Tax Bombshell: Just One-Fifth of American Workers Pay More Than 80% of All U.S. Income Taxes
Income inequality in America exists alongside income tax inequality, but Internal Revenue Service records suggest the two run in opposite directions.
A Zenger News review of IRS data from 2017, the most recent numbers currently available, shows that a large majority of federal income taxes are paid by a relatively small number of wealthy people. And Americans who pay the least aren’t swimming in luxury, since they have little in the first place.
Taxes by group
Tax returns with less than $50,000 in adjusted gross income (AGI) account for more than 83.7 million out of 152.9 million total returns, or about 55%. That group earned 9% of America’s taxable personal income and paid 5.1% of all taxes, after credits for things like education, health care, and home ownership.
AGI is a taxpayer’s gross income minus adjustments, including “educator expenses, student loan interest, alimony payments or contributions to a retirement account,” the IRS says.
Including taxpayers whose AGIs range up to $100,000 doesn’t change the picture much. That larger group filed 123 million tax returns in 2017, about 4 out of 5. They earned just 29.7% of all taxable income, and paid just 18.9% of all income tax after those credits.
In higher income brackets, the dynamics flip and there’s no case where Americans pay less in taxes than their proportion of the income might suggest.
Nearly 26.2 million returns showed AGIs from $100,000 to $500,000. Measured the same way, that group earned 44.4% of the income and paid 42.9% of income taxes—proportions closer to parity than anywhere else in the income tax data.
The roughly 130,000 returns with income between $2 million and $5 million had 4.3% of all taxable income and paid 6.9% of taxes. Between $5 million and $10 million, it’s 2.4% of income and 3.8% of taxes.
With $10 million in AGI, a return becomes part of a pool that earns 6.9% of all taxable income and pays 10.1% of income taxes.
More complicated than it seems
The picture becomes more complicated when analysts try to match tax returns to individuals or households. “Are you talking families or are you talking single people?” said Jason Escamilla, a financial advisor and CEO of Impact Labs. “As soon as you merge families, single people and people on Social Security in the same bucket, you’ve combined [many different things].”
Nearly half of the 152,903,231 total returns in 2017, 48%, were from taxpayers filing as single people. Just over one-third were married couples filing jointly. About 2% were married people filing separately and another 14% filed as heads of household.
And who earns what levels of income is a shifting measurement. “The top 1% changes every year,” Escamilla said. “A lot of people have sold their businesses because they’re retiring.” So what appears like a massive income might be the one-time sale of a life-long business.
Americans can also lower the taxes they owe by reducing the income they appear to have.
Pushing the numbers down
The options for lowering taxes are limited for most people. “If you’re a W-2 employee, there’s very little you can do to control the amount of taxes you can pay,” said Paul Miller, a CPA who owns New York accounting firm Miller & Company. “You’re still paying Social Security taxes, which is 7.5% of your income. On a $50,000 a year salary, that’s almost $4,000. That’s a lot of money.”
People who earn more money do it in a greater variety of different ways. Those who don’t depend on an employer’s paycheck find more ways to lower what they owe, technically lowering their taxable income in the process.
Among the ways people cut their taxable income, “the classic is schedule A, itemized deductions,” said Mike Chatham, an associate professor of accounting at Radford University in Virginia.
That tool became harder to use with the passage of the Tax Cuts and Jobs Act of 2017. The legislation gave Americans a higher standard deduction, giving most low- and middle-income earners an annual windfall. Before that law took effect, about 31.1% of taxpayers itemized deductions, a number that dropped to 13.7% afterward, according to an analysis by the Tax Foundation.
Owning a business allows Americans to set up defined pension plan for their future while deducting the costs immediately, Miller said. Or they can invest in other businesses that are losing money today, providing an immediate tax deduction while building value for a future cash-out when their stock is worth more.
“There are the people who have dividend-loaded stocks,” added Miller, channeling large amounts of income into streams that carry just a 15% tax rate—lower than what someone would pay making $60,200, according to a Zenger analysis of IRS 2020 individual income tax brackets. And then, Miller says, a common practice is to bring the income into states like Florida, which has no state income tax.
“You’re transcending income down from a higher bracket to a lower bracket,” Miller said. “It’s one of the tax strategies you use. But most people don’t have that capability.”
(Edited by Jeff Epstein and David Martosko.)