IRS: How Does Your Income Stack Up? What Portion of Taxes Do You Pay?

The IRS recently released the data from 2005 tax returns. Kiplinger has an article How Do You Rank as a Taxpayer? which digs into this new information:

New data show that an income of $30,881 or more puts you in the top half of the class. Earning about twice that much — $62,068 — earns you a spot among the top 25% of all wage earners. You crack the elite top 10% if you earn more than $103,912… And $364,657 buys top bragging rights: Earn that much or more and you’re among the top 1% of all American earners.

Keep in mind this is actually adjusted gross income (AGI), which adds in investment income but leaves out pre-tax 401k contributions. The data doesn’t distinguish between single and joint returns either, and payroll taxes are also not taken into account.

Still, the chart below does an interesting comparison of the percentage of all income with the percentage of taxes paid. The top 1% earn 21% of all income and pay 39% of all taxes. The bottom 50% earn 13% of all income, but pay only 3% of all taxes.

altext

These stats are interesting but not really surprising given our progressive tax system. Maybe being in the top 1% isn’t all that great… nah. ;)

Comments

  1. minimum wage says:

    Our income tax system might be nominally progressive but effectively it isn’t all that progressive.

    Payroll taxes are quite regressive. The income tax includes numerous tax preference items which mitigate against progressivity. (Employer-provided fringes, retirement plans, and home capital gains exclusion up to $500K are some of the more obvious ones.) It’x easy for a homeowner family with $50K-$100K income and good fringes to pay a lower effective tax rate than a childless single earning $20K with no hope of owning a home.

    Warren Buffett (whose income consists almost exclusively of dividends taxed at a 15% marginal rate) has said that his secretary pays a higher effective tax rate than he does. What’s progressive about that?

  2. Why is it we can never get a real discussion, in the political realm, about a flat tax or the fair tax (national sales tax with no income taxes). Both of these systems are proven to work better than what we have and maybe we could work a way for Gen X to actually have Social Security. Russia has a flat tax and they are debt free.

  3. I wonder how the percentages would change if Social Security and Medicare taxes were included. Since Social Security surpluses have been subsidizing the general budget for decades, it should always be included in evaluations of this kind.

  4. Dan Weber says:

    If we would switch to a national sales tax, then how would you handle the dollars invested in Roth IRAs that has already been taxed? If someone with a Roth takes a distribution to make a purchase and we have a natioanl sales tax, it seems they would be paying double taxes.

  5. The Saving Freak:

    My understanding is, that whenever you talk about a flat tax, you are talking about a shift in who pays taxes, assuming the government collects the same total amount. It seems to me that people with lower incomes will buy consumable, taxable items as a greater percentage of their income, whereas wealthy people will buy less consumable, taxable items as a percentage of their income (Investments will all be tax-free, etc). Personally, I believe the wealthy should pay higher taxes as a percentage of their income, because as a general rule, the wealthier you are, the easier it is for you to make money, and the less your life will be impacted by paying taxes, but that is just my opinion.

    I’m not sure how a flat tax would “fix” social security, unless it substantially increased the total amount of money the government collects. You don’t need to change the tax system to increase taxes.

  6. Huckabee brought up switching to a sales tax approach in the last Republican debate. The problem with a “fair” tax is that it is actually a regressive tax. It increases the tax burden for people with less money, while decreasing it for those that are rich. I agree they need to change the tax structure in this country, but switching from a progressive tax to a regressive tax is not the answer.

  7. Dan Weber:
    You’re exactly right. An investment in a Roth IRA is a gamble- will legislators and/or a president with a fairtax agenda be elected? If such a system is implemented, you can kiss the Roth benefit goodbye! I don’t see this happening in the near or even distant future, though.

  8. Missing payroll taxes, mainly social security, really makes some of these comparisons completely irrelevant, particularly since SS is regressive, and yet SS money is used for general expenses by the fed gov’t. SS is a huge tax on anyone making $100k or under in individual salary – approx. 15% when you combine the employee and employer contributions.

