View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Economic SYNOPSES
short essays and reports on the economic issues of the day
2006 ■ Number 7

Income Taxes: Who Pays and How Much?
Cletus C. Coughlin
ith the tax filing season in full swing, these summary
was 18.5 percent. Comparing the top 25 percent with the top 10
figures may provide some perspective on the issue of
percent, one sees that those with higher incomes pay higher averwho is paying federal individual income taxes and,
age tax rates. This fact continues to hold as we examine those
more importantly, the relative shares paid by different groups of
with even higher income, which is a characteristic of a progressive
taxpayers. (Note that, because I do not include the impact of other
income tax system (i.e., the income tax rate increases as income
taxes, such as payroll taxes, my discussion does not address the
increases). The top 5 percent accounted for 31.2 percent of AGI
overall tax system.)
and paid 54.4 percent of IIT. Their tax rate was 20.7 percent.
Federal tax receipts for 2003 totaled $1.7 trillion, with the
Finally, the top 1 percent accounted for 16.8 percent of AGI and
largest share (43 percent) coming from individual income taxes
paid 34.3 percent of IIT. Their tax rate was 24.3 percent, roughly
(IIT). As shown in the table, receipts from IIT totaled $747.9 bileight times the average rate of the bottom 50 percent. The rate
lion for 2003, the result of 128.6 million filed returns that reported
of 24.3 percent is approximately twice the average rate for all
total adjusted gross income (AGI) of $6.3 trillion. Thus, the ratio
taxpayers, which is roughly the midpoint of the range of 1.8 to
of taxes to income, known as the total average tax rate, was 11.9
2.3 based on annual calculations for 1985-2003.
percent. Undertaking the same calculation for earlier years, one
Reaching political consensus on a tax system that simultanefinds that the average tax rate for 2003 is the lowest rate for
ously (i) provides desirable incentives to work, save, and invest;
1985-2003.
(ii) is viewed as fair; (iii) is easy to understand; and (iv) generates
The table also provides data on the income tax burdens of
sufficient revenues to fund spending decisions has proven to be
specific groups. By ordering the returns based on AGI from higha major challenge in the United States.1 One place to start the
est to lowest, one can calculate useful income and tax information.
discussion is with some basic facts about the existing income tax
Let’s start with the top 50 percent and the bottom 50 percent: The
system. ■
former group accounted for 86 percent of AGI and paid more
1 For a discussion of reform options, see Simple, Fair, and Pro-Growth: Proposals
than 96.5 percent of IIT, while the latter group accounted for 14
to
Fix America’s Tax System, Report of the President’s Advisory Panel on Federal
percent of AGI and 3.5 percent of IIT. The average tax rate for
Tax Reform, November 2005.
the top 50 percent was 13.4 percent, while the rate for the bottom
50 percent was 3 percent. Both of these rates
for 2003 are at their
Federal Income Tax Burden by Income Group, 2003
lowest levels for 1985Income
Group’s
Group’s share
2003.
Income
Number of
AGI
taxes paid
share of
of income
Average tax
Next, let’s look at
group
returns
($ millions)
($ millions)
total AGI (%)
taxes (%)
rate (%)
groups in the top 50
percent. The top 25
All taxpayers
128,609,786
6,287,586
747,939
100.00
100.00
11.90
percent accounted for
Top 1%
1,286,098
1,054,567
256,340
16.77
34.27
24.31
64.9 percent of AGI
Top 5%
6,430,489
1,960,676
406,597
31.18
54.36
20.74
and paid 83.9 percent
Top 10%
12,860,979
2,663,470
492,452
42.36
65.84
18.49
of IIT. Their tax rate
Top 25%
32,152,447
4,078,277
627,380
64.86
83.88
15.38
was 15.4 percent.
Top 50%
64,304,893
5,407,851
722,027
86.01
96.54
13.35
Meanwhile, the top 10
Bottom 50%
64,304,893
879,735
25,912
13.99
3.46
2.95
percent accounted for
SOURCE: Internal Revenue Service, Individual Income Tax Returns with Positive Adjusted Gross Income (AGI), Tables 5 and 6;
42.4 percent of AGI
www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html.
and paid 65.8 percent
of IIT. Their tax rate

W

Views expressed do not necessarily reflect official positions of the Federal Reserve System.

research.stlouisfed.org