Who Pays the Most Income Taxes?

The "fairness" of the federal income tax system in the U.S., and any plans to make any changes, either to increase or decrease taxes for any particular group or income level, are generally the subject of heated political debate. Studies agree that those with the highest incomes pay the most taxes, which is in line with the progressive intent of the federal income tax law. The highest income taxpayers contribute the most to fiscal revenues in terms of dollar amounts and their effective tax rate.

Taxes by income distribution

According to a report from the Congressional Budget Office, for the year 2006 households in the bottom fifth of the income distribution paid 4.3% of their income in federal taxes. The middle fifth paid 14.2% and the highest fifth paid an average of 25.8%. The top percentile within the highest fifth had an effective tax rate of 31.2%. The highest fifth earned 55.7% of total pretax income and paid 69.3% of total federal taxes. The top 1% earned 18.8% of all income and paid 28.3% of all taxes.

In terms of household income in 2006, the lowest fifth had an average pretax annual income of $17,200, the middle fifth had $60,700, and the top fifth had $248,400. The top 1% had average pretax income of $1,743,700.

The figures change when the calculations are made based on adjusted gross income, as reported by the IRS. According to The Tax Foundation, in 2006 the top 1% reached an all-time high in terms of percentage of total earnings (22.1% of all adjusted gross income) and federal individual income taxes paid (39.9% of the total).

In a blog on The Tax Policy Center website, Howard Gleckman points out that according to the same Congressional Budget Office estimates, the average pretax income of the top 1% of taxpayers more than tripled between 1979 and 2006. Their average income went from around half a million to over $1.7 million, even though the average income for all households stayed about the same. This means that their average after-tax income went from $330,000 to $1.2 million. This was in 2006, and the figures could change significantly due to the economic downturn.

The payroll tax is a different story. In this case, also according to the Congressional Budget Office, the lowest fifth of the income distribution paid an effective payroll tax rate of 8.5%. The middle fifth paid 9.4% and the highest fifth paid 5.8%. This is because of the maximum limit on income subject to the tax and also because capital income, which is not subject to payroll tax, is a larger share of income for the top income group. For all but the top fifth, payroll taxes represent the largest share of taxes paid by households.

According to an article by Robert Mackey in the New York Times, a recent Gallup poll found that 48% of Americans feel the amount of federal income tax they pay is "about right". 46% feel it is "too high", and 3% feel it is "too low". According to Gallup, this is the highest level of support they have measured since 1956, with 61% of Americans saying "they regard the income taxes they have to pay this year as fair." This differs from a Tax Foundation survey referenced in a CNNMoney article, which found that 56% of Americans think they pay too much. Those most likely to feel that way make between $35,000 and $50,000.

Comparison with other countries

The Organisation for Economic Cooperation and Development (OECD) has published a table in its Factbook 2009 that shows the "taxes on a single average worker". The figures represent personal income taxes, employees' social security contributions, employers' social security contributions, and payroll taxes as a percentage of the total labor cost of a worker. The total labor cost consists of gross wages plus employers' social security contributions and payroll tax. This does not take into account the intricacies of the tax code in each country, but serves as a useful overall comparison.

According to OECD data, for 2007 the taxes on a single average worker in the U.S. were 30%. This is below the OECD average of 37.7% and considerably below many countries, especially in Europe, where several countries have a percentage in the 40's and 50's. Belgium was the highest at 55.5%, followed closely by Hungary at 54.4% and Germany at 52.2%. At the low end of the spectrum is Mexico with 15.3%. Canada, at 31.3%, Japan at 29.3%, and Switzerland at 29.6% are the closest to the U.S.

Corporate taxes

Reuters reported in August, 2008 that according to the Government Accountability Office, 72% of all foreign corporations and about 57% of U.S. companies doing business in the United States did not pay any federal income taxes for at least one of the years between 1998 and 2005. The reports adds that over half of foreign companies and about 42% of U.S. companies paid no U.S. income taxes for two or more years during that period. According to Senators Carl Levin of Michigan and Byron Dorgan of North Dakota who requested the study, corporate sales in the U.S. totaled about $2.5 trillion during that time.

Sources:
Historical Effective Federal Tax Rates: 1979 to 2006 - Congressional Budget Office
Hold the Tea: Americans Fine With Taxes, by Robert Mackey - The New York Times
Study says most corporations pay no U.S. income taxes, by Donna Smith - Reuters
Summary of Latest Federal Individual Income Tax Data, by Gerald Prante - The Tax Foundation
Taxes on the average worker - OECD Factbook 2009
Who pays taxes - and how much? by Jeanne Sahadi - CNNMoney
Who pays taxes? Who should? by Howard Gleckman - Tax Policy Center