The truth about taxes

The truth about taxes

Note: Although I try to keep GRS a politics-free zone, today's topic is inherently political. I've stayed as neutral as possible in the article, but I know that there'll be some political discussion in the comments. Please keep conversation civil, as always.

Because I was frustrated with my own ignorance about the U.S. federal budget and our tax system, I recently spent twelve hours researching a variety of tax topics. From my research came two articles: last week's short guide to the federal budget and today's post, which answers some of my personal questions about taxes.

Note: Though I've done my best to be accurate, I'm sure there are errors in this post. As they're caught, I'll make corrections.

Last week, we tried to take a few small steps toward understanding the federal budget. We looked at where the U.S. government spends its money. But where does it actually find the cash to spend?

Of the $2.333 Trillion dollars in U.S. government receipts:

  • $1050 Billion (45.0%) comes from Individual Income Taxes
  • $939 Billion (40.2%) comes from Social Insurance/Retirement Receipts
  • $221 Billion (9.5%) comes from Corporate Income Taxes
  • $76 Billion (3.3%) comes from Excise Taxes
  • $20 Billion (0.9%) comes from Estate and Gift Taxes
  • $28 Billion (1.2%) comes from Federal Reserve Deposits
  • $16 Billion (0.7%) comes from other miscellaneous sources

As you can see, nearly half of government receipts come from individual
income taxes. Naturally, taxes are a hot-button issue. They have been since this nation was founded. (To be fair, though, the driving force then was “taxation without representation”. Modern complaints are against taxes in principle, I think.)

During my research, several questions about taxes occurred to me. In today's article, I'll do my best to share the answers I found.

Is it true that X% of Americans pay no federal income tax?

In a recent discussion about taxes at The Simple Dollar, Kevin wrote:

Roughly half of all Americans don't pay any income tax at all. I'm sure those folks feel the current tax levels are just fine and dandy, no complaints. Those of us who DO pay taxes, however, are buckling under the weight.

Kevin's comment left me wondering: Are there really that many Americans who don't pay income tax? And are those of us who do pay income tax really “buckling under the weight”?

I was unable to locate government data on people who don't pay taxes. Instead, I found a March 2006 article from the Tax Foundation, a nonpartisan tax research group based in Washington, D.C., which calculated that 43.4 million tax returns resulted in zero (or negative) tax liability. Another 15 million households file no tax return at all. Based on these numbers, the article concludes:

Roughly 121 million Americans — or 41 percent of the U.S. population — will be completely outside the federal income tax system in 2006. This total includes those who pay no tax, and those who pay some tax upfront and are later refunded the full amount of the tax paid or more.

So, according to this study, 41% of the U.S. population lives outside the federal income tax system, and 32% of U.S. tax returns resulted in zero or negative liability in 2006.

This 32% number is relatively high. Previous peaks were at 28% in 1950 and 26% in 1978. Lows were 16% in 1968 and 18% in 1984. In general, the percentage of tax returns with no tax liability is between 20% and 25%.

Note: As several commenters have noted, although some people pay no income tax, that doesn't mean they pay no federal tax at all. Linear Girl writes: “The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren't paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). “

The Tax Foundation sees these numbers as a call to “broaden the tax base”, but admit that nonpayers tend to be younger and earn lower incomes. (Here's a past GRS article about people who live on low incomes in order to avoid paying taxes.)

If there are a large number of non-payers, does that mean the rest of us are “buckling under the burden”? Let's look at more numbers.

How do current income tax rates compare with those from the past?

In the United States, the federal individual income tax went into effect in 1913. The top marginal rate was 7% — and that's if you earned over half a million dollars. (According to the Bureau of Labor Statistics inflation calculator, that's equivalent to an income of nearly $11,000,000 today!)

Note: The difference between marginal tax rates and effective tax rates can be confusing, even for those who know better. Here's an explanation of how marginal tax rates work.

