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Here's Who Actually Pays the Most (and Least) to the IRS
It’s no surprise to hear that a majority of Americans think that the IRS forces them to pay far too much in federal income taxes.
However, you may be shocked to hear who actually pays the most to the IRS. Just about 6 in 10 people incorrectly assume the group that deals with the highest tax burden is the middle class, but this is simply not the case. When asked to weigh in on the subject, only 18% of taxpaying adults correctly guessed the group who faces the highest federal tax level—high-income Americans.
Tax Debt on the Brain
In the midst of the 2023 tax filing season, millions of people have their impending tax figures at the forefront of their minds. While many are eagerly awaiting their refunds, others are dreading to find out how much they will owe in tax debt to the IRS.
A mere 27% of taxpayers feel that their federal income taxes are fairly appointed, while 60% reported to AP-NORC that their tax burden seems far too high to be considered fair. Seemingly, there appears to be a great discrepancy between the public’s general opinion and the realities of the tax burdens they face.
A Progressive Tax System for All
The United States tax system was designed to be intentionally progressive, so lower-income Americans pay a smaller share of their hard-earned income in federal taxes than workers with a higher income rate.
Alex Muresianu, who is a senior policy analyst at the esteemed Tax Foundation, aptly stated, “Raising another dollar from someone who is higher income is not going to be as much of a burden to them as raising another dollar from someone who is lower income.” Simply put, the government is making a genuine attempt to ensure tax rates are fair for all.
Are Higher Taxes for the Rich on the Horizon?
In spite of the fact that the U.S. tax system has been thoughtfully crafted in a manner that intends to be fair for all, there is still a great deal of pressure from some lawmakers and policy experts to elevate the tax rates for the wealthy sect.
President Joe Biden has put forth a controversial proposal to reverse a prior rate cut for the nation’s top earners that was enforced as a large part of the Tax Cuts & Jobs Act set in play in 2017. Biden’s divisive proposal would see the top marginal rate return to 39.6% from its current level of 37%. While this may not sound like a drastic shift, those earning hundreds of millions of dollars per year will certainly feel a massive change in their tax debt with this increase.
So, Who Is Actually Paying the Bulk of the Nation’s Federal Taxes?
As of 2021, the average American paid $14,279 in federal income taxes which equates to a rate of 14.9%. This figure does not factor in the payroll tax covering Medicare and Social Security.
The top 50% of earners in the United States contribute an astonishing majority of the nation’s federal taxes at a rate of nearly 98%. Of these high-earners, the top 10% with incomes of at least $169,800 foot approximately three-quarters of the country’s tax bill. The remaining 50%, who make up the country’s lower-income earners of $46,637 or less annually, account for only 2.3% of the nation’s tax receipts.
That said, this does not include the impact of other taxes which are not progressive. For example, state and local taxes are deducted at the same rate for every tax paying individual, regardless of their salary level. Speaking proportionally, this inevitably means low-income earning Americans allocate a far larger share of their income toward sales taxes than higher-earning folks.
In a Surprising Twist for Most, it is NOT the Middle Class Who Bear the Heaviest Tax Burden.
Despite the fact that most Americans feel strongly that the middle class shoulders the heaviest tax burden, studies from the Tax Foundation find that the top 1% of high earners pay the highest federal tax rate to the IRS, at 25.9%.
Though these top earners do pay the highest taxes, the peak average rate has declined as time goes on. For example, in 2001, the country’s highest income earners felt the weight of an effective tax rate of 27.6%. That is nearly 2% higher than the current rate they face.
Those at the Top of the Earning Pyramid Actually Pay Slightly Less to the IRS Than the Next Level Down
Something interesting to note is that the top 0.1% of earners, with at least $3.8 million in annual income, pay an effective federal tax rate of 25.7%, which is surprisingly slightly lower than the 25.9% tax rate for the top 1% of earners.
So, how do these millionaires get a tax break that their slightly lower-earning counterparts do not? Typically, the uber wealthy households of America are able to gain access to tax loopholes and write-offs that salaried W2 workers do not have available to them. Additionally, a majority of their income tends to be sourced from capital gains – which garner a lower tax rate than standard earned income.
