Breakdown of Who Pays the Most—and Least—in Taxes
Those who earn $200,000 or more pay more than half of total income taxes.
The U.S. tax system is designed to be progressive—the more you earn, the greater the percentage of your income is destined to be handed over to the Internal Revenue Service (IRS). But that’s the black-and-white version of the equation and, in fact, there are many gray areas. The sits atop a whole labyrinth of laws and codes that can affect who pays how much.
It takes years to compile data from tax returns to determine how much citizens paid and who paid the most and the least. 2015 is the last year for which concrete, comprehensive statistics are available. Individual taxpayers paid $1.45 trillion in taxes in 2015. That’s expected to have increased to about $1.66 trillion in 2017.
So who, exactly, is paying all that money?
It All Starts With Tax Brackets
A man who earns $300,000 a year will pay a top tax rate that’s significantly more than a woman who’s scraping by on $15,000 annually. Any income he earns over $204,100 is going to be taxed at 35% as of 2019, whereas that woman will pay a top rate of just 12%. That’s how a progressive system works, but the actual equation is a bit more complicated than that.
“Effective” Tax Rates
Not all of this guy’s income will be taxed at 35%. Technically, the first $9,700 he earns will be taxed at only 10% in 2019. Income between that threshold and $39,475 will be taxed at 12%, and income of $39,476 up to $84,200 will be subject to a 22% rate. Beyond this point, his income up to $160,725 will be taxed at 24%, then his income from $160,726 to $204,100 is taxed at a rate of 32%. Only that last $95,900 suffers a 35% tax bite, and this is assuming that he’s single.
Yes, it’s complicated. The bottom line is that your actual “effective” tax rate is the result of dividing the tax you end up owing by the amount of your adjusted gross income (AGI)—what’s left after taking certain above-the-line adjustments to income on your tax return. This is the tax rate you actually pay on all your income.
The chart below helps to illustrate the discrepancy in how much tax-payers are spending depending on income bracket.
The Effect of Credits and Deductions
Tax credits and deductions must also be taken into consideration because these heavily influence how much of an individual’s income will ultimately be taxed. The equation doesn’t end after taking any above-the-line deductions you might qualify for.
The guy with the $300,000 income can bring that figure down to $287,800 just by claiming the standard deduction for his filing status, which is $12,200 as of tax tear 2019. The woman’s taxable income would drop to just $2,800, assuming she’s also single and she claims the $12,200 standard deduction.
Yet, the six-figure taxpayer might potentially bring his taxable income down even more by itemizing instead. Taxpayers claimed $56.9 billion in itemized charitable donation deductions in 2017. The woman earning $15,000 a year almost certainly did not contribute to that number. Generally, wealthier taxpayers would take advantage of this itemized deduction because it requires some measure of disposable income.
The same applies to the mortgage interest deduction, which resulted in $63.6 billion being shaved off taxpayers’ incomes in 2017. Low-income individuals are not paying interest on mega-mortgages enough to give them a sizeable tax deduction. Property and state taxes accounted for $69.3 billion in claimed tax deductions in 2017, and it only stands to reason that the majority of that total can be attributed to those who paid the most in such taxes—high-income individuals.
Basically, the more you earn, the more you spend, and if your spending is done on tax-deductible expenses, the greater tax break you will get. Of course, wealthier individuals are precluded from claiming the earned income tax credit, estimated at $65 billion in taxpayer savings in 2017. Qualifying for this credit can result in the IRS paying the citizen rather than the other way around because it’s refundable. But taxpayers who earn over a certain threshold can’t claim it. It’s designed to put cash into the pockets of low-income families.
So who pays what after taking all this into consideration?
The Tax Burden for Low-Income Taxpayers
Only 1.4 % of the $1.45 trillion in taxes paid in 2015 was contributed by taxpayers earning less than $30,000, according to the Pew Research Center.