The Tax Foundation has published a handy viewer that allows users to explore U.S. federal individual income tax rates from 1913 to 2009. (They offer PDF and Excel versions of the data, too.)

Using their data, I created a graph that shows the history of U.S. marginal tax rates. This graph shows the lowest marginal rate in red and the highest marginal rate in blue. At any one time there are many other rates in between. (The tax tables are simple right now, believe it or not.)

Based on this information, it would be easy to conclude that tax rates are low in the United States right now relative to past history. While I believe this is probably true, it's impossible to know this for sure without copious data regarding average incomes and effective tax rates. Still, the answer to the next question provides a bit of a response.

What tax rate does the average person pay?

Because the United States has a system of progressive taxation, it's difficult to know exactly how much each person pays for income tax. We all know our marginal tax rates — the rate at which the last dollar of our income is taxed — but our effective tax rates (or average tax rates) fluctuate from year to year.

I don't know a source for comprehensive data on this question. The IRS does provide some statistics (and may, in fact, provide all the data one needs), and other parties have taken the time to collate some of it. For example, the Tax Foundation has produced several pages of summary tables. From this info, I built the following chart:

 

This chart shows the average federal income tax rates over time for a variety of income levels. The red line shows the average tax rate from 1980 to 2007 for the top 1% of the population based on Adjusted Gross Income (AGI). The black lines shows the top 10% of earners based on AGI. The blue line shows the overall average federal income tax rate for all U.S. citizens.

In 1980, Americans paid 15.31% of their AGI in income taxes. In 1990, that number was 12.95%. In 2000, it was 15.26%. In 2007 — the last year for which there is data — that number was 12.68%. Based on this, I'd say that the average American has an effective federal income tax rate of 13-15%. (And top earners pay about 22%.)

Note that these numbers don't exactly match the statistics for effective tax rates that are available from the Congressional Budget Office. (Which show, for example, an effective individual income tax rate of 11.7% in 1980, 10.1% in 1990, 11.8% in 2000, and 9.1% in 2006.) I'm almost certain it's a matter of methodology, but I don't have the time to dig in and discover the details. That last link, by the way, contains loads of great data, some of which is analyzed in this piece at The New York Times.

Note: This graph shows something else, too. Contrary to some arguments, high income earners do pay more in taxes than low-income earners. The bottom half of American wage earners pay an average of about 5% to the federal income tax. The top half pays about 15%. The top tenth of American wage earners pay nearly 20% of their wages in federal income taxes. Again, I'm not saying this is right or it's wrong, but those with high incomes do pay more in taxes.

So are Americans “buckling under the burden” of taxes? I'm not convinced. Taxes seem to be moderately low right now based on our past history. But maybe we pay more than the rest of the world? Let's find out.

How does the U.S. tax burden compare with that of other countries?

Though I was unable to locate comprehensive statistics for every country in the wold, the Organization for Economic Co-operation and Development (OECD) does collect data on its 30 member nations.

In fact, you can view 18 years of OECD tax data all on one page. These numbers represent each country's tax revenue as a percentage of GDP (gross domestic product). These figures include all taxes: federal, state, and local. (Note that you can export the data from this page in a variety of formats! Fun for stats geeks and tax geeks alike.) Here's a graph of the data from 2006, the most recent year for which complete stats are available:

 

In 2006, tax revenue in the United States was 28.0% of the gross domestic product. Put another way, the average American paid 28% of her income to taxes (state, federal, and local). Of the 30 OECD member countries, only four had lower taxes (Japan, Korea, Turkey, and Mexico). The highest tax burdens were in Denmark and Sweden, where tax revenue was 49.1% of the GDP. The lowest tax burden (by far!) was in Mexico, where tax revenue was only 20.6% of GDP.

These numbers indicate that relative to other countries, the United States has a low tax burden.

How much is this all costing me?

