Who Pays Taxes?
Issues in Brief
October 11, 2012
One of the most hotly debated issues of our time is the fairness of our federal tax system. But too often, discussions are clouded and confused because they focus on only one part of our federal tax system–usually the individual income tax — and ignore the fact that Americans pay many other taxes, such as the payroll tax, the corporate income tax, and the estate tax. To assess whether the tax system is fair or not, it is important to look at the combined taxes that people pay, not just at one tax.
This approach helps to dispel two misconceptions that have emerged in recent debates about our tax system.
The first misconception is that nearly half of taxpayers pay no federal tax. Although it is true that many people pay no individual income tax, they face significant payroll taxes if they are working. In fact, the bottom 80 percent of taxpayers pay, on average, more in payroll tax than income tax.
The second misconception is that high-income people face low overall tax rates because they generally receive most of their income in the form of tax-favored capital gains and dividends from investments instead of wages and salaries. That conclusion, however, does not account for the fact that high-income people bear a disproportionate share of the corporate income tax because their most of their investment earnings are also taxed at the corporate level. That significantly raises their overall effective tax rates.
Effective tax rates: income, payroll, corporate and estate taxes combined
SOURCE: TPC, Table T12-0018 Effective Federal Tax Rates by Cash Income Percentile; 2011, February 2012. Compiled by PGPF.NOTE: *Individual income tax rates for the lowest and second lowest quintiles are negative and are netted against the payroll tax rate. A quintile is one fifth of the population. Calculations assume that employees also pay the employer portion of payroll taxes in the form of reduced wages. The breaks are (in 2011 dollars): 20% $16,812; 40% $33,542; 60% $59,486; 80% $103,465; 90% $163,173; 95% $210,998; 99% $532,613; 99.9% $2,178,886.
For more on taxes, see PGPF's Taxes Primer and Tax Rate Explainer.
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