TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. day is a day away and this time of year there are always questions about who pays how much in taxes.
A recent poll by Pew Research Center found that “the feeling that some wealthy people don’t pay their fair share,” bothered 79 percent of respondents some or a lot. Recent analysis by the Joint Committee on Taxation shows that these respondents can rest easy.
When it comes to individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. ation in the United States, the average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. paid increases as we move up the income scale (chart below). As a group, taxpayers who make over $1,000,000 pay an average tax rate of 27.4 percent. At the bottom of the income scale, taxpayers who earn less than $10,000 pay an average tax rate of -7.1 percent, which means they receive money back from the government, in the form of refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. s. The next income group up has an even lower negative tax rate at 11 percent.
These results are as expected. The U.S. income tax system is progressive, with marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s increasing as incomes increase and a large number of tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s (refundable and nonrefundable) that limit the tax burden for lower incomes.
Many would argue, however, that people pay more federal taxes that just individual income taxes. They are correct. People also pay social insurance taxes (for Social Security, Medicare, Unemployment Insurance, etc.), business taxes, and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es.
But even when we consider these taxes, the tax code is still progressive. The Joint Committee on taxation report finds that the average combined marginal income and social insurance tax increases substantially as income increases. The average combined marginal tax rate is 7.7 percent for those who make under $10,000 and 44.6 percent for those who make over $1,000,000.
We see that this progressivity remains when we look at average tax rates that combine income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es with business and excise taxes as well (chart below). The average tax rate for taxpayers who earn over $1,000,000 is 33.1 percent. For those who make between $10,000 and $20,000 the average total tax rate is 0.4 percent. (The average tax rate for those in the lowest income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. is 10.6 percent, higher than each group between $10,000 and $40,000. This is likely because the amount of refundable tax credits is much smaller for the income group that makes under $10,000.)
Whether this level of progressivity is the correct amount requires a larger discussion, but it’s important to note that progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. es come with an economic cost.
The evidence shows that progressive taxes limit economic growth. In a report from 2012, the OECD stated that moving away from progressive taxes would raise living standards. Our own economic model (TAG) finds that a cut in the top marginal income tax rate would boost the economy by 0.4 percent and that refundable tax credits have little impact on economic growth.
When we determine the type of tax system we want to have and who should pay how much, we should evaluate these types of trade-offs with the greatest amount of information possible.Share