  9. We think we make decent money but we struggle every month, I find it hard to believe if you earn over 100 that puts you in the top 10 percent…

  10. Income Taxes
    Over 1% Over 364,657 21% 39%
    2%-5% 145,284 to 364,657 15% 21%
    6%-10% 103,913 to 145,283 10% 10%
    11%-25% 62,069 to 103,912 22% 16%
    26%-50% 30,881 to 62,068 19% 11%
    51%-100% Less than 30,881 13% 3%
    100% 100%

    I like to look at it this way… you’re not really supporting more than your share until you are in the top 5% and it’s not just the bottom 50% that get the burden lifted, it’s the bottom 89%. So correct me if I’m wrong but a flat tax will increase taxes for 89% of the popluation and lower taxes for 11% of the population… the richest 11%. If I’m in the bottom 50% I would go from paying 3% of all taxes to 13% of all taxes? That’s more than a 300% increase. The US already has an increasing gap between upper and lower class and a flat tax would only make it worse.

  11. See if this comes out better…

    Income Taxes
    Over 1% Over 364,657 21% 39%
    2%-5% 145,284 to 364,657 15% 21%
    6%-10% 103,913 to 145,283 10% 10%
    11%-25% 62,069 to 103,912 22% 16%
    26%-50% 30,881 to 62,068 19% 11%
    51%-100% Less than 30,881 13% 3%
    100% 100%

  12. Ted Valentine says:

    Brian and Dan #1 are correct. I really tire of those that make the most income crying about paying more income taxes. Especially when you consider the income tax rates for the upper brackets are low compared to historical levels (the income tax rate was over 50% for over 50 years).

    You need to look at the whole tax paid on income to compare apples to apples. Those in the lower bracket already pay a flat tax of 15.3% on top of income tax. Those making over $102,000 don’t pay this tax on income above that level. Throw in the fact that the long term capital gains rate is only 15% and there is no room to complain.

  13. How about following the US Constitution to the letter and abolishing the IRS? I have nothing but contempt for politicians telling me how much I can invest tax free for retirement, when I can collect, and so forth.

    There is no need for the EPA, IRS, OSHA, FDA, Dept of Education, Dept of Housing, and various other agencies. If states want to do it, there is little that prohibits them other than the voters.

    For those who believe in a progressive income tax, this is a Marxist idea that simply needs to die. I make less than the national median income and found that even a 4.4% payraise did translate into much as I like thanks to socialist garbage like social security and income tax. Not much incentive to make more when more is looted.

    The rich do pay more than their fair share and as a result they are taking their wealth elsewhere. It is the rich that provide new monies for investment and the creation of entire new sectors of the economy.

    Look at what those who sponsored the X-prize have done with the idea that space travel might be a profitable venture in the future.

  14. Ted, hey I like Warren Buffet make alot of income (though certainly not at his level) and don’t complain about my taxes. There are plenty of high income individuals who are more than willing to pay higher tax rates, and believe that it’s fair to do so. It shouldn’t be about class welfare. It should be about creating a system that is fair, and not a burden. Personally I’m a fan of lowering taxes, but I think lowering taxes should always be first directed most heavily at the lower brackets first. Though of course to lower taxes we would need to cut spending, and I’m not sure how much of that we can do with the war going on.

  15. I second the opinion that no income tax should be levied. For those living in California and in the top tax brackets, the first half of the year you work for the government. There is something inherently wrong with this picture. If you wonder where else the government can get its money, contemplate the following facts:

    1. Income tax makes up about one third of all government income.
    2. The government spending has gone up by one third since 2000.

    In other words, if we go back to the size of the government in 2000, we can eliminate the income tax. Don’t want to be too political about this since this is a personal finance blog, but the government is growing out of control. Neither party is doing anything about it. This is totally against the principles this great country was founded on.

  16. Ted: yes, top marginal tax rates were over 50% for a long time, and as a result there was a large and wasteful industry just for setting up tax shelters. When the top marginal rates came down there was less need and those resources that had been tied up in avoiding taxes could be put to better use.

  17. SS taxes more than likely would be solved by removing the $88K cap on SS tax. Decreasing SS tax to 2% and eliminating the CAP so that the 2% applies to ALL incomes would both 1) reduce the tax burden on middle income and lower income families and 2) result in more SS revenues. I forget who completed the analysis, but Tiger Woods for example pays .000003% in SS taxes while everyone below $88K pays 7.5%… SS is a regressive tax as well… I would vote for a change in this prior to a “fair tax.” Quickest and easiest way to give all of lower/middle America a pay raise.