Social Security, Medicare, Medicaid. Food Stamps, Unemployment Compensation. The Army, the Navy, the Air Force, the Marines. And the interstate highway to grandmother's house. How much does this all cost you?

Well, Jess Bachman (the Death and Taxes poster guy) has done the calculations for you:

 

The average U.S. taxpayer has an income of $43,650. For every billion dollars of government spending, this taxpayer is on the hook for five bucks. These numbers scale up or down depending on your income. If you earn $100,000 a year, for example, you pay $15 of taxes for every billion dollars the government spends. Ouch.

Conclusion

Based on my research, U.S. taxes actually seem relatively low, both historically and in relation to other countries. I am not arguing that we should have higher taxes. Nor am I arguing we should have lower taxes. I'm just relaying the facts.

In fact, I don't really have a purpose behind my research other than education. With all of the recent national discussion about taxes, I felt woefully under-informed on the subject. When listening to people argue about taxes, it's difficult to know whom to believe. I wanted to do my own research and then share the results with you.

For more exciting information about taxes, check out the following:

  • Internal Revenue Service: Tax statistics
  • U.S. Treasury: A history of the U.S. tax system
  • Data.Gov provides easy access to tons of statistics collated by the U.S. government.
  • Tax Foundation: State and local tax burdens (by year) and State and local tax burdens (by state)
  • Congressional Budget Office: Data on the distribution of federal taxes and household income (with thanks to Dan, a commenter at The Simple Dollar, who shared this info with me)

After all that, how would I balance the budget if I were dictator of the United States? Easy. I'd cut all programs across the board by 10% while increasing taxes on everyone by 10%. Yeah, that sucks, and every citizen of the U.S. would be unhappy. But you know what? If I were dictator, I wouldn't care. I'd be sitting in a cozy room reading comic books while eating chocolate chip cookies with milk.

Update #1: As with last week's post, I'll post updates here at the end of the article as readers offer clarifications or important points. For example, although I focused exclusively on federal income tax for individuals in this article, several readers noted that this is not our only federal tax in the United States. Linear Girl provides a succinct summary: “The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren't paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). “ So, if you want to include the complete federal tax burden in the above conversation, you need to add 7.65% to all figures — 15.30% if you're self-employed.

Update #2: For those requesting a second part to this article about how this money is spent…that was actually the first part, last Monday's short guide to understanding the federal budget.

Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster.

More about...Taxes, Economics

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K. Smits
K. Smits
10 years ago

I think that an important lesson of the international comparative taxation graph is the role of Mexico’s dysfunctional taxation system as a push factor in emigration from Mexico. Mexico has some of the richest individuals in the world and is home to a number of very wealthy multinational corporations, yet tax revenues are abysmally low (20%). The U.S. effectively subsidizes rich Mexicans and Mexican corporations by providing a social “safety net” in the form of emigration and remittances. Unfortunately, most studies have shown that this places a significant tax burden on American taxpayers, largely at the state and local level,… Read more »

Minderbender
Minderbender
10 years ago

Thanks J.D. Nice job with the research.

My biggest frustration with the tax system is the complexity. I would love to see a simpler system with more transparency, but alas, transparency is not the desired outcome of the political class. Our legislators love to use the tax system to reward an industry (donors) or a class of citizens (voters) and I don’t see them ever giving up this ability.

Maybe we should all forward GRS columns on living within our means to our representatives.

gjd
gjd
10 years ago
You seem to ignore that Social Security and Medicare (FICA) are a Federal Tax. This adds 7.65% for all single earners below $102,000.

As you included this figure in your receipts categories, you should also include it in your rates calculations.

