Income Taxes. Who Pays What?

A few weeks ago I made the suggestion that Fiscal policy needed to be changed to allow the Federal Reserve a say. The intentions were to enable the Fed to control the deficits and in a manner which it saw most beneficial to the economy. See RateWatch #479 A Major Change to Fiscal Policy

I was thinking of expanding the discussion about fiscal policy and started to look into income taxes. I wanted to understand who paid how much income tax. Understand, I am only talking about Federal Income Tax. In 2003 (the last year the IRS has data available for public viewing) the top 1% of all income earners paid 34.27% of all the income tax (they had 16.77% of all income). The next 9% (the 2%-10% of income earners) paid 32.96% of all income tax. The top 10% of income earners paid 64.84% of the total collected for income tax. They had 42.36% of the income. The top 25% of income earners earned 64.86% and paid 83.88% of the income tax. The top 50% of all income earners paid 96.54% of all Federal income tax. They had 86.01% of the income.

Federal Income Tax Paid by Percentile 2003 ("AGI"= Adjusted Gross Income)

	Number of Returns	AGI ($ millions)	Income Taxes Paid ($ millions)	Group's Share of Total AGI	Group's Share of Income Taxes	Average Tax Rate
All Taxpayers	128,609,786	$6,287,586	$747,939	100.00%	100.00%	11.90%
Top 1%	1,286,098	$1,054,567	$256,340	16.77%	34.27%	24.31%
Top 2-5%	5,144,391	$906,109	$150,257	14.41%	20.09%	16.58%
Top 5%	6,430,489	$1,960,676	$406,597	31.18%	54.36%	20.74%
Top 6-10%	6,430,490	$702,794	$85,855	11.18%	11.48%	12.22%
Top 10%	12,860,979	$2,663,470	$492,452	42.36%	65.84%	18.49%
Top 11-25%	19,291,468	$1,414,757	$134,928	22.50%	18.04%	9.54%
Top 25%	32,152,447	$4,078,227	$627,380	64.86%	83.88%	15.38%
Top 26-50%	32,152,446	$1,329,624	$94,647	21.15%	12.66%	7.12%
Top 50%	64,304,893	$5,407,851	$722,027	86.01%	96.54%	13.35%
Bottom 50%	64,304,893	$879,735	$25,912	13.99%	3.46%	2.95%

Some notes: 2003 was the year in which all of the tax cuts proposed by the present administration kicked-in.

AGI = Adjusted Gross Income

Source: Internal Revenue Service See Table 5 on that page for 2003

If you have trouble with that link, it is: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=129270,00.html

The original table on the IRS site presents as an Excel spreadsheet and is somewhat well-hidden. Look in the last row (2003)of each part of table 5 to find the data in the above table. I started with the IRS data and found that is was presented in this much more clear table at Tax Foundation

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Comments

[Nancy Wilbourne]

Hi Dick,
On this chart, why is it that when percentages are combined, the tax rate is lower than the top or bottom end of the tax rate for that income level? An example is the 16.58% in the 2-5% income bracket.

[Dick Lepre]

The top 1% pay an average tax rate of 24.31%. The 2-5% pay an average rate of 16.58%. When these 2 sets are added together, the top 5% pay (on the average) 20.74%. The average (20.74%) is lower than the top (24.31%).

[Mike Sacauskis]

Lets put some perspective on percentages. A person who makes $1,000,000 and pays 25% in Taxes, keeps, $750,000. A person Making $50,000, which is about what the average AGI is, and pay's 14% keeps $43000.

Our tax system is progressive for a reason, those at the higher end of the income specturm have more dollars than those at the lower and therefore can afford to pay more taxes. The amount of money the actually keep is an order of magnitude greater than those at the lower end.

Using percentages to imply anything is just a red herring.

[Dick lepre]

Mike,

I certainly agree that the progressive income tax model is appropriate and that those with higher incomes should pay a greater percentage of their income to taxes. The reason why I first created this table was to dispel the myth that "the wealthy do not pay their share of taxes." I find the most interesting number in this table to be the one saying that the top 1% of income earners pay 34.27% of the total personal FIT - but that is subjective.

[Mike Sacauskis]

Hi Dick

Yes, whether one is paying their "share" of the tax burden is subjective. Technically we are all paying a share of the tax burden, what ones "fair share" is really what's in debate. I'm not sure what an objective metric would be, but I think real dollars have to be factored in. Percentages are misleading. Percentages dehumanize the issue. 100% of people who ever drank water die, but that doesn't mean that water was the cause.

If you consider the fact that the government is running at a deficit one can make the argument that no one is paying thier share.

Mike

[Dick Lepre]

Mike,

I don't see percentages as dehumanizing. I mean I am not representing wealth or income or tax receipts as a surrogate for one's humanity or inherent worth. I was only commenting that the top 1% of income earners pay 34.27% of the FIT. As for everyone paying their share, I just co-authored an extensive piece on that suggesting a major change to fiscal policy. I just sent it to some big newspapers for publication. This will be dealt with here and in my newsletters after I find someone to publish it.