Higher Incomes Pay Most of the Federal Income Taxes; For Most Low-to-Middle Income Americans, Federal Income Tax Isn’t the Problem
About half of American families pay little to no federal income tax after tax credits and deductions. Payroll taxes, excise taxes, and sales taxes hit the average American family the hardest.
Keeping in mind the data differs a little depending on which study of which year we are looking at (see the citations), and differs if we are talking about tax filing households, tax filing individuals, or simply tax units (households and individuals): Roughly speaking, according to the TaxPolicyCenter (TPC) data presented below, in America the bottom 45% of earners pay nothing or have a negative tax rate (they get money back) on average, and the next 40% have tax rates in the single digits on average.
Although specific numbers are hard to cite, the TPC data presented below shows that in total, nearly half (about 45%) of Americans don’t pay any federal income taxes at all under the current tax code (they have an effective federal income tax rate of zero or less).
Given the facts, it is correct to sum this up by saying “the majority of American families pay little to no federal income tax” (the 40% who pays none plus the 40% who pays little to none = majority) and “the majority of Americans pay little to no federal income tax”. With that said, phrasing it as “over half of Americans pay little to no income tax”, the phrasing we settled on here, paints an accurate picture without having to quickly follow up the statement with sometimes complicated facts and figures .
Do the Rich Pay a Disproportionate Share of Taxes?
While this may make it sound like the rich pay a disproportionate share of taxes, that is not fully true. There is a lot more happening in America than just the federal income tax.
The top 1% pays a much higher effective tax rate than the rest, and the top 20% pays about twice what the 40% below them pays, but the federal income tax is only one of many taxes we have to account for.
America’s very progressive Federal Income Tax system becomes less progressive when paired with the rather flat and regressive federal payroll tax, state sales tax, and excise taxes that those who don’t pay the income tax face (and which burden those lower-incomes disproportionally due to their lower incomes).
When talking about ability to pay, tax burden vs. overall wealth and income, inflation, and factor in the general cost of living including car payments, health care, debt, unsubsidized child care, mortgages, etc. we see that many expenses burden lower income people disproportionally.
Fairness of the income tax aside, the tax and cost burdens lower-incomes face create a growing wealth gap, due to the rich saving more and having higher returns, while lower income households extend themselves on credit.
Thus, while taxes are very generous to the average family by some measures, even to the extent that half of America doesn’t even pay the Federal Income Tax, flat / regressive taxes, and other costs offset the gains from progressive taxes, tax credits, and deductions in practice.
TIP: See our page on Understanding Progressive Tax System, Marginal Tax Rate, Average Tax Rate, and Effective Tax Rate for terms and definitions. See also this excellent Marketwatch article which also uses TPC data: 45% of Americans pay no federal income tax.
TIP: When talking about a family’s tax rate, we have to factor in state taxes too. For some middle-income homeowners especially seniors, property tax is a major burden. Meanwhile, small business owners and investors have other state and federal taxes to consider, not to mention hiring costs and other expenses which help explain their low effective tax rates.
FACT: Excise tax is the tax on things like gas, cigarettes, and alcohol.
TIP: One can make the claim that since the bottom 50% don’t pay Federal Income Tax then they shouldn’t be voting on Federal Income Taxes. Be wary of drawing overly simple and classist conclusions; the tax system is what helps the economy work. See our argument for why, given the facts on this page, a progressive tax is fairer than a flat tax.
Looking at the Data on Effective Federal Income Tax Rates
Although there is more than one way to look at the data, the estimated Effective Federal Income Tax Rates featured in the Tax Policy Center images below illustrate that:
- The majority of Americans pay little to nothing in income tax after credits and deductions on average,
- And that this is truer when family size is considered.
A Chart showing Effective Federal Tax Rates By Expanded Cash Income Percentile, 2016
The chart below from the Tax Policy Center shows the average income tax an individual pays on average for each income percentile. Note the negative income tax rate of the bottom 40%, but the much higher effective federal tax rate when payroll and excise are considered.
NOTE: This chart doesn’t factor in all taxes, it just looks at federal taxes, there are also state taxes like sales tax, property tax, and income tax in some cities and states.
A Chart showing Effective Federal Tax Rates By Expanded Cash Income Percentile – Adjusted For Families – 2016
The chart below shows the same data, but this time is adjusted for families.
There are other ways to look at this data, but they all tell the same story. Notice how again the bottom 40% pay nothing and even the next 40% only pay “a little” Federal Income tax.
TIP: When all is said and done we have a progressive federal tax system in practice in the United States. See the far right column of the chart in the above image. I would even go as far to say, on average, it is not unfair. However, when we consider all state and federal taxes and the cost of living we can see how the burden increases for those who have lower incomes. We can also get a better sense why assistance programs tend to help lower income people and tax breaks tend to help higher income people.