Gwendally
Gwendally
10 years ago

Any conversation about tax rate has to include the 15.3% payroll tax on wages and self-employment that is sitting off to the side. Also, Bush pushed through a 0% tax rate on certain dividends and long-term capital gains, two assets typically held in trust funds. I’m a tax accountant and a CPA. I had two families come in last year with the same amount of income, roughly $120K, with the same mortgage and the same number of children. One of the families paid $30K in income and payroll taxes on that $120K. The other paid $0, as all their income… Read more »

Writer's Coin
Writer's Coin
10 years ago

Well done! I think the takeaway here is pretty simple: people need to stop complaining about their taxes already.

kathy
kathy
10 years ago

It’s not just federal taxes. Here in NYS the state income tax is high, my town real estate taxes are among the highest (mine were as high as my federal taxes before deductions)…even the sales tax is 8.25% That doesn’t include all the new fees/taxes impossed on many services and registrations here in the state. And as others have said, SSI, SSDI, and others, as well as investment taxes, etc. My tax burden overall is very high.

Jeremy Keith Hammond
Jeremy Keith Hammond
10 years ago

Well done indeed! I’d love to see some further research on how that money is spent… but that might be a bit more frustrating for the readers.

midwestbird
midwestbird
10 years ago

Well done. I enjoyed reading this article.

Martin
Martin
10 years ago

Taxes are a great thing to complain about. Every working person pays taxes, so it has the potential to resonate with all voters. Of course, the devil is in the details. I for one like the idea of raising taxes and decreasing spending at the same time. Right now, we have one party that frames itself as providing the programs that people want, and the other party frames itself as the one that will reduce your tax burden. They are both liars, because neither one of them wants to do what is necessary to be responsible for future generations. We… Read more »

Ms. Clear
Ms. Clear
10 years ago

Good post, very informative.

I was glad to see you point out that those who don’t pay federal income taxes usually have lower incomes. My family has low federal income tax payments, because we don’t make very much money…I’ll gladly trade my lower income for a higher one and happily pay the taxes associated with that income.

tmk
tmk
10 years ago

I think the idea of the Fair Tax is a good one. “The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment. The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes… Read more »

rabbit
rabbit
10 years ago

For many Americans, the issue is still “taxation without representation,” not against taxes in principle. I live in Washington D.C. and we do not have any say at all in the federal tax system. Indeed, our license plates say “Taxation without Representation.” We D.C. residents do not have full voting rights in the House, nor any voice at all in the Senate.

If Wyoming, Alaska, or Rhode Island were in the same situation and denied federal legislative representation, I simply can not imagine the uproar.

MM
MM
10 years ago

Gwendally:

I suspect there will be two kinds of responses to your anecdote: people who think, “Wow, I should figure out how to pay no taxes too!” and people who think, “Wow, that’s wrong and should change.”

Gwen
Gwen
10 years ago

This is very informative. Numbers don’t lie, and I appreciate looking at data rather than listening or hearing various opinions on what taxes should or should not be about.

Becky
Becky
10 years ago

I think when people complain about taxes in general, it is the total taxes they are trying to figure out. How a person would go about doing that, I have no idea. If a person has property tax, sales tax in their state/city, state income tax, federal income tax, etc., various gov’t fees, it might be why so many are complaining. Denmark has very high taxes according to your chart. I believe it. We were just there. Everything there is quite expensive! People seem to live okay, though, and one lady told my husband how everything is “free”…though she pays… Read more »

oldernwiser
oldernwiser
10 years ago

“Roughly half of all Americans don’t pay any income tax at all. I’m sure those folks feel the current tax levels are just fine and dandy, no complaints. Those of us who DO pay taxes, however, are buckling under the weight.” This is a hot topic of discussion at our house and included in that sort of statistic (whether it be “roughly half” or 41%) are the percentage of taxpayers whose income is derived from government jobs funded by TAXES! And because people tend to vote in their own self interest, our fear is that when the tipping point reaches… Read more »

