The U.S. tax system is progressive—the more you earn, the greater the percentage of your income is taxed by the IRS. But that’s the black-and-white version of the equation and, in fact, there are many gray areas.
It takes years to compile data from tax returns to determine how much citizens paid and who paid the most and the least. The last year for which concrete, comprehensive statistics are available is 2017, when individual taxpayers paid $1.6 trillion in taxes. But who, exactly, is paying all that money? The wealthiest taxpayers are taking the heat.
Federal Income Tax Brackets
A single taxpayer who earns $300,000 a year will pay a top tax rate that’s significantly higher than a taxpayer who only makes $15,000 a year. Any income the first person earns over $209,426 is going to be taxed at 35% as of 2021, whereas the second person will pay a top rate of just 12% (assuming both are filing as single taxpayers, not as married taxpayers).
That’s how a progressive system works, but the actual equation is a bit more complicated than that. Here’s how tax brackets work for single taxpayers in tax years 2020 and 2021 (if you’re filing jointly with your spouse or as a head of household, your tax brackets are slightly different).
|Income Tax Rate||2020 Income||2021 Income|
|10%||$0 to $9,875||$0 to $9,950|
|12%||$9,876 to $40,125||$9,951 to $40,525|
|22%||$40,126 to $85,525||$40,526 to $86,375|
|24%||$85,526 to $163,300||$86,376 to $164,925|
|32%||$163,301 to $207,350||$164,926 to $209,425|
|35%||$207,351 to $518,400||$209,426 to $523,600|
|37%||$518,401 or more||$523,601 or more|
Marginal vs. Effective Tax Rates
Not all of the $300,000-a-year taxpayer’s income is taxed at 35%. The first $9,950 they earn in 2021 would be taxed at only 10%. Income between that threshold and $40,525 would be taxed at 12%, and income of $40,526 up to $86,375 would be subject to a 22% rate. Next, their income up to $164,925 would be taxed at 24%, and their income from $164,926 to $209,425 would be taxed at a rate of 32%. Only that last $90,575 (i.e., $300,000 - $209,425) would incur a 35% tax rate.
That 35% is the person’s “marginal” tax rate: the percentage they pay on their top dollar earned. Their “effective” tax rate is the result of dividing the total amount of tax they owe by their adjusted gross income (AGI)—what’s left after making certain above-the-line adjustments to income on your tax return. Your effective tax rate is the share of your income you actually pay in taxes.
The chart below helps to illustrate how much taxpayers are spending depending on their income brackets.
The Effect of Credits and Deductions
Tax credits and deductions must also be taken into consideration because they heavily influence how much of an individual’s income will ultimately be taxed.
The taxpayer with the $300,000 income can bring that figure down to $287,450 just by claiming the standard deduction for their single filing status, which is $12,550 for tax year 2021. The $15,000-a-year person’s taxable income would drop to just $2,450, assuming they’re also single and they claim the $12,550 standard deduction.
The six-figure taxpayer might potentially bring their taxable income down even more by itemizing instead. Taxpayers claimed $42.8 billion in itemized charitable donation deductions in 2017. The taxpayer who earns just $15,000 a year likely would not contribute much to that number. Generally, wealthier taxpayers are more likely to take advantage of this itemized deduction because it requires some amount 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 generally don’t pay enough interest on mortgages to give them a sizable tax deduction.
Property and state taxes accounted for $69.3 billion in claimed tax deductions in 2017, and it stands to reason that the majority of that total can be attributed to people who paid the most in such taxes—high-income individuals.
Basically, the more you earn, the more you spend, and the greater the tax break you’ll get if your spending is on tax-deductible expenses. But 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.
Taxpayers who earn over a certain income threshold can’t claim the earned income credit. It’s designed to put cash into the pockets of low-income families.
The Tax Burden for Low-Income Taxpayers
Only 1.4% of the $1.45 trillion in taxes paid in 2017 was contributed by taxpayers earning less than $30,000, according to the Pew Research Center.
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—the IRS paid out about $62 million in earned income tax credits in 2020. The average payment to qualifying taxpayers was $2,461.
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 bottom 50%. The lower half included taxpayers with AGIs of $41,740 or less in 2017. The Tax Foundation found that this lower 50% demographic contributed just 3% of taxes paid in 2017.
The 2018 edition of the same study 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 Tax Burden for High-Income Taxpayers
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 of their incomes, 15% of $30,000 is a great deal less than 15% of $300,000. But 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%, to be exact.
Those with incomes over $2 million paid a 27.5% effective tax rate, triple that of taxpayers who earned less than six figures annually, although the effective rate drops to 25.9% for the super-wealthy who earned $10 million a year or more.
The Tax Foundation’s study concluded that 96.9% of all 2017 income taxes were paid by the higher-earning 50% of taxpayers.
The Pew Research Center study indicates that taxpayers earning between $200,000 and $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 taxes paid at an effective tax rate of 26.8% for those with incomes between $500,000 and $2 million.
Why Is the Federal Income Tax a Progressive Tax?
A progressive tax system is designed to distribute the tax burden more heavily toward those who have more income. Its supporters reason that taxpayers with higher wages have greater means to support government services, and it's meant to support a thriving middle class. Detractors argue that this discourages people from earning more since they will have to pay a higher tax rate if they do.
How Do I Calculate My Marginal Tax Rate?
To calculate your marginal tax rate, you will need to look at the tax bracket table for the current year (see the 2021 table). First, calculate your adjusted gross income (AGI) by subtracting the standard deduction or itemized deductions and any other allowable above-the-line deductions from your total income. Then multiply each portion of your AGI by the tax rate for each income level and add the totals for your total income tax obligation.