What is often missing from the federal 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. debate is a real sense of who America’s taxpayers are and how different policies impact their lives. Our Putting a Face on America’s Tax Returns series aims to address that.
How do today’s taxpayers compare to yesterday’s and what shifts should we be aware of? Who really bears the burden of federal taxes? Who benefits from credits and deductions and by how much? How progressive is our current tax system and what role do taxes play in the debate over income inequality?
The posts below are designed to provide taxpayers and legislators with the facts and data necessary to better understand federal tax policy and have an open and productive debate.
America Already Has a 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. System
If the tax system weren’t progressive, each income group would bear a share of the total tax burden equal to its share of the nation’s income. In fact, high-income taxpayers pay a larger share of the tax burden, while lower- and middle-income individuals shoulder a relatively smaller tax burden. This is true for both federal income taxes and the federal tax code overall. Read more.
Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s
By historical standards, the very top income earners do not face an unusually low income tax burden. While the average rates for total taxes on the top 0.1 percent have fallen 10.8 percentage points from the 1950s, average income tax rates have remained relatively stable. In the 1950s, the top 0.1 percent of households paid average income tax rates of 21.0 percent, versus 20.7 percent as of 2014. Read more.
The Composition of Federal Revenue Has Changed Over Time
Before 1941, 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, such as gas and tobacco taxes, were the largest source of revenue for the federal government, comprising nearly one-third of government revenue in 1940. Excise taxes were followed by 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 and then corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es. Today, payroll taxes remain the second largest source of revenue, while 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. es comprise nearly half of all revenue. Corporate income and excise taxes have decreased relative to other sources. Read more.
The Top 1 Percent’s Tax Rates Over Time
Top marginal income tax rates often differ from effective tax rates. In the 1950s, when the top marginal income tax rate reached 92 percent, the top 1 percent of taxpayers paid an effective rate of only 16.9 percent. As the top marginal income tax rate has fallen, the top 1 percent’s income tax burden has increased. Read more.
Who Benefits from Itemized DeductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s?
While the tax code contains preferences that benefit lower- and middle-income households, such as the earned income credit and the child 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. , others, like itemized deductions, primarily benefit high-income households. According to the JCT, high-income taxpayers will claim 52 percent of the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. , 84 percent of the charitable donation deduction, and 60 percent of the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act reduced the amount of principal and limited the types of loans that qualify for the deduction. . Even so, the overall burden of the individual income tax remains progressive. Read more.
How Do Transfers and Progressive Taxes Affect the Distribution of Income?
Taxpayers face higher average federal tax rates as income increases. For example, those in the lowest quintile paid an average federal tax rate of 1.5 percent in 2015, while those in the highest quintile paid an average rate of 26.7 percent. The bottom two quintiles experience a negative income tax as a result 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, and the result of all federal taxes and transfers is a redistribution of income from high- to low-income households. Read more.
A Growing Percentage of Americans Have Zero Income Tax Liability
The percentage of nonpayers (taxpayers who owe zero income taxes after taking their credits and deductions) has risen over time, from 28 percent in 1950 to 33.4 percent in 2016. As the value of refundable tax credits increases, more people find themselves paying no income taxes, and as fewer Americans pay income taxes, the remaining taxpayers shoulder a greater share of the burden. Read more.
Increasing Individual Income Tax Rates Would Impact a Majority of U.S. Businesses
Most U.S. businesses are pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es, such as partnerships, S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, LLCs, and sole proprietorships. These businesses “pass” their income “through” to their owners, which is reported on the owners’ individual income tax returns. Progressive marginal rates can discourage pass-through business owners from conducting business activities that would increase their income—such as investing in new capital, hiring workers, and producing goods for consumers. Changes to the individual income tax, especially to top marginal rates, can affect a business’s incentives to invest, hire, and produce. Read more.
Average Income Tends to Rise with Age
The income of an average taxpayer rises dramatically as he or she ages and gains education and experience. For example, in 2016, taxpayers nearest to retirement, ages 55 under 65, reported average adjusted gross income (AGI)Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions. of $99,836. Compared to the average AGI for all taxpayers of $69,317 and the average of $18,798 of the 18 under 26 age group, we can see that incomes tend to rise as taxpayers grow older and more experienced. A snapshot of income data in one year cannot tell the life cycle story of income. Read more.
New Report Shows the Burdens of Payroll and Income Taxes
The tax burden for most Americans in 2019 –67.8 percent—will come primarily from payroll taxes, not income taxes. One possible reason for the relatively heavy payroll tax burden is the Tax Cuts and Jobs Act, which lowered income taxes for most individuals. While the income tax is progressive, with average rates rising with income, the payroll tax is regressive, with the highest average rate falling on Americans with the lowest incomes. Read more.
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