  18. Ben,

    According to the fair tax plan, a pre-bate is given to pay for the basic necessities of life (food and what not). This is a check sent to you to offset any taxes paid on those items. Given that, the poor don’t pay any taxes if they are only buying the basics needed to survive and saving the rest of their income to no longer be poor (as you said, investments wouldn’t be taxed). Most of the taxes would be paid by people buying new expensive goods (boats, cars, clothing…etc.). So it is quite possible to avoid paying any taxes at all. The Fair Tax would remove any tax burden from those that are really truly poor. But if you are living check to check and you continue to mis-use your income by not saving and continuing to buy luxury items then yes, you as an individual will indeed pay more taxes as a percentage of you income BY CHOICE.

    Read the book, it explains all of this way better than I can. It’s by Linder and Boortz and a new book will be comming out called Answering the Critics.

  19. Nobody has mentioned anything about the self-employed paying both halves of FICA. I’d like to see that leveled out somehow.

    Also, those who are pro-progressive tax: what is your justification for why those who make more should pay a higher effective tax rate? Isn’t that contrary to the general American spirit? As one works harder and becomes more successful one gets to pay an ever-increasing amount of tax!

  20. All this discussion about taxes reminds me of an experiment that was conducted to get an idea of the mindset of people and taxes. To sum it up, the game went like this:

    People were given money at the start of the game. During the game, money exchanged hands (I don’t know the details) and some people ended up with more than others. At the end of the game, people with the least amount of money were given a choice. They were asked if they would give up a little money in order to have a larger sum of money taken from someone with a lot of money. They were told they wouldn’t be receiving any money but that by giving up some of their money, a larger sum of money would be taken from someone with more. The crazy thing is, people actually did it. They gave away money just to see more money taken from someone who they believe had more to give.

    It is this kind of thinking that drives me crazy. People would give up money (hurting themselves) just to see more money taken from the next guy because he has more of it. Please tell me I’m not the only one that is bothered by this kind of thinking.

  21. seems pretty fair to me. I really don’t know what would be achieved by changing the tax system (and I’m right in the middle somewhere between the top 10 – 25%, we make roughly 115000 a year, but that’s not AGI).

    What we really need is a plan to fix social security and a national health care system before the average American can’t even afford health insurance premiums. Not to mention having put into social security for years and not being able to collect. These two things are the most regressive of deficiencies. The poorest will definitely suffer the most from these two things not being addressed.

  22. Has anyone read The 2% Solution by Matthew Miller? A VERY interesting treatment of tax theory and a way to build consensus in our political quagmire. Amazon has them used for $.01.

  23. Ted Valentine says:

    I agree with Dong and Justin about the spending problem. The two party system is not helping us. All either side cares about is making the other side look bad instead of actually doing something productive.

    Mark – My brother in law is a doctor. He moonlights under his own consulting business. He has his wife set up as a 51% owner and pays her. Every vacation they take is written off. Part of their house is written off. Phones, internet, etc., are all write offs as expenses. As long as shelters are out there the rich will use and benefit from them.

    ntguru – All employees pay both halves of the tax. Those that have employers just never see that amount cross their pay stub. They still pay it, even if it is somewhat hidden.

  24. To Robert:

    It makes perfect sense to do that. Wealth is relative, so by decreasing the wealth of others more than yours you are:
    1. Increasing the relative purchasing power of your money (assuming no one gets the money that is taken away).
    2. Increasing your relative wealth.

    Studies have shown that it is RELATIVE wealth that matters for happiness. If you are poor but surrounded by poorer people you will be happy. OTOH if you are rich but surrounded by richer people you won’t. So in light of that this decision makes sense.

  25. I’m not a terribly politically active guy. I just take things as they are and do the best I can with them. I do like the idea of simplified taxes, though. I think it would help everyone deal with their finances better.

    I agree that the “rich” do take advantage of all the tax breaks they can, but none of these are restricted to the rich. I ran a business with $10k in total income and still grabbed all the business deductions I can. It’s just hard to decipher all the rules.

