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Who Pays The Most Federal Taxes

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Low Taxes Or Just Regressive Taxes

Who pays the most taxes?

This report identifies the most regressive state and local tax systems and the policy choices that drive that unfairness. Many of the most upside-down tax systems have another trait in common: they are frequently hailed as low-tax states, often with an emphasis on their lack of an income tax. But this raises the question: low tax for whom?

No-income-tax states like Washington, Texas, and Florida do, in fact, have average to low taxes overall. However, they are far from low-tax for poor families. In fact, these states disproportionate reliance on sales and excise taxes make their taxes among the highest in the entire nation on low-income families.

FIGURE 10

Figure 10 shows the 10 states that tax poor families the most. Washington State, which does not have an income tax, is the highest-tax state in the country for poor people. In fact, when all state and local taxes are tallied, Washingtons poor families pay 17.8 percent of their income in state and local taxes. Compare that to neighboring Idaho and Oregon, where the poor pay 9.2 percent and 10.1 percent, respectively, of their incomes in state and local taxes far less than in Washington.

How Are Federal Taxes Spent

OVERVIEW

All citizens must pay taxes. How are these federal taxes being spent?

All citizens must pay taxes, and by doing so, contribute their fair share to the health of the government and national economy.

The federal taxes you pay are used by the government to invest in technology and education, and to provide goods and services for the benefit of the American people.

The three biggest categories of expenditures are:

  • Major health programs, such as Medicare and Medicaid
  • Social security
  • Defense and security

Interest on the national debt and various safety net programs such as low-income assistance comprise a sizable chunk of national expenditures, while other categories such as transportation and infrastructure spending round out the government budget.

Why Is The Federal Income Tax A Progressive Tax

A progressive tax system is designed to distribute the tax burden more heavily toward those who have more income. Its supporters reason that taxpayers with higher wages have greater means to support government services, and it’s meant to support a thriving middle class. Detractors argue that this discourages people from earning more since they will have to pay a higher tax rate if they do.

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Reducing Tax Breaks On Wealthy Peoples Income That Already Is Taxable

As discussed above, much of wealthy peoples annual income is not taxed. Wealthy people also enjoy another broad tax advantage: significant streams of their income that are taxed often enjoy special tax breaks or discounted tax rates. Prominent among these are realized capital gains and dividends, carried interest, and pass-through business income. All three of these are potential areas of reform. Policymakers should also consider enacting a surtax on high-income people.

Expert Insights On Federal Funding Disparities

Are you grateful that the top 1% pays 40% of all income taxes?
  • Why do some states receive more federal funding than others?
  • What role does federal funding play in state government finances?
  • Is the current allocation of funding fair and equitable? Why or why not?
  • Associate Professor of Public Policy and Economics in the McCourt School of Public Policy, Georgetown University, and Research Associate at the National Bureau of Economic Research

    Professor of Politics at Oglethorpe University

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    How The 2017 Tax Law Made Our Tax System Less Progressive

    The Tax Cuts and Jobs Act , which was enacted by President Trump and his supporters in Congress at the end of 2017, made the nations tax system less progressive. TCJA cut federal taxes, and thus cut the total effective tax rate, for all income groups. This is illustrated in Figure 3, which compares the total effective tax rate for each group as it will be in 2020 versus what it would have been if TCJA had not been enacted.

    However, the law particularly benefited the rich thanks to its provisions cutting personal income taxes for business owners, its cuts in the corporate income tax and its cut in the estate tax. As illustrated in Figure 4, the decline in effective tax rates for the richest 5 percent of taxpayers exceeded the decline for other income groups.

    FIGURE 3

    FIGURE 4

    TCJA reduced the federal effective tax rate by 2.2 percentage points for the top 1 percent and by 2.6 for the next richest 4 percent. For all other income groups, TCJA reduced the federal effective rate by far less than 2 percentage points.

    The share of total taxes paid by each income group was also affected by the 2017 law. Figure 5 shows that TCJA reduced the overall share of taxes paid by the richest 5 percent while increasing the share paid by other income groups.

    FIGURE 5

    Reported Income Increased And Taxes Paid Increased In 2017

    Taxpayers reported $10.9 trillion in adjusted gross income on 143.3 million tax returns in 2017, the last tax year before the Tax Cuts and Jobs Act took effect. Total AGI grew $780 billion from 2016 levels, significantly more than the $14 billion increase from 2015 to 2016. There were 2.4 million more tax returns filed in 2017 than in 2016, and average AGI rose by $4,232 per return, or 5.8 percent.

