The U.S. progressive tax system makes it difficult to pin down an “average” taxpayer. Tax brackets range from 10% to 37% as of 2021, and there are seven of them, so the average tax rate might be expected to be something like 24.57%. And conveniently, there is a 24% tax bracket. So is this what the average American pays in taxes?
Not really. Different spans of income are taxed at different rates. A single taxpayer who earns $86,376, for example, would pay that 24% “average” rate on only one dollar of income in 2021—the dollar over the $86,375 ceiling for the 22% bracket. Here’s how it breaks down.
How Tax Brackets Impact Rates
The 24% bracket applies only to incomes from $86,376 through $164,925, at least for single taxpayers. These income thresholds vary by filing status. Here’s how the brackets for the single filing status break down, as of tax year 2021:
|Marginal Tax Rate||Income Threshold|
|10%||$0 to $9,950|
|12%||$9,951 to $40,525|
|22%||$40,526 to $86,375|
|24%||$86,376 to $164,925|
|32%||$164,926 to $209,425|
|35%||$209,426 to $523,600|
|37%||$523,601 or more|
The 24% rate wouldn’t affect an unmarried taxpayer earning $35,000 a year. They would be in the 12% tax rate bracket—but only on income over $9,950. That first $9,950 would be taxed at just 10%.
These income spans are up somewhat from what they were in tax year 2020 because they’re tweaked annually to keep pace with inflation.
‘Median’ Might Be a Better Term
It might be easier to understand the median tax burden of American taxpayers instead. A median number is one that falls right in the middle. Half of all taxpayers would pay less than a median figure, and half would pay more.
The top 50% of taxpayers paid 97% of all federal income taxes in 2017, the last tax year for which comprehensive and vetted statistics are available, according to the Tax Foundation. As a result, the bottom 50% paid just 3%.
Based on these and other figures, the Tax Foundation derives an average tax rate of 16% for the top 50% of taxpayers, just 4% for the bottom 50%, and an average of 14.6% overall.
But this is just one way of looking at the equation. There’s also something known as the “tax wedge,” and the figures from the Tax Foundation reflect only income taxes. Social Security and Medicare also take a percentage of Americans’ earnings. Technically, these should be considered when weighing an average tax burden, too.
The Tax Wedge
The tax wedge is a ratio between what the average Joe pays in taxes and what he would have taken home in earnings if he hadn’t had to pay those taxes. In economic terms, what Joe would have earned had he not paid taxes is referred to as the “total labor costs” for his employer—or what his employer would have paid him otherwise.
The Organisation for Economic Co-Operation and Development (OECD) calculates tax wedges annually for the U.S. and dozens of other developed countries. The tax wedges are based on the pay and tax brackets of single individuals, and the idea is that the higher the tax wedge, the less likely it becomes that some taxpayers will see any benefit in holding down a job.
Calculating the Tax Wedge
Tax wedge calculations include both income taxes and FICA taxes—Social Security, Medicare, and the Additional Medicare tax, where applicable. But the federal income tax represents the biggest burden on American taxpayers—14.9% of their pay in 2018, or about 50% of the overall tax wedge.
Both the employers’ and the employees’ shares of Social Security and Medicare are used to calculate the OECD tax wedge, the idea being that even if an employee doesn’t have to pay their employer’s share out of pocket, that money would have otherwise been paid to them without that contribution. The Social Security tax rate for wages paid in 2021 is set at 6.2% for both employers and employees, while the rate for self-employment income is 12.4%. The Medicare tax takes 1.45% for employers and employees each, and 2.9% for self-employed individuals.
The U.S. Tax Wedge
The Tax Foundation reported in May 2020 that the U.S. tax wedge was 29.8% in 2019, which is still less than the OECD average for all countries—36% in the same year. The U.S. tax wedge rose by 0.2% from 2018, but it remains about 2 percentage points lower than it was prior to passage of the Tax Cuts and Jobs Act (TCJA).
So what does this mean in dollars? A tax wedge of 29.8% works out to about $18,368 of an “average wage earner’s” salary in 2019, meaning the average Joe contributed that much to the federal government, according to OECD calculations.
The OECD tax wedge only includes these three taxes: income, Social Security, and Medicare. It doesn’t include the sales taxes that individuals regularly pay, nor property or vehicle taxes, nor even state income taxes.
- The average single American contributed 29.8% of their earnings to three taxes in 2019—income taxes, Medicare, and Social Security.
- The average income tax rate for all Americans was 14.6% in 2017, according to the Tax Foundation’s method of calculation.
- The tax wedge increased by 0.2% from 2018 to 2019, but the current amount of 29.8% is 2% less than before the Tax Cuts and Jobs Act took effect in 2018.
Frequently Asked Questions (FAQs)
What is the average tax rate in Canada?
According to the OECD, the tax wedge in Canada was 30.4% in 2020.
What is a flat tax?
When the tax rate remains consistent for all levels of income, it is known as a "flat tax." Most sales taxes are a form of a flat tax—you pay the same rate at the register regardless of whether you're a billionaire or living below the poverty line. This is the opposite of a "progressive tax," in which the tax rate increases with a taxpayer's income level.
What is the average tax rate paid by the 1%?
According to the Tax Foundation's review of 2018 tax returns, the latest year for which data is available, the top 1% paid an average income tax rate of about 25.4%.