The effective tax rate for those earning less than $30,000 worked out to 4.9%. It’s anticipated that the Tax Cuts and Jobs Act (TCJA) will reduce the effective tax rate for the poorest 20% of Americans by about 5.5% beginning in 2018 through at least 2025 when the TCJA is set to expire.
It should also be noted that many taxpayers in this income group received income from the government in the form of those refundable tax credits mentioned earlier—the IRS paid out 4.49% of collected taxes in 2015.
The bottom line: Those who earned less than $30,000 paid 1.4% of the country’s total income taxes at an effective tax rate of 4.9% in 2015, according to the Pew Research Center.
The Tax Burden for Middle-Income Filers
A study by the Tax Foundation breaks down taxpayers into just two groups: the top 50% of earners and the lowest 50%. The bottom half comprises taxpayers with AGIs of $40,078 or less.
The Tax Foundation found that this lower 50% demographic contributed just 3% of taxes paid. This adds up to $43.9 billion.
The study also indicated that the bottom half of taxpayers paid an effective tax rate of 3.7%. Those with AGIs falling between $50,000 and $100,000, which could be considered middle income, paid an effective rate of 9.25%. AGIs of $139,713 to $197,651 paid an average effective rate of 14%.
The bottom line: Those who earned between $30,000 and $50,000 in 2015 paid 4% of all income taxes at an effective rate of 7.2%. Those who earned between $50,000 and $100,000 paid 14.1% of all taxes paid at an effective tax rate of 9.2%.
High-Income Taxpayers Do Pay the Most
Wealthy individuals do indeed pay more in taxes than low-income or even middle-income individuals. It's just basic math.
Even if the tax system were not progressive and everyone paid the same percentage, 15% of $30,000 is a great deal less than 15% of $300,000. We do have a progressive system, so high-income individuals pay higher effective tax rates, even after all those tax credits and deductions are taken into consideration. Those deductions won’t reduce $300,000 to $30,000.
The Pew Research Center indicates that taxpayers with AGIs in excess of $200,000 paid more than half of all taxes collected in 2015—58.9 percent, to be exact.
Those with incomes topping $2 million paid a 27.5% effective rate, triple that of those earning less than six figures annually, although this drops to 25.9% for the super-wealthy who earn $10 million a year or more.
The Tax Foundation’s 50/50 study attributes 96.96% of all 2016 income taxes paid to the top half of individuals. The top 1% of this upper echelon contributed 37.32% at a 26.87% effective tax rate. This demographic includes those with AGIs of $480,804 or more. Yes, only 1% of all taxpayers earned that much in 2016, but they contributed a smidgen more than 37.32% to the government’s income that year.
The bottom line: The Pew Research Center study indicates that taxpayers earning from $200,000 to $500,000 annually paid an effective tax rate of 19.4% in 2015. Their income taxes represented 20.6% of the total taken in by the IRS. This decreased to 17.9% of the total at an effective tax rate of 26.8% for those with incomes over $500,000 and up to $2 million.
Internal Revenue Service. "Individual Income Tax Shares, 2015," Page 1. Accessed June 19, 2020.
Pew Research Center. "A Closer Look at Who Does (and Doesn’t) Pay U.S. Income Tax." Accessed June 19, 2020.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed June 19, 2020.
The Joint Committee on Taxation. "Estimates of Federal Tax Expenditures for Fiscal Years 2016-2020," Select "Download," Page 32. Accessed June 19, 2020.
The Joint Committee on Taxation. "Estimates Of Federal Tax Expenditures For Fiscal Years 2016-2020," Select "Download," Page 40. Accessed June 18, 2020.
Internal Revenue Service. "Qualifying for the Earned Income Tax Credit." Accessed June 19, 2020.
Institute on Taxation and Economic Policy. "Who Pays Taxes in America in 2018?," Page 4. Accessed June 19, 2020.
Tax Foundation. "Summary of the Latest Federal Income Tax Data, 2018 Update." Accessed June 19, 2020.