax income.
Federal Income Tax Brackets for Tax Years 2022 and 2023
The federal income tax rates remain unchanged for the 2022 and 2023 tax years are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The income thresholds for each bracket, though, are adjusted slightly every year for inflation. Read on for more about the federal income tax brackets for both tax year 2022 (filed by April 17, 2023) and tax year 2023 (filed by April 15, 2024). You can also work with a financial advisor to build a tax plan within your overall financial plan.
The Federal Income Tax Brackets
The U.S. currently has seven federal income tax brackets, with rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. If you’re one of the lucky few to earn enough to fall into the 37% bracket, that doesn’t mean that the entirety of your taxable income will be subject to a 37% tax. Instead, 37% is your top marginal tax rate.
With a marginal tax rate, you pay that rate only on the amount of your income that falls into a certain range. To understand how marginal rates work, consider the bottom tax rate of 10%. For single filers, all income between $0 and $10,275 is subject to a 10% tax rate. If you have $10,475 in taxable income, the first $10,275 is subject to the 10% rate and the remaining $200 is subject to the tax rate of the next bracket (12%).
Check out the chart below to see what your top marginal tax rate is for the tax year 2022, which will be filed in 2023.
|Federal Income Tax Bracket for 2022 (filing deadline: April 17, 2023)|
|Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||$0 – $10,275||$0 – $20,550||$0 – $10,275||$0 – $14,650|
|12%||$10,276 – $41,775||$20,551 – $83,550||$10,276 – $41,775||$14,651 – $55,900|
|22%||$41,776 – $89,075||$83,551 – $178,150||$41,776 – $89,075||$55,901 – $89,050|
|24%||$89,076 – $170,050||$178,151 – $340,100||$89,076 – $170,050||$89,051 – $170,050|
|32%||$170,051 – $215,950||$340,101 – $431,900||$170,051 – $215,950||$170,051 – $215,950|
|35%||$215,951 – $539,900||$431,901 – $647,850||$215,951 – $323,925||$215,951 – $539,900|
Now, here is the chart for tax brackets for the 2023 tax year, to be filed in 2024:
|Federal Income Tax Bracket for 2023 (filing deadline: April 15, 2024)|
|Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||$0 – $11,000||$0 – $22,000||$0 – $11,000||$0 – $15,700|
|12%||$11,001 – $44,725||$22,001 – $89,450||$11,001 – $44,725||$15,701 – $59,850|
|22%||$44,726 – $95,375||$89,451 – $190,750||$44,726 – $95,375||$59,851 – $95,350|
|24%||$95,376 – $182,100||$190,751 – $364,200||$95,376 – $182,100||$95,351 – $182,100|
|32%||$182,101 – $231,250||$364,201 – $462,500||$182,101 – $231,250||$182,101 – $231,250|
|35%||$231,251 – $578,125||$462,501 – $693,750||$231,251 – $346,875||$231,251 – $578,100|
In rare cases, such as when one spouse is subject to tax refund garnishing because of unpaid debts to the state or federal government, opting for the “Married filing separately” tax status can be advantageous. Typically, though, filing jointly provides a tax break.
Only single people should use the single filing status. Single taxpayers who have dependents, though, should file as “Head of Household.” To qualify for this filing status, you must pay more than half of household expenses, be unmarried and have a qualifying child or dependent.
How Federal Tax Brackets Work
In the U.S., income is taxed progressively with higher tax brackets than in most other nations. Not all income is treated equally, as the more you make the higher percentage you end up contributing in taxes. All brackets work on a taxable income basis, not necessarily the actual amount of money earned in a given year.
Once all deductions are accounted for, and tax credits awarded, then the income total that is leftover is your taxable income. That income falls into a tax bracket and you pay the percentage within that bracket.
The easiest thing to do is to use SmartAsset’s free income tax calculator, but here are some tips to keep in mind if you’re estimating your own taxes:
- Actual taxes paid: The tax you owe could vary based on where your income comes from and how it is broken up. Your entire income won’t necessarily be taxed at your tax bracket rate.
- Income thresholds: The income thresholds for the federal tax brackets are updated and could change, annually. This is done to account for inflation.
- Effective tax rate: Your effective tax rate is the percentage of your taxable income that you’ll pay in taxes. You can calculate this by dividing your tax owed by your total income. This is what you’ll actually pay.
If someone asks you for your tax bracket, the person is almost certainly asking for your top marginal tax rate. That’s why, when you’re reading the news, you’ll hear references to “filers in the top bracket” or maybe “taxpayers in the 37% bracket.” America’s top federal income tax bracket is varying over time quite a bit. It’s hard to believe now, but top federal income tax rates were once as high as 92%.
Understanding the Current Federal Income Tax Brackets
Our current tax brackets were adjusted when Congress passed new legislation in 2017 that changed the brackets and how taxes are filed. The tax reform passed by President Trump and Congressional Republicans lowered the top rate for five of the seven brackets. It also increased the standard deduction to nearly twice its 2017 amount.
For the 2022 tax year that’s filed in 2023, the standard deduction is $12,950 for single filers and married filers who file separately. Joint filers will have a $25,900 deduction and heads of household get $19,400. For the 2023 tax year that’s filed in 2024, the standard deductions are $13,850, $27,700 and $20,800, respectively.
Tax filers will need the 2022 federal income tax brackets when they file taxes in 2023. Your top tax bracket doesn’t just depend on your salary. It also depends on other sources of income (such as interest and capital gains) and your deductions. Depending on where you fall within a tax bracket, deductions could knock you into a lower tax bracket, reducing your tax liability or increasing the size of your tax refund.
Tips for Tax Filing
- If you’re precise with numbers and good at record-keeping, you’re probably fine using tax preparation software. But if you want help to minimize your tax liability, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you need more time to file your taxes, you can use Form 4868 to get a maximum extension of six months from the April 15 deadline (to October 15.) But remember, this extension does not apply to payments. So if you owe taxes, you should estimate what you owe and pay what you can to avoid a penalty and interest.
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