  26. “What we really need is a plan to fix social security and a national health care system before the average American can?t even afford health insurance premiums. Not to mention having put into social security for years and not being able to collect.”

    So why can’t the market do this? Are you saying that people are too stupid put money away for their own retirement? I resent the fact that the SS money looted from me could have already funded an adequate IRA even at an interest of 5% (inflation is another issue). Instead, I am trying to fund my IRA adequately before I can commit that money to paying off a home or other needs.

    As for health insurance, how about abolishing the FDA and get government out of the health system entirely? FDA regs kill more people than they help.

  27. Ted,

    Don’t fret. If Hildabeast gets elected…………your brother can kiss those write offs goodbye!!! ;)

    Anybody remember Genesis’ album, “Selling England by the Pound”??

    They need to make a new one called…….”Selling America by the Doll……….err…….. Euro!”

    Doh! :)

  28. Robert,

    I agree, the truly poor would not suffer under the fair tax. But it is the rest of us that I am worried about.
    http://www.factcheck.org/taxes/unspinning_the_fairtax.html
    It seems to me that under any tax system, somebody has to pay, and under the fair tax system, the rich pay less. Therefore, either the middle class pays more, or the government collects less.

    Disclaimer: I am not an economist. I also understand their are benefits to the fair tax system, I just worry about the consequences.

  29. “Russia has a flat tax and they are debt free.”

    Russia is debt free because last decade they declared all existing debt to be null and void. Plus they’re exporting as much oil as they can pull out of the ground.

  30. Andy,

    It makes absolutely no sense at all. I’m not sure how giving away money increases purchasing power in this situation. The decision to give up money to punish someone else for having more had nothing to do with increasing purchasing power because purchasing power was unchanged during this experiment (prices on goods didn’t go up or down based on how much money you had left at the end of the game). And anyone who thinks giving up money to increase their “relative” wealth makes sense needs to be examined. If you want to increase your wealth, increase your income, not your outgo.

    For some reason, there is a huge population that hate hates rich people for the simple fact that they are rich and feel they should be made to pay, forgetting the fact that the wealthiest of people in this country employ a lot of people in the country and give away more in charitable contributions.

  31. what does the last column mean? I thought it should add up to be 100% shouldn’t it?

  32. Ted, I know that both halves always get paid. I meant that a W2 employee for a company only pays half and his/her employer pays the other half, while a self-employed person pays both halves directly. Having +/- 6% of your income going to programs that may not be available when it’s your turn is annoying, having that number double to +-12% is even more annoying.

  33. sadhu – There is some overlap in the tiers. It does add up to 100%.

    Top 50% by AGI pay 97% of all taxes collected.
    Bottom 50% by AGI pay 3% of all taxes collected.

  34. As my earlier comment probably makes clear already, I’m a fan of progressive taxes for the simple fact that I want my fellow citizens who make less than I do can better feed and shelter themselves. As a high income earner, I have no problem paying a larger share to make sure we have smoother running nation and economy. I mean you could take a “flat” tax to it’s logical extreme, and say that every citizen needs to pay X amount regardless of what they earn. Why should taxes be a percentage? Somehow I think that if that X amount were 10k, and I only made 20k it would prevent me from feeding and sheltering myself while to the person making 1 million it would hardly make a difference in his or her life. Making taxes progressive add further nuance to the system. Is it equitable? Maybe not. Is it fair? I think it is. To be in favor of progressive taxes does not imply that I hate the rich – hell I am one of the rich. It just means that I don’t have a problem with having those with means to pay, paying more. I have friends and family who make less than me who probably work harder than me. Do I want them to pay more taxes so the tax system is more equitable? Hell no. Would I want lower taxes overall? Hell yes. But I would want them lowered first on my friend who’s supporting two children on combined salary of 60k rather than on me who doesn’t support anyone.

  35. When studying and discussing tax policy/systems, I always find myself coming back to Hong Kong’s tax system.

    Here’s an article by the Cato Institute that sums up why HK’s tax system works well and how it could actually work here in the US.

    http://www.cato.org/pub_display.php?pub_id=3793

    Some highlights relevant to us as income tax payers are:

    “Personal exemptions are so generous that most employees owe little or no tax on salaries.”