    Taxes paid rose to $1.6 trillion for all taxpayers in 2017, an 11 percent increase from the previous year. The average individual income tax rate for all taxpayers rose from 14.2 percent to 14.6 percent.

    The share of income earned by the top 1 percent rose from 19.7 percent in 2016 to 21.0 percent in 2017, and the share of the income tax burden for the top 1 percent rose as well, from 37.3 percent in 2016 to 38.5 percent in 2017.

    Table 1. Summary of Federal Income Tax Data, 2017

    Note: Table does not include dependent filers. Income split point is the minimum AGI for tax returns to fall into each percentile.

    Source: IRS, Statistics of Income, Individual Income Rates and Tax Shares .

    21.0%
    38.5%
    14.6%

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    The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

    The Tax Burden For Middle

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    Data from IRS breaks down taxpayers into just two groups: the top 50% of earners and the bottom 50%. In 2019, the top 50% accounted for more than 96% of the income taxes paid while the lower 50% demographic contributed just 3.06% of taxes paid that year.

    The bottom half of taxpayers paid an effective tax rate of 3.54%. These were taxpayers with AGIs below taxpayers with AGI below $44,269.

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    The Tax Cuts And Jobs Act Reduced Average Tax Rates Across Income Groups

    The 2019 filing season was the second filing season under the TCJA. The TCJA made many significant, but temporary, changes to the individual income tax code including lower tax rates, wider brackets, a larger standard deduction, and an expanded child tax credit. The net effect of all the changes was to lower tax burdens, on average, for taxpayers across all income levels.

    In 2019, individual taxpayers paid $1.6 trillion in individual income taxes, $23 billion less than in 2017, even as adjusted gross income was $946 billion higher. Average tax rates were lower in 2019 than in 2017 across all income groups. Average rates for the bottom 50 percent fell from 4.05 percent in 2017 to 3.54 percent in 2019 and for the top 1 percent, from 26.76 percent to 25.57 percent.

    The share of income taxes paid by the bottom 50 percent of taxpayers changed little from 2017, when it was 3.11 percent, to 3.06 percent in 2019. The share of income taxes paid by the top 1 percent increased slightly from 38.47 percent in 2017 to 38.77 percent in 2019.

    Undermining Progressivity With Tax Breaks For Wealthy Taxpayers

    In contrast to states that improve tax fairness with tax credits for low-income families, more than a dozen states currently allow substantial tax breaks for the wealthy that undermine tax progressivity. Two of the most regressive state income tax loopholes are capital gains tax breaks and deductions for federal income taxes paid .

    In combination with a flat rate structure, these tax breaks can create an odd and unfair situation where the highest income taxpayers devote a lower percentage of their income to income taxes than their middle-income neighbors.

    For example, Alabama allows a deduction for federal income taxes. Although Alabamas income tax is essentially flat, the federal income tax is still progressive. So Alabamas deduction for federal income taxes disproportionately benefits the states wealthiest taxpayers. As a result, effective marginal income tax rates in Alabama actually decline at the states highest income levels. Despite the 5 percent top tax rate, the effective income tax rate on the very wealthiest taxpayers is actually less than 3 percent. Among the six states that allow a deduction for federal taxes, three allow a full deduction for federal taxes, including Alabama, while the other three have a partial deduction.

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    Higher Gdp Equals Less Federal Dependence

    MoneyGeek analysis shows that states with higher per capita GDP are less dependent on the federal government.

    “Higher-income states produce the majority of the tax dollars that go into the federal government’s pocket,” Fallon says. Because of the higher income, states and their residents need less support and use fewer federal dollars.

    Fallon noted that tax code changes have made wealthy states’ contributions more pronounced.

    “Before, people who paid large state income taxes would deduct those from their federal tax payments,” she says. Now, state tax deductions are capped. “Ironically, it means the wealthier states’ populations are paying even more.”

    Reported Income And Taxes Paid Increased In Tax Year 2019

    Who Pays The Most Taxes Chart

    Taxpayers reported nearly $11.9 trillion in adjusted gross income on 148.3 million tax returns in 2019. The number of returns filed rose by 3.9 million and reported AGI rose by $319 million above 2018 levels. Total income taxes paid rose by $42 billion to $1.58 trillion, a 2.7 percent increase above 2018. The average individual income tax rate was nearly unchanged: 13.29 percent in 2019, compared to 13.28 percent in 2018.

    Table 1. Summary of Federal Income Tax Data, Tax Year 2019

    $653 $10,649

    Note: Table does not include dependent filers. Income split point is the minimum AGI for tax returns to fall into each percentile. Income taxes paid is the sum of income tax after credits limited to zero plus net investment income tax from Form 8960 and the tax from Form 4970, Tax on Accumulation Distribution of Trusts. It does not include any refundable portions of these credits.

