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. With the conversation on tax cuts heating up soon, we will certainly hear the often repeated claim that “the wealthy don’t pay their fair share of taxes”. Once again, the data builds an even bigger case for us to demonstrate what that statement has always been: a big fat lie.
Federal Income Tax
There are two parts that are applicable to this subject; the tax rates people pay and the amount of tax people pay. First, let’s discuss the tax rates that individuals in different income tax brackets pay each year. Despite what some shout loudly from the rooftops, the facts demonstrate very clearly: the tax structure in the United States is highly 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.
A new graph from the Tax Foundation in Washington DC using IRS data shows how the top 5% of income earners pay an average income tax rate of 17.5% and the top 1% pay an average rate of 26%. Both rates are higher than the previous year.
Compare that 26% average tax rate to the bottom 50% of earners’ rate of just 3.1%. When it comes to the tax rates the wealthy pay, it is a fact that they pay far higher effective rates than middle and lower income individuals. Their average rate is EIGHT TIMES higher than those in the bottom 50% of income. Although it always feels like we pay “too much tax”, it may come as a surprise to the average taxpayer to realize that once all the deductions, exemptions, and child tax credits are taken into account, they likely pay a minimal amount of actual federal income tax – close to the national average of 3.1%, according to IRS data.
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) of less than $42,184 (single) and the bottom 75% are those with AGI less than $85,853 (single). Even once one approaches what would be considered good income approaching $100,000 per year, the average effective tax rate for federal income tax is still very low at 6.54%.
As for the amount of tax paid by the people in the various tax brackets, the numbers get even more telling. Based on the updated IRS numbers from 2020, the bottom 50% of income earners, those with AGI less than $42,184 (single), contributed only 2.3% of total tax paid, totalling approximately $40 billion dollars. The other 97.7% of the total tax collected was paid by the top 50% of income earners, or, in other words, 50% of taxpayers shouldered 97.7% of the federal tax burden
In fact, those making more than $150,000 per year paid a whopping $1.668 trillion in federal income tax (yes, you read that right – TRILLION). Think about that for a minute. Without the zeroes, that is $1,668 compared to $40 from the bottom 50% of taxpayers. The top 50% of taxpayers are paying more than 41 times more in total taxes than the bottom 50%.
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. It should come as no surprise that they are migrating away from high tax states to low or zero income tax states.
State Income Tax
The same analysis comes to the same conclusion on the state income tax level in Utah. Since Utah is one of the nine states that has a flat income tax rate (many more states are moving towards a flat income tax rate in the next few years), there is no progressive ramp up in the effective tax rate as one moves up the income scale and therefore the analysis would look at the amount of state income tax paid by the various income brackets.
The data shows that, just as in the federal income tax, higher income individuals pay the vast majority of state income tax in Utah.
Source: Utah State Tax Commission Annual Report
According to the 2022 State Tax Commission Annual Report (using tax year 2020 data), the top 20.74% of income earners paid over 70% of all state income tax in Utah. In fact, the top 50% (those making >$50,000 per year) paid 92.29% of all state income tax. Those making less than $50,000 paid the remaining 7.71% of the taxes collected.
Whether it is on the national level or the state level, the most recent data still paints the same picture as always and the statement that “the wealthy don’t pay their fair share of taxes” retains the status of one big, fat lie.