    “Hong Kong has no payroll tax for Social Security, no general sales or value-added tax, no tariffs on imports and no personal tax on income from financial assets.”

    “For those with high salaries, however, it is cheaper to forego personal exemptions (but not deductions) and pay a 16 percent “standard rate.”” (ie. 16 MAXIMUM tax rate).

    Feel free to read the article if interested. HK’s tax system is simple and effective all while generating similar % of GDP as revenue. I would love to see it implemented here.

  36. I really hate the Fair Tax talk. The advocates speak of it as if it would magical cure for everything tax. It won’t get rid of the income tax brackets at the state and local level. Homeowners would lose their mortgage interest deductions. The pre-bate is just the start of the exceptions, there’s nothing that would stop amendments to the code from being made and the rules would just balloon to the tax code we have now.

    You want to pay fewer taxes? Vote for politicians that have a history of fiscal responsibility. They’ll cut wasteful spending, increase spending for programs that actually benefit people, and then when the taxes are lowered the government won’t need to borrow money to offset the deficit spending.

  37. The primary factor for a progressive tax system is that basic costs to live are the same regardless of income, therefore the poor have much less “disposable” income than the rich. If the poor are barely getting by, then revolution / instability / crime all tend to rise which makes life worse for poor and rich alike.

    The truth is that we don’t have a progressive tax system in the US. Percentage-wise the rich do not pay a higher rate of taxes than the poor.

    http://business.timesonline.co.uk/tol/business/money/tax/article1996735.ece

    If we want to make taxes fairer we need to get rid of all writeoffs and tax everyone at the same rate on All income (flat tax). Using the taxcode to provide incentives for various actions is not proper or fair – it guarantees congress will be bribed by the most wealthy to avoid paying their full share.

  38. The thing is no one would choose the tax system we have now. If the fair tax were enacted it would be the greatest transfer of power from a government to its people since the writing of the constitution. There would be no more tinkering with tax laws to make people behave one way or another. It is a great way to get the fed govt out of peoples lives.

    Let me think about the mortgage interest deduction. HMMM I pay no income tax or I get to keep a little of my income tax. The mortgage deduction argument makes no sense.

    On top of that you will only see a very small increase in prices because we are already have an imbedded tax upwards of 21% in everything we purchase. This would be taken away under the fair tax.

  39. RothNovice says:

    How can the government be broke??

    We make 5% returns on ur dollar PER YEAR in a good savings account.

    The government makes 6 to 10% PER Dollar for every transaction that takes place.

    If u buy something for $1, betweenn 6 to 10 cents goes to the government EACH time. In a day that same DOLLAR could be involved in multiple transactions…..so their returns are like 6 to 10% or more PER DAY.

  40. Richard,

    What is the point of a mortgage interest deduction if your not paying income taxes, social security taxes or medicare taxes? How can a sales tax balloon into the tax code we have today? The point of the Fair Tax isn’t to address state and local taxes, it’s there to address the federal income tax.

    I’ll say this one more time just to be clear: There is no need for a mortgage interest deduction if you’re not paying income taxes at all…or any other deduction for that matter.

  41. Seems to me we should only expect from the gov’t what we would expect from ourselves. Don’t spend more than you can afford. If you are in serious debt (like now) cut costs at all expense, except when it comes to health, education and security. If you can’t afford something, you shouldn’t do it (the continuance of the war for example).

    For me I was astounded in how much I paid in taxes as an employee…and how little I pay now as an independant consultant. Sure it’s a royal pain in the butt keeping track of deductions and expenses…but that’s the deal. Yeah…less income tax and more sales tax makes more sense to me. I just hate being taxed 2 or 3 times…on income, when I buy something and when I sell something that has appreciated.

    BTW…I am strongly independant…I can’t think of a more retarded administration than the current Shrub, and I don’t think the Dems could organize their way out of a wet paper sack…and anybody that votes along a party line because they were brainwashed into thinking the other party is evil…is an idiot. Not one single politition, despite all the evidence to the contrary, wants this country to fail or flounder. Wow…it’s lonely up here on my soap box.