Chris
Chris
10 years ago

In 2006, tax revenue in the United States was 28.0% of the gross domestic product. Put another way, the average American paid 28% of her income to taxes (state, federal, and local). Of the 30 OECD member countries, only four had lower taxes (Japan, Korea, Turkey, and Mexico). The highest tax burdens were in Denmark and Sweden, where tax revenue was 49.1% of the GDP. The lowest tax burden (by far!) was in Mexico, where tax revenue was only 20.6% of GDP. I don’t think the first two statements are equivalent. I think that GDP is not a measure of… Read more »

Paul in cAshburn
Paul in cAshburn
10 years ago

1. Taxes need to be simplified because we spend way too much on tax preparation, filing, and enforcement. Very few people disagree with that, unless they somehow derive their income from the preparation, filing, and/or enforcement. Simplify things and make it fairer! 2. Taxes need to be fair. Almost everyone has an opinion on what “fair” means. I’d say that “fair” means everyone pays some federal income tax – if they have income – regardless of source. Trying to get people to behave a certain way by giving tax breaks is social engineering and shouldn’t be part of the tax… Read more »

Peter
Peter
10 years ago

This is great. Thank you very much for crafting an exceptional educational piece. I’ll share it both with my Fox News relatives and Daily Show friends.

Linear Girl
Linear Girl
10 years ago

The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren’t paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). I think it’s important to keep this in mind during discussions because the rhetoric often gets quite heated about people who don’t pay “anything.” Since our government does not keep these funds in trust for retirement benefits but instead spends them in our regular budget, these… Read more »

Brenda
Brenda
10 years ago

I’m still scratching my head over how some people avoid paying taxes altogether. HOW!? I’m very close to the $12,000/yr mark, and every year, I pay at least $1000 in federal taxes, sometimes more. Is it because I’m partially self-employed? Even my part-time retail job, which brings in around $9000/yr (well under the $12,000 mark) takes taxes out of every paycheck. I never get a refund at tax time, I always owe (I filed my w-4 as single/0). What in the world am I doing wrong? 0_o

Adam
Adam
10 years ago

oldernwiser :
Regardless of where the money came from, you still earned it, didn’t you? You provided a service worthy of payment, or else you wouldn’t have been paid. The florist and mechanic are paying taxes with OPM too. Someone else had to earn that money to pay for those roses. Either way the money is going to be spent, and the money you take home at the end of the day used to belong to someone else.

And yes, OUR taxes are paying my salary.

Avistew
Avistew
10 years ago

What I’d be interested in would be a comparison between taxes and other stuff.

For instance, for these 30 countries, how does the tax rate compare to quality of life?
Or, how does the tax rate compare to the rich/poor gap? (difference between highest wage and lowest wage, percentage of very rich/very poor people, etc).

If I had to go with instinct, I’d say high taxes would result in a higher average quality of life, with less poverty and less very rich people. In other words, that it redistributes wealth more.
Which is the point to some extent.

ethel
ethel
10 years ago

oldernwiser, I don’t exactly understand your post. As an educator who is paid through taxes, you can’t exactly vote yourself higher pay over and over again. You might be able to vote for people who promise to raise taxes, but (1) I haven’t heard a politician promise to raise taxes in years; and (2) just because taxes are raised does not mean your particular interest group will get a pay raise and almost every educator I know is acutely aware of that. I just don’t see this conspiracy of “let’s vote for higher taxes so I’ll get a raise” out… Read more »

Gwendally
Gwendally
10 years ago

It’s impossible to simply taxes, because the biggest problem is in deciding what constitutes income. The secondary issue is in deciding what rate applies. Let’s assume people in my examples are in the marginal 15% bracket, by far the most common: Example 1: is it income if you sell standing timber on your woodlot? What about if you CUT the standing timber and sell it? (Cutting it is subject to self-employment income, selling a capital asset is subject to capital gains taxes, so the rate is either 15%+15.3% if you do the work, or 0% if you owned it to… Read more »

