Do the Rich Pay Their Fair Share? A Look at the Federal Income Tax

 

Senator Bernie Sanders is well known for his talking points regarding the richest among us not paying their fair share. He was able to mount a very surprising opposition to Secretary Clinton throughout the Democratic Primary with this very idea. He suggested that the middle class was being taken advantage of by the “top 1/10 of the 1%”. It’s also a similar populist message that President Trump used to help him win the White House. His Contract with the American Voter, specifically outlines a section regarding middle class tax relief. Senator Sanders is very well known for talking about the wealth/income inequality and using this as reasoning for why we need to change the tax structure to better benefit the middle class. So do the rich pay their fair share?

The Federal Government is a massive machine and is fueled by many different revenue streams. Every year the Congressional Joint Committee on Taxation releases their overview of the federal tax system. This report drives the remainder of this post and gives us an insight into the source of the government’s revenues for the year. The revenues for 2017 shows that the federal government is projected to receive about 3.2 trillion dollars. As seen in the graph below, this is broken down into two main sections, individual income taxes and social insurance taxes (mainly made up of payroll taxes). The biggest, the individual income tax, comes out to 1.55 trillion dollars, 48.5% of the federal revenues as shown in the graph. Considering this is the largest revenue stream and the one most people are familiar with, we’ll be looking at it specifically.

The graph below is a breakdown of the individual income taxes highlighted above (48.5% of the federal revenues). Many of the discussions around taxes focus on things like the estate tax, capital gains, corporate income taxes, etc. While all of these are important, the largest revenue is the taxes on wages and salaries  (68%). Those taxes are responsible for most of the individual income taxes. Almost a trillion dollars of the revenues (about a third of the total revenues) comes directly from taxes on the wages and salaries of Americans.

With April 15th, tax day, right around the corner, it’s an opportune time to examine who pays federal income tax and how much they pay. Considering it’s plays such a huge role in the revenues for the government, it should be at the fore front of the every single discussion about tax reform. President Trump has said that this will be the next issue he tackles and it’s an important one.

So what does the Congressional report tell us? For most Americans, it will be relatively surprising. Here are the three biggest takeaways from the data:

  1. For the income categories of less than $40,000, the average tax rate for these tax payers is negative. This means that their tax refunds at the end of the year far exceed the amounts that they pay throughout the year. Due to exemptions and credits they are actually receiving money from the Federal Government. 
  2. The top 25% (people making over $100,000) of tax payers contribute more than 90% of the total individual income taxes. This comes out to be around 1.4 trillion dollars out of a 3.2 trillion dollar budget.
  3. The median income in the United States is $50,000. These tax payers on average pay less than 1% ($500) of their income to federal income taxes.

Now, federal income taxes are not the only taxes that Americans pay. State, local, sales, property and many more make up the full list of taxes that are paid each year. However, federal individual income tax makes up a very significant portion of the federal budget and therefore requires the most examination. If we’re going to have an honest discussion about tax reform, we need to understand where most of the federal governments money comes from. In relation to federal individual income tax, the rich are paying far more than their fair share.