    Source: IRS, Statistics of Income, Individual Income Rates and Tax Shares.

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    Child Tax Credits By State

    MoneyGeek analyzed child tax credit data to learn more about which states received the most significant portion of this federal aid.

    The states receiving the largest annualized child tax credit payments generally correlated with the states population: California received the biggest annualized child tax credit payment at $20,480 million, followed by Texas and Florida the next two largest states by population.

    However, demographics show that red states that have large families get the most money per capita for child tax credits. Iowa got the most child tax credit per capita, followed by Oklahoma, South Dakota, North Dakota and Tennessee all Republican-voting states.

    State

    $254.38

    Where Do My Social Security And Medicare Taxes Go

    You may recognize these taxes on your paycheck. Unlike personal income taxes, these taxes are used to help fund specific social service programs. Funds are collected from your paycheck, and in most cases, matched by your employer, and then divided into the various trust fund accounts.

    Social Security has two trust fund accounts: the Old Age and Survivors Insurance Trust Fund and the Disability Trust Fund . The funds in these accounts are responsible for providing workers and their families with retirement, disability, and survivor’s insurance benefits.

    Medicare also has two accounts: the Hospital Insurance Trust Fund , also known as Medicare Part A, and the Supplementary Medicare Insurance Trust Fund . These funds pay for hospital, home health, skilled nursing, and hospice care for the elderly and disabled.

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    *The original version of this column erroneously understated the level of wages subject to FICA. Medicare taxes apply to a larger portion of wages than Social Security.

    The Least Regressive State And Local Tax Systems

    Many of America’s wealthiest pay little to no income tax | WNT

    Ten jurisdictions with more equitable state and local tax systems can be found in Figure 5. Six of the ten California, the District of Columbia, Delaware, Minnesota, New Jersey, and Vermont had positive scores on ITEPs Tax Inequality Index, meaning that their state and local tax systems do not worsen income inequality. Thoughtful, progressive tax policy decisions permitted these six jurisdictions to make their tax systems somewhat more equitable for those with the least ability to pay taxes.

    But none of these six tax systems are robustly progressive in a traditional sense. Rather than seeing effective tax rates steadily rise throughout the entire income distribution, some of these jurisdictions see peaks, where taxes on middle-income families are somewhat higher than at the top, or valleys, where low-income families face higher rates than the middle-class.

    Several important factors define states with more equitable tax systems. Here is what they have in common:

    FIGURE 5

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    The Us Tax System Is Progressive

    As a whole, the U.S. tax code remains progressive with higher-income taxpayers paying a greater share of their income in taxes. That is true despite the fact that high-income Americans benefit disproportionately from tax breaks, otherwise known as tax expenditures.

    Major tax expenditures such as lower rates on capital gains and dividends, deductions for charitable contributions, and deductions for state and local taxes tend to benefit higher-income taxpayers more than lower-income groups. CBO estimates that the top quintile of taxpayers receive 51 percent of the value of major tax expenditures, while only 8 percent goes to the bottom quintile. However, even with substantial tax expenditures, the top one percent of American taxpayers still pay an effective tax rate of 29 percent, on average, while the bottom 20 percent of the population pay an average of 3 percent.

    TPC estimates that 68 percent of taxes collected for 2019 came from those in the top quintile, or those earning an income above $163,600 annually. Within this group, the top one percent of income earners those earning more than $818,700 per year will contribute over one-quarter of all federal revenues collected.

    While the fairness of the tax system is much debated, many economists agree that simplifying the tax code would help the economy. Further tax reform could promote economic growth while also making the code more simple, transparent, and fair.

    % Of Americans Paid No Federal Income Taxes In 2020 Tax Policy Center Says

    • More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a report from the Tax Policy Center.
    • The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government.
    • The main reasons for the spike high unemployment, large stimulus checks and generous tax credit programs will largely expire after 2022.

    More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report.

    The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government. According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million or 44% of all taxpayers in 2019.

    “It’s a really big number,” said Howard Gleckman, senior fellow in the Tax Policy Center. “It’s also really transitory.”

    Gleckman said the main reasons for the spike high unemployment, large stimulus checks and generous tax credit programs will largely expire after 2022, so the share of nontaxpayers will fall again starting next year.

    The top 20% of taxpayers paid 78% of federal income taxes in 2020, according to the Tax Policy Center, up from 68% in 2019. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.

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