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Who Pays the Federal Individual Income Tax?

By: David Hoffman

Download Special Report No. 109

PLEASE DO NOT CITE—AN UPDATED VERSION OF THIS STUDY IS AVAILABLE. Visit https://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.

Special Report No. 109

Executive Summary The latest income tax data from the Internal Revenue Service show that in 1999, the 25 percent of taxpayers who earned the most paid more than five out of every six dollars collected, or 83.5 percent. This top 25 percent consisted of 31.5 million tax returns showing adjusted gross incomes (AGI) of higher than $52,965 (see Table 1 on page 2).

A time series analysis of the data shows that since 1980, the share of federal 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 paid by the top 25 percent has increased markedly. Figure one below presents two snapshots from that series: 1999, the latest data available, and 1989, a decade earlier. In 1989, the top 25 percent of taxpayers paid 77.2 percent of federal individual income taxes, a hefty share but significantly less than its 83.5 percent share in 1999. Naturally, this has resulted in a corresponding decline in the share of the tax burden shouldered by the remaining 75 percent of the nation’s taxpayers.

Even among the top 25 percent, the highest earners paid the lion’s share. The top ten percent paid almost two thirds of the total collected, 66.5 percent. And even further up the income ladder, the top one percent of earners in the country paid well over a third. That is fewer than 1.3 million tax returns whose payments constituted 36.2 percent of 1999’s federal individual income taxes. This is a considerably larger share than the 25.2 percent paid by the top one percent in 1989.

Dividing all tax returns in half, based on AGI, the vast majority of 1999’s federal individual income tax burden, 96.0 percent, was borne by individuals in the top half — those with AGIs over $26,415. In 1989, the top half paid 94.2 percent of total collections. The shift in the tax burden onto the top 25 percent has lightened the relative load on lower-income filers. Figure 1 shows that in 1989 individuals in the lower half of the income spectrum paid 5.8 percent of total federal individual income taxes. By 1999 this figure had dropped to just 4.0 percent. The fact that this percentage has dropped steadily since 1980 does not mean that low-income taxpayers have paid less in income taxes each year, just that their tax payments have not increased as quickly as those of high-income taxpayers.