Tax

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There is no debate that the rich pay a disproportionate amount of income taxes in the United States. Whether this is fair or not is a political discussion that I won’t address in this article. I’m more concerned about the reliability of statistics that are floating around.

You’ve probably heard that the top 20% of earners pay 80% the taxes and that the rich pay half the taxes. Are these comments true?  What percentage of taxes do the rich pay?

To answer this question, let’s to go the authority on tax statistics – the Internal Revenue Service. The data used in this article comes straight from the IRS web site.

Before we get started, I’d like to make a few points:

  • These statistics are based on returns, rather than people. The lower levels of income tend to have fewer people represented by a return (single people are over-represented in these levels). This means that you can’t say that 8274 EARNERS had an AGI of more than $10 million or more. This could be a dual income household where each spouse earns $5 million.
  • Data is from tax year 2009. The is the most recent data available at the time this article was written.
  • I’m not exactly sure what to make of the returns with no AGI. I have included this data for the sake of completeness, but this group likely includes a hodgepodge of exception statuses and the stats for this group might not make much sense. Caveat emptor!

Let’s take a look at the first table. This lists the percentage of returns for each income level, as well as the group’s percentage of the nation’s aggregate AGI ($7.6 trillion) and individual income taxes paid ($865 billion). Dollar amounts are in thousands. What data can we glean?

  • The top 20.57% of returns – those with AGI of $75,000 or more – earn 62.37% of the nation’s AGI and pay 83.96% of the taxes. So the much quoted stat about the top 20% paying 80% of taxes is true (assuming it means 20% of returns).
  • What about the rich paying half the taxes? This depends on your definition of “rich”, but returns with more than $200,000 in AGI represent 2.79% of all returns, earn 25.76% of AGI, and pay 50.14% of taxes.
  • Returns claiming AGI of more than one million dollars represented 0.17% of all returns, but paid 20.49% of all taxes.

Here’s the data:

  # of returns % AGI
(thousands)
% Taxes paid
(thousands)
%
All returns 140,494,127   7,626,430,723   865,948,695  
No AGI 2,511,925 1.79% -198,958,452 -2.61% 85,376 0.01%
$1 –
$5,000
10,447,635 7.44% 27,218,608 0.36% 40,278 0.00%
$5,000 –
$10,000
12,220,335 8.70% 92,407,278 1.21% 379,851 0.04%
$10,000 –
$15,000
12,444,512 8.86% 155,465,805 2.04% 848,075 0.10%
$15,000 –
$20,000
11,400,228 8.11% 199,017,560 2.61% 2,516,274 0.29%
$20,000 –
$25,000
10,033,887 7.14% 225,167,737 2.95% 4,669,410 0.54%
$25,000 –
$30,000
8,662,392 6.17% 237,994,230 3.12% 6,827,564 0.79%
$30,000 –
$40,000
14,371,647 10.23% 499,879,773 6.55% 20,151,883 2.33%
$40,000 –
$50,000
10,796,412 7.68% 483,088,798 6.33% 25,404,305 2.93%
$50,000 –
$75,000
18,694,893 13.31% 1,149,068,817 15.07% 77,962,073 9.00%
$75,000 –
$100,000
11,463,725 8.16% 990,337,913 12.99% 80,492,622 9.30%
$100,000 –
$200,000
13,522,048 9.62% 1,801,446,897 23.62% 212,290,589 24.52%
$200,000 –
$500,000
3,195,039 2.27% 905,347,402 11.87% 176,322,148 20.36%
$500,000 –
$1,000,000
492,568 0.35% 332,037,478 4.35% 80,458,186 9.29%
$1,000,000
– $1,500,000
108,096 0.08% 130,149,237 1.71% 32,755,871 3.78%
$1,500,000
– $2,000,000
44,273 0.03% 76,148,200 1.00% 19,393,235 2.24%
$2,000,000
– $5,000,000
61,918 0.04% 182,986,391 2.40% 46,943,630 5.42%
$5,000,000
– $10,000,000
14,322 0.01% 97,493,167 1.28% 24,617,005 2.84%
$10,000,000
or more
8,274 0.01% 240,133,885 3.15% 53,790,324 6.21%

 

OK, but what rate does everyone pay? In the next table, I’ve simply divided the taxes paid by the AGI to determine the effective tax rate.