Gwendally
Gwendally
10 years ago

@Brenda: if you earn $12,000 you have exemptions and deductions worth approx. $9K, leaving you with $3K in taxable income in the 10% bracket, that’s $300. But you also pay 15.3% in social security and medicare taxes, and that’s $1700, leaving you with a tax burden of $2000, some of which you may have had withheld or paid via quarterlies. Because withholding (the law of the land) is so smooth, self-employed people are the only ones who ever really notice their tax burdens, because they’re the ones writing big checks. Employees are paying exactly the same taxes, they just don’t… Read more »

J.D.
J.D.
10 years ago

@Gwendally (#25)
You’re right — I should have explicitly included payroll taxes in the post. (It’s implicit in the country-by-country comparison, which includes all taxes.) I’ve added an update to note this. And I want to highlight an excerpt from your comment. This is a good point:

You simply CANNOT talk about marginal tax rates without discussing the nearly invisible 15.3% tax people pay on the very first dollar of their labor earnings. This is a flat tax on the first $100K people make (after that it drops down to 2.9% for people earning six figures.)

Paul in cAshburn
Paul in cAshburn
10 years ago

@WritersCoin #3: “…people need to stop complaining about their taxes already.” I respectfully disagree. I believe taxes are too complex, and, the spending of taxes on items that aren’t constitutionally-mandated is not fair because they amount to social engineering (which is NOT supposed to be the function of the federal income tax). I believe complaining will continue until at least these two items are mitigated. Some additional statistics from the IRS in 2005: Bottom 50% paid 3% of federal income taxes. Top 5% paid 60% of federal income taxes. Top 1% paid 39% of federal income taxes. Some additional statistics… Read more »

Bud
Bud
10 years ago

# 5 – Writer’s Coin

Are you kidding me?

Linear Girl
Linear Girl
10 years ago

@Brenda – Keep in mind that if you have self-employment income, you pay that tax on your 1040 tax return, but it is NOT considered income tax. Also, they way people (families, really) don’t pay tax is through exemptions and child tax credits. If you’re single with no dependents, you get one personal exemption and the standard deduction. If you had a child, you’d get a second personal exemption and if you owed any taxes after that they’d likely be covered by the Child Tax Credit, and further, if your income was low enough, you’d be eligible for the Earned… Read more »

J.D.
J.D.
10 years ago

Also, I want to confirm something that Gwendally says in #26: When you are self-employed, you become acutely aware of payroll taxes. Again, I’m not arguing that taxes are too low or too high. But when I make my quarterly payments, it’s a very painful thing. I experience a visceral ache when I write these huge checks to the IRS. The first year I did it I complained to Kris that it really felt like the last month or two of work had been for naught — I had no money in my account because it all went to taxes.… Read more »

ethel
ethel
10 years ago

J.D., thanks for the great research and neutral presentation of information. These posts have really demonstrated the power of the internet, in my opinion. As other commenters have indicated, I do think you should revise this post so that it is clearer when you are referring to “federal income tax” as opposed to “taxes” as a broad category. The reason I–and apparently many others–don’t like this “roughly half of all Americans don’t pay any taxes” is because that is simply not true. They don’t pay federal income taxes. And, I’d still be interested in how many people *do* pay the… Read more »

Michael West
Michael West
10 years ago

I feel like the percentages of the US population not paying taxes are being skewed. Not purposefully mind you, but of the 32 percent of zero balance tax returns how many of those were under 22 and reflected students working part time? Of the 41 percent of the population living outside the tax structure is this allowing for dependents that are included in population counts? Or is it counting them as being outside the system? Individuals under the age of 18 make up 23% of the population. A large amount of those kids aren’t old enough to legally work at… Read more »

Linear Girl
Linear Girl
10 years ago

I think we focus perhaps too much on how much we’re paying in taxes instead of on what we get in exchange for those taxes. I would happily pay 49% in taxes for the standard of living in Denmark or Sweden. Great medical care, college students paid to be students rather than paying to do so (in Denmark at least), terrific social security, low crime, well-maintained roads – where do I sign up?