  42. i just find it hard to believe that you can earn 60 or 70k a year and be largely above the rest of the country earnings-wise…

    how are families surviving on 30 and 40k salaries? that will barely cover living expenses + a little fun for one person…

  43. Bryan,

    It’s possible depending on where you live. I started my 1st job making just above 40k and was able to buy a house and have fun (this was in 2005). You can’t buy a tool shed in some parts of the country on that kind of salary.

  44. Several of the comments expressing shock that the median AGI is as low as it is are quite revealing about how out of touch a lot of us are. Most people in this country are too busy scratching out a living to even have any investments to worry about. They don’t subscribe to Kiplingers or log into My Money Blog. At the end of their lives they rely on Social Security and their families to survive. Scrapping the progressive income tax, the IRS, EPA, OSHA, Medicare, etc. may be a fun thought experiment for the Cato Institute but the consequences would not be pleasant in reality. That said, what the hell, every man for himself! Let the weak die out and the race will benefit. Right?

  45. I agree with you, Dan. I don’t think enough attention is being paid to Social Security. And I just want to answer sth_texas who wrote:

    “So why can?t the market do this? Are you saying that people are too stupid put money away for their own retirement? I resent the fact that the SS money looted from me could have already funded an adequate IRA”, etc..

    I never said the market couldn’t do this. But for those of us (yourself included) who have already been contributing for years — what will they get? A refund? Hahahahaha. And I don’t believe anyone is stupid either — lots of people just didn’t plan ahead in any other way or didn’t have the money to fund private IRAs, and they are relying on social security to be around. There’s lots of baby boomers getting set to retire who will be in a horrible position if social security isn’t saved. Yes, they’ll get to fall into that ‘coveted’ lowest 50% bracket by being poor as dirt — but at 65, they’ll have healthcare! Kind of ironic.

  46. Again, for those of you arguing for progressive taxes, you really should read the article I posted earlier about HK’s tax system.

    http://www.cato.org/pub_display.php?pub_id=3793

    It’s a combination flat tax (which caps the maximum taxes one can pay), all while ensuring that the higher income earners pay more.

    In fact, “Only the top 2 percent usually pay that standard rate (the 16% flat rate), yet they account for nearly half of all revenue from the salaries tax. “

  47. justanotherblogger,
    good link on the HK tax system. Though I’m not sure I’d call the HK system a flat tax system if anything it sounds highly progressive just implemented in a more creative way.

  48. As discussed by Scott Burns, “In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is pushing 40 percent.”

    link

    The tax rate (not just income tax) varies very little by income group. So, we already have a flat tax system based on this analysis.

  49. Hong Kong is a city. The US has very different public issues that require a much more substancial revenue base.

    Also, the progressive tax has been around since Lincoln. Consider your tax rate a payment for living in a civilized society – the rich are taxed at a higher level because they enjoy a better version of society.

    A flat tax imposes a burden on the poor no matter how you do it.

  50. Minimum Wage says:

    Robert -

    I have a problem with the FairTax’ disregard for state and local taxes. Most states have higher tax rates on rental prop than on owner-occ primary residences. In Michigan, where I lived previously, the school tax rate on rental prop is FOUR TIMES the rate on owner-occ homes.

    What amounts to a redistribution of income from renters to homeowners becomes exascerbated under the FairTax, when the rent (inflated due to the higher prop taxes) is subjected to an additional tax. I regard this as a tax (the FairTax) on top of a tax (the “extra” prop tax on rentals) on top of a tax (the base tax rate on all property).

    I cannot support such a “Fair” Tax, and I believe FairTax suppoorters have a moral obligation to level the property tax field.

    Question: are the prop taxes paid by a homeowner subject to FairTax? If not, that itself is unFair, since prop taxes embedded in rent will be FairTaxed.

  51. FairTax is ludicrous if only for one reason: it puts the amount of tax that the rich pay entirely in their hands.

    There are two questions. First, how many years can the rich go without spending huge amounts of money buying stuff in the US (i.e. saving or going abroad instead)? Second, how many years can the government go without collecting much tax from the rich?

    I don’t know the exact numbers, but I do know there’s a reason we have contribution limits on tax-advantaged investment accounts.

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