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The fairness of our federal tax system is a hotly debated issue. Too often, however, those debates confuse or misrepresent important facts because they focus on one type of tax in isolation rather than the various taxes that people face in aggregate. Using 2019 data from the Tax Policy Center (TPC) and the Congressional Budget Office (CBO), to reflect a typical year before the COVID pandemic, we can examine the broader federal tax system.
The federal government collects revenues from a variety of sources such as:
While nearly all Americans pay taxes, the composition of the type of taxes paid is very different for taxpayers at various points in the income distribution. Affluent Americans pay a larger share of their income in individual income taxes, corporate taxes, and estate taxes than do lower-income groups.1 By contrast, lower-income groups owe a greater portion of their earnings for payroll and excise taxes than those who are better off. In fact, taxpayers whose incomes are in the bottom 90 percent of all incomes pay, on average, more in payroll taxes than in income taxes.
As a whole, the U.S. tax code remains progressive — with higher-income taxpayers paying a greater share of their income in taxes. That is true despite the fact that high-income Americans benefit disproportionately from tax breaks, otherwise known as tax expenditures.
Major tax expenditures — such as lower rates on capital gains and dividends, deductions for charitable contributions, and deductions for state and local taxes — tend to benefit higher-income taxpayers more than lower-income groups. CBO estimates that the top quintile of taxpayers receive 51 percent of the value of major tax expenditures, while only 8 percent goes to the bottom quintile. However, even with substantial tax expenditures, the top one percent of American taxpayers still pay an effective tax rate of 29 percent, on average, while the bottom 20 percent of the population pay an average of 3 percent.
TPC estimates that 68 percent of taxes collected for 2019 came from those in the top quintile, or those earning an income above $163,600 annually. Within this group, the top one percent of income earners — those earning more than $818,700 per year — will contribute over one-quarter of all federal revenues collected.
While the fairness of the tax system is much debated, many economists agree that simplifying the tax code would help the economy. Further tax reform could promote economic growth while also making the code more simple, transparent, and fair.
1 The corporate income tax affects individuals by reducing wages and returns to capital. Based on economic research, TPC attributes 80% of the corporate-tax burden to capital and 20% to wages and other sources of labor income.