Further Explanation of the Claim that the Majority of American Families Pay Little to No Income Tax
According to 2016 projections done by the tax policy center, the lowest and second lowest quintiles (the bottom 40% of families in terms of income) have an effective negative federal income tax rate on average. They pay “nothing” and may get money back.
Meanwhile, the next quintile has an effective rate of under 3.4%. The next 20% pays “a little” on average after credits and deductions.
That means about 3/5th, or 60% of American families, AKA the majority of American families, “pay little to no federal income tax.” For the next 30%, income tax still isn’t the biggest burden, although they do pay a higher share than the bottom 60% at a 6.6% federal income tax rate on average.
People tend to be confused about which taxes people pay and how the federal income tax system works. People may mistakenly think that politicians are offering them a financial benefit when they lower the income tax. In reality, they are raising their net cost, cutting assistance programs, and offering big tax breaks to big businesses.
As you can see in the table below, which has rough but not exact percentages for the effective tax rate, the average marginal tax rate and the effective tax rate after tax credits and deductions are two wildly different things.
|Marginal Federal Income Tax rate 2016||Effective Federal Income Tax Rate Adjusted For Family Size
(% of cash income actually paid in federal taxes)
|Married filing jointly
Cash Income After Deductions
|10%||-11% to -7.1%||Up to $18,550|
|15%||-5.4% to 3.8%||$18,551 to $75,300|
|25%||6% to 8%||$75,301 to $151,900|
|28%||8% to 10%||$151,901 to $231,450|
|33%||15%||$231,451 to $413,350|
|35%||15%||$413,351 to $466,950|
|39.6%||22% to 27%||Over $466,951|
TIP: Effective tax rates are estimates from JCT data as cited by Fool.com and can be referenced against the 2016 projections by the Tax Policy center featured above. See also, Taxes in the United States: History, Fairness, and Current Political Issues.
“I am in favor of an income tax. When I find a man who is not willing to pay his share of the burden of the government which protects him, I find a man who is unworthy to enjoy the blessings of a government like ours”. – William Jennings Bryan From his “Cross of Gold” Speech
Proving the Average Family Pays Little to Nothing in Federal Income Taxes
The chart below shows the average federal income tax rate and payroll tax rate for each income bracket, this time using the information from the Fool.com article that cites the JCT (not the 2016 tax policy center one used above).
According to this data, the average American family paid an average federal tax rate of 21% in 2014 (this includes income tax, payroll tax, and excise taxes on goods like gasoline and cigarettes).
However, that is their “average rate,” not their “effective rate.” After deductions and credits, the average effective federal income tax rate is less than 10% for all brackets below $200,000.
If we consider that the average income of an American family was $54,462 in 2015, then we can say the average family making under this amount pays “little to no income tax.” If we consider only those households making under $100,000, which is about 75% of American households, we can claim that the majority of Americans pay “little to no income tax.”
Most American families are paying little to no income tax and instead are burdened by payroll, sales, and property taxes. Thus, a politician who promises to lower your taxes and save you from tax credit programs is not going to act in your interest. Instead, people earning under $100,000 stand to lose benefits from programs such as the Affordable Care Act, Medicare, and Social Security.
The Table Below Shows Effective (What People Actually Pay) Tax Rates Estimated by the JCT
|Income Category||Income Tax Rate||Payroll Tax Rate||Total, (Including Excise Taxes)|
|Less than $10,000||-7.1%||10.2%||10.6%|
|More than $1,000,000||27.4%||1.8%||33.1%|
TIP: Our poorest who don’t file taxes lack access to tax credits that require filing and may end up with a larger share of the burden because of this.
TIP: The $100,000-$200,000 segment of the earning population has both the biggest share of returns at 15.2% and contributes the most income, making up 27.5% of total contributions. Business owners also owe additional taxes like the corporate tax.
TIP: The deduction from your check for Medicare and Social Security is a “payroll tax,” not an “income tax.” There is a payroll tax cliff, so while employers pay this per-employee, and so do low-to-middle income employees, high-income employees making over $118,500 don’t. This is called a “social security FICA tax.” This regressive tax favors America’s wealthiest.
Understanding Donald Trump and Hillary Clinton’s Tax Plans. You need to look very carefully when a politician promises “lower taxes.” Unless other factors are taken into account such as programs you may benefit from or the amount of your money that must be spent for living expenses and not luxuries, you will not see the whole picture. See Tax Policy Center’s analysis of the Candidate’s plans for proof of my claims. The above video is also excellent.
TIP: This page helps explain why a flat tax is less fair than a progressive tax. Low-to-middle income families don’t pay the progressive tax. They would pay the flat tax and thus would have less disposable income.
TIP: Everyone can take standard credits and deductions and may be able to take some non-standard ones. Learn more about taking the child tax credit, the standard deduction, itemized deductions to lower your effective tax rate. 401ks, HSAs, and other tax advantaged vehicles that may help too.