A couple of observations:

  • Returns with an AGI of $10 million or more have an effective rate significantly lower than several other income levels. Why? Capital gains. Note that this income level doesn’t have an upper bound, and the more extreme outliers are generally going to be the result of capital gains. It’s much more difficult to earn $1 billion in wages than $1 billion in capital gains (I’m speaking in relative terms; both are extremely difficult to do).
  • There’s a noticeable jump between the 100-200K group and the 200-500K group. Not only are there some rate increases in these levels, but you will also see the effect of phase-outs of certain itemized deductions.

Here’s the data:

  # of returns % AGI
(thousands)
Tax paid
(thousands)
Effective
rate
All returns 140,494,127   7,626,430,723 865,948,695 11.35%
No AGI 2,511,925 1.79% -198,958,452 85,376 -0.04%
$1 – $5,000 10,447,635 7.44% 27,218,608 40,278 0.15%
$5,000 – $10,000 12,220,335 8.70% 92,407,278 379,851 0.41%
$10,000 – $15,000 12,444,512 8.86% 155,465,805 848,075 0.55%
$15,000 – $20,000 11,400,228 8.11% 199,017,560 2,516,274 1.26%
$20,000 – $25,000 10,033,887 7.14% 225,167,737 4,669,410 2.07%
$25,000 – $30,000 8,662,392 6.17% 237,994,230 6,827,564 2.87%
$30,000 – $40,000 14,371,647 10.23% 499,879,773 20,151,883 4.03%
$40,000 – $50,000 10,796,412 7.68% 483,088,798 25,404,305 5.26%
$50,000 – $75,000 18,694,893 13.31% 1,149,068,817 77,962,073 6.78%
$75,000 – $100,000 11,463,725 8.16% 990,337,913 80,492,622 8.13%
$100,000 – $200,000 13,522,048 9.62% 1,801,446,897 212,290,589 11.78%
$200,000 – $500,000 3,195,039 2.27% 905,347,402 176,322,148 19.48%
$500,000 – $1,000,000 492,568 0.35% 332,037,478 80,458,186 24.23%
$1,000,000 – $1,500,000 108,096 0.08% 130,149,237 32,755,871 25.17%
$1,500,000 – $2,000,000 44,273 0.03% 76,148,200 19,393,235 25.47%
$2,000,000 – $5,000,000 61,918 0.04% 182,986,391 46,943,630 25.65%
$5,000,000 – $10,000,000 14,322 0.01% 97,493,167 24,617,005 25.25%
$10,000,000 or more 8,274 0.01% 240,133,885 53,790,324 22.40%

 

As a whole, the aggregate effective tax rate is 11.35%. For each $100 of AGI, the government will collect $11.35 in taxes. The 100-200K group is basically right at this level, but the other income levels drift far away from this baseline. What percent of the “expected” taxes are paid at each income level (based on the expectation of $11.35 in taxes paid on each $100 of AGI).

I’ll let you peruse this data without any observations, other than pointing out that 100% would be equal to the expected 11.35% effective rate.

All
returns
% AGI % tax % baseline
No AGI -2.61% 0.01% -0.38%
$1 – $5,000 0.36% 0.00% 1.30%
$5,000 – $10,000 1.21% 0.04% 3.62%
$10,000 – $15,000 2.04% 0.10% 4.80%
$15,000 – $20,000 2.61% 0.29% 11.14%
$20,000 – $25,000 2.95% 0.54% 18.26%
$25,000 – $30,000 3.12% 0.79% 25.27%
$30,000 – $40,000 6.55% 2.33% 35.50%
$40,000 – $50,000 6.33% 2.93% 46.31%
$50,000 – $75,000 15.07% 9.00% 59.75%
$75,000 – $100,000 12.99% 9.30% 71.58%
$100,000 – $200,000 23.62% 24.52% 103.79%
$200,000 – $500,000 11.87% 20.36% 171.52%
$500,000 – $1,000,000 4.35% 9.29% 213.41%
$1,000,000 – $1,500,000 1.71% 3.78% 221.65%
$1,500,000 – $2,000,000 1.00% 2.24% 224.30%
$2,000,000 – $5,000,000 2.40% 5.42% 225.94%
$5,000,000 – $10,000,000 1.28% 2.84% 222.38%
$10,000,000 or more 3.15% 6.21% 197.28%

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Kosmo is the founder of The Soap Boxers and writes on a variety of topics. Many of his short stories have been collected into Kindle books.

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