Paul in cAshburn
Paul in cAshburn
10 years ago

@JD and Gwendally #27: “You simply CANNOT talk about marginal tax rates without discussing the nearly invisible 15.3% tax people pay on the very first dollar of their labor earnings. This is a flat tax…” JD, please remember that the “payroll taxes” result in federal benefits (medicare and social security payments) that pay a MUCH higher percentage of return to the bottom 50% of taxpayers (see my post #28 above). What this means is that the top 1% of taxpayers may pay 3, 4, or 5 times the payroll taxes due to income up to $106,900 this year, but they… Read more »

ethel
ethel
10 years ago

Paul in cAshburn: how have you come to decide that the top 5% already pay enough? They pay slightly less than they used to, and they pay less than in most other developed countries. So, is this just a gut feeling of yours, or are you looking at data that indicates tehy pay “enough”? I’m not being snarky; I’m serious.

I’d also like to see your statistics that the bottom 50% are getting “more and more” from the federal government. What are you referring to?

Ms. Clear
Ms. Clear
10 years ago

http://online.wsj.com/article/SB121677287690575589.html

This article describes how the richest 1% share of the tax burden has grown, but not as fast as their incomes have.

J.D.
J.D.
10 years ago

@Michael West (#33)
Although I didn’t indicate this in the post, I agree with you. I’m highly skeptical of these numbers because they don’t come from any official source; there’s only one entity producing them, and they don’t share their methodology. (The simply say that they “use IRS data”.) As a result, I distrust this data. I would love to see a more detailed breakdown.

Lynn
Lynn
10 years ago

for Avistew, I know from first-hand experience (married to a Dane) that although taxes in Denmark may seem high compared to taxes in the U.S., you have to look at what the Danes get for their money: free education at all levels (including med schools, PhDs, along with monthly stipends), free medical care (including long-term nursing home care if needed), and guaranteed retirement benefits. All one has to budget for in Denmark are clothes, food, gas, mortgage, and vacations. If you are laid-off from a job, you are guaranteed 90% of your former income while unemployed. Not to mention maternity… Read more »

Jessica
Jessica
10 years ago

While this is probably way to much work to ask of you JD, I’d be curious what percentage of the 41% who pay no Federal income tax are teenagers. I never payed federal taxes as a teenager, but I spent every cent I earned. Having no need to pay for necessities and being too foolish to think about saving, I, like I’m sure most teenagers, gave about 8% of my income in sales taxes to state and local governments. Even for an adult making a salary low enough to be exempt, they would have a lower savings rate proportional to… Read more »

Gwendally
Gwendally
10 years ago

I read an interesting treatise once that showed that democracy only survives and thrives in places where people have to pay income taxes. In asset-rich nations (oil, for example) the people are content to just let the government do everything for them, and despotism inevitably arrives. It’s only when people get outraged at their pockets being picked that they get involved at the grass root level. I think this is why so many self-employed people are represented so widely at the town and state level of politics. They’re just AWARE of what’s happening. @MM: I have no idea what the… Read more »

Avistew
Avistew
10 years ago

I just wanted to pitch in about people who don’t pay income tax. 1 – seriously, I’ve been there and I prefer paying taxes to earning that little. Let’s not forget that if you earn more and pay income taxes, you’re still left with more money in the end than the ones who earn less and don’t pay taxes, due to how the tax system works) 2 – if they “voted themselves a higher wage”, they’d earn more and need to start paying taxes anyways 3 – they still pay stuff like sales tax like everybody else, so it’s not… Read more »

Gwendally
Gwendally
10 years ago

I’ve heard a few people mention unemployment: that tax is ALSO a hidden tax on labor and is approximately 2% of payroll (it varies a lot with a complex calculation, though, so it’s hard to guess.) A lot of people think that it’s just a cost of doing business, and it is, but it’s the cost the employer is willing to pay to obtain an employee’s labor. They factor that in when they determine how much they’ll pay in wages: the total cost to the employer of obtaining the employee’s labor IS what the employee is earning for their labor,… Read more »

