In today’s hyperbolic, Twitter-headline political environment, many “one-liners” get repeated endlessly to attempt to bludgeon a statement that is false into a morphed belief that is somehow seen as truth. None is seen or heard more than the oft uttered phrase currently coming out of the White House and others claiming “the wealthy and corporations don’t pay their fair share of taxes”. We would like to demonstrate what that statement is: a big fat lie.
In this article I will focus on federal income taxes, saving the discussion on state taxes and corporate taxes for later. First, let’s discuss the tax rates that individuals in different income tax brackets pay each year. As everyone knows, the tax structure in the United States is progressive – meaning the more income you earn the higher your tax rate becomes. In addition, once one’s income gets high enough, virtually every credit or exemption is phased out and taken away, further raising the effective tax rate.
The usual diatribe that some roll out in this discussion conflates capital gains tax rates with income tax rates. Warren Buffett and some other billionaires talk about how they pay a lower tax rate than their janitor, which conveniently ignores the fact that those who live off capital gains from their accumulated wealth make up a microscopic needle in the haystack of taxpayers overall. All of those folks combined could fit into a pretty small space. Capital gains taxes are an entirely different discussion. It is comparing apples and oranges and leverages the public’s misunderstanding of the difference. In addition, talk of raising those rates completely ignores the very heart of innovation, growth, investment and the foundation of free enterprise and free market principles that now provide us all with the modern day benefits and economic abundance we enjoy. Raising those rates could destroy what got us to this point.
The following graph from the national Tax Foundation, using IRS data shows how the top 5% of income earners pay an average income tax rate of 17.3% and the top 1% pay an average rate of 25.4%. It should be noted that this only accounts for federal income taxes. Once you pile state income tax on top of that the average rates jump much higher, especially in high tax states like California and New York, driving the wealthy to low or no income tax states like Texas and Florida.
Compare that 25.4% average tax rate to the bottom 50% of earners rate of just 3.4%. That is a massive difference. When it comes to the tax rates the wealthy pay, it is a fact that they pay far more than middle and lower income individuals. Their average rate is SEVEN TIMES higher than those in the bottom 50% of income. It might be a shock to most that are not wealthy to take a look at their “effective tax rate” for federal income tax on their last tax return. Once all the deductions, exemptions, and child tax credits are taken into account, most filers pay a minimal amount of actual federal income tax. As the IRS data show, the actual tax rate paid is likely in the very low single digits similar to the national average of 3.4%.
By the way, if you are curious what the income levels are for these categories, the bottom 50% are those with AGI (adjusted gross income) less than $43,614 (single) and the bottom 50% to 25% are those with AGI of $87,044 (single) or less. Even once one approaches what would be considered good income approaching $100,000 per year, the average effective tax rate is still very low at 6.9%.
Now let’s shift the discussion from the rates that high income earners pay to the dollar amount, or total amount of taxes they pay.
In the most recent year that complete data is available, 2018, the bottom 50% of income earners, those with AGI less than $43,614 (single), contributed just under 3% of the total taxes paid, or $45.1 billion dollars to be exact. The other 97% of the total taxes collected was paid by the top 50% of income earners.
In fact, those making more than $150,000 per year paid a whopping $3.9 trillion in federal income tax (yes, you read that right – TRILLION). Think about that for a minute. Without the zeroes, that is $3,900 compared to $45. Those that value various programs provided by the government should realize that the very people that are funding those programs are the very same ones that are often demonized and maligned. They are the proverbial goose that is laying the golden egg.
As tax policy experts have always said – if you want more of something, tax it less. States that have moved toward very low income tax rates or no state income tax at all are reaping the benefits of inmigration of wealth and business activity and the ballooning tax revenue that comes along with it.
Whether one is comparing federal income tax rates or total taxes paid, the data and facts show that the statement that “the rich don’t pay their fair share of taxes” is plain and simple – one big fat lie.