Ughh…the dreaded month of April and time to pay the taxes. This day has a major impact on almost every American, but in particular for the small minority of American households that pay the majority of taxes in this country. And we hope that anyone that was scheduled to receive a refund, we hope you filed much earlier than April 17, 2018.
The fact is a small number of Americans pay most of the taxes in this country, and there are tens of millions of people who do not pay any taxes at all. The federal government system is progressive, meaning that the higher the households income the greater percentage of those earnings from those earners goes to the government. The data on who pays taxes, how much, and who doesn’t is kid of astounding to me. Congressional Budget Office data shows that for tax year 2016 the following. Note the 2017 tax deadline is right now so the data will not be available for many months.
The “one-percenters”, which is the top one percent of households by income, paid a total of 38.3% of all federal income taxes in 2016. The average tax rate they pay is 23.6% of their total income. I wish that only 23.6% of my total income went towards taxes! How much more money I would have had in my pocket if I had only paid that percent of my income to the government.
The