Four Pillars
Four Pillars
10 years ago

As always with statistics they can be spinned any way you like. The idea that “40% of Americans” or 121 million people don’t pay any tax sounds pretty bad but how many of those are little kids or teenagers with low incomes? According to the census – 24.3% of all Americans are under 18 which is about 73 million people. This leaves only 48 million people (or 16%) of the population outside the tax system (and presumably could be inside the system) which doesn’t sound quite so bad. Of those 48 million people who are 18 or over, some are… Read more »

Aaron Windeler
Aaron Windeler
10 years ago

Good article & I really respect your attempt to present facts rather than just slant things so that they seem to agree with what you believe (though I think both sides do this).

One small quibble – you say, “the average U.S. taxpayer has an income of $43,650”, but I think you mean the average U.S. household (apparently it was a little over $50k in 2006-2007, but has probably come down quite a bit from there). However, major kudos for pointing out the difference between marginal taxation versus how most people think about it.

jeffeb3
jeffeb3
10 years ago

The richest Americans do pay a higher percentage on the AGI, but what about the tax strategies that relieve their AGI, thus reducing their taxes. Specifically, corporate income taxes, and taxes on L.L.C.’s are lower. Every rich person in this country “owns” their own corporation, even if all it does is invest for them. Then, when they need a corporate jet, the “company” buys one for their “CEO”. The book “Rich Dad Poor Dad” shows you exactly how to do that, by putting your original taxed assets (income) into a tax sheltered growth environment (a real estate or investment company)… Read more »

mythago
mythago
10 years ago

Kevin’s comment is breathtakingly dishonest. It implies that “roughly half” of Americans really ought to be paying income taxes, but aren’t, and are smugly dumping their burden on the rest of us. It apparently doesn’t occur to him that some Americans do not have income. (Darn those selfish kindergartners, dumping their responsibilities on us hard-working taxpayers! Make the little rugrats pay!) It also doesn’t occur to him that, as has been pointed out repeatedly above, people who don’t pay income tax pay other taxes – like sales tax.

Albert
Albert
10 years ago

J.D., unless I’m missing something, which is entirely possible, there is a major flaw in the section before your conclusion: How much is this all costing me? Social Security, Medicare, Medicaid. Food Stamps, Unemployment Compensation. The Army, the Navy, the Air Force, the Marines. And the interstate highway to grandmother’s house. How much does this all cost you? Well, Jess Bachman (the Death and Taxes poster guy) has done the calculations for you: [poster on how much discretionary spending costs us] The average U.S. taxpayer has an income of $43,650. For every billion dollars of government spending, this taxpayer is… Read more »

Paul in cAshburn
Paul in cAshburn
10 years ago

#ethel #36: My personal opinion is that taxes should be more linear, which would result in a minimum percentage of federal tax imposed on all who have income. (What’s income? Sorry, that’s a separate debate, this post will be long enough already…). Yes, I believe a higher percentage of federal tax should be imposed on higher incomes, but I think when the bottom 50% are paying 3%, and the top 5% are paying 53%, it’s not linear enough. (i.e., It’s skewed too much in favor of the bottom 50% of federal taxpayers.) I believe this gross non-linearity causes guilt and… Read more »

Lesley
Lesley
10 years ago

This is a very interesting analysis. Before you get too comfortable with the idea that our taxes are low in relation to our history, I think a more thorough examination of ALL taxes would have to be included: 1. You failed to include payroll taxes. As a self-employed person, these hammer me. 2. State income taxes and state property taxes in most states are at an all-time high. 3. Likewise, sales tax is at an all-time high in most localities. My total effective federal income tax rate is right around 20%. But when you add in payroll tax (more than… Read more »

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