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Countdown to Tax Reform, Part III: Who Pays Income Taxes in America?

4 min readBy: Scott Hodge

Fiscal Fact No. 34

What are the characteristics of those who pay federal income taxes in America today? As noted in Part II, the vast majority of 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. payers who face the highest 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 tend to be married couples. But aside from being married, they also tend to be dual-income, live in high-cost urban areas, are older, college educated, and are engaged in business activities. Each of these characteristics makes them more likely to be exposed to the highest marginal tax rates.

Dual-Income Couples If the traditionally middle-class icons “Ozzie and Harriet” ever existed outside of our television screens, they are now certainly living comfortably in retirement. Over the past four decades, America has become a nation of dual-income working couples who, at least on paper, are statistically high-income—especially when compared to the vast number of single taxpayers who populate the lower-income groups.

Figure 1 shows the growth in dual-income working couples since the mid-1960s. In 1967, less than half of all working couples were dual-income. Today, nearly 7 out of 10 working couples are dual-income. Between 1980 and 2003, the number of dual-income working couples grew by nearly 8 million, or 31 percent, from 29.5 million to 33.2 million.

Figure 1: America Has Become a Nation of Dual-Income Working Couples

Source: Bureau of Labor Statistics, May 2005.

When two single workers marry, they can quickly move from the statistical middle into the so-called “rich.” For example, a young factory worker earning $18 per hour—or $36,700 per-year—clearly falls into the statistical middle. But if she marries a man earning the same amount, their combined income of $73,440 is enough to qualify them to be in the top 20 percent of Americans. Thus a family can have two “middle-class” jobs with two middle-income salaries, but still be considered statistically high-income according to IRS data.

Using the Tax Foundation’s matched IRS/Census database (which blends sterile tax data with demographically rich Census data), our economists created a basic profile of dual-income working couples.

Dual Incomes Appear Statistically “Rich”Not surprisingly, dual-income couples are largely found in upper-income groups, as standard income distribution tables such as Table 1 shows. More than 73 percent of dual-income couples are in the top two income groups (quintiles). Indeed, 41 percent earn enough to be among the top 20 percent of taxpayers. While dual-income couples comprise just 25 percent of all taxpayers, they comprise nearly 45 percent of the fourth quintile and nearly 62 percent of the top quintile.

Table 1: Dual-Income Couples Tend to Be Higher-Income

Income Group As a Share of All Taxpayers Percentage of Dual-Income Within Each Group
Bottom 20% $0 — $14,280 3.3% 3.6%
Second 20% 7.3% 8.8%
Third 20% $25,757 — $42,617 16.1% 20.9%
Fourth 20% 32.4% 44.7%
Top 20% $71,028 and above 40.9% 61.8%
Total 100% 25.5%

Source: IRS, Tax Foundation Individual Tax Model.

Because so many dual-income couples face the highest marginal rates, they pay 44 percent of all income taxes and nearly half of all income taxes paid by the top 20 percent of taxpayers.

However, many low-income working couples do benefit substantially from the refundable child credit and Earned Income 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. . As a group, working couples in the bottom two quintiles get more money back in refundable credits than they pay.

As is shown in Table 2, Dual-income couples are overwhelmingly between the ages of 35 and 54 and are in their peak earning years. So it is natural that they would be among the higher-income taxpayers. However, as will be shown later, this is only a snapshot in time of their lives. As they reach retirement, they will likely live on a fixed income and move down to the lower rungs of the income scale.

Table 2: Dual-Income Couples Tend to be in Peak Earning Years

Age Percentage of All Couples in Each Age Group
18-24 22.8%
35-44 33.2%
45-54 32.1%
55 and above 11.9%

Source: IRS, Tax Foundation Individual Tax Model.

Table 3 shows that dual-income couples tend to work in professional or skilled jobs. It is, therefore, no surprise that when two single professionals get married, their combined income leapfrogs them into the highest income group.

Table 3: Dual-Income Couples Tend to Be Professional or Skilled Workers

Leading Occupations of Dual-Income Couples Number Percentage in Each Category
Executive, admin. & managerial 5,403,749 18.3%
Professional specialty 4,917,108 16.6%
Technicians & related support 945,000 3.2%
Sales 3,234,501 11.0%
Administrative support, incl. 2,769,500 9.4%
Other service 1,767,181 6.0%
Precision production, craft & 4,241,888 14.4%
Machine operators, assemblers & 1,650,779 5.6%
Transportation & material 1,258,815 4.3%
Handlers, equip. cleaners, etc. 668,669 2.3%
Farming, forestry & fishing 742,833 2.5%

Source: IRS, Tax Foundation Individual Tax Model.

(This “Fiscal Fact” is based on the forthcoming Tax Foundation book Putting a Face on America’s Tax Returns. For more information please contact Bill Ahern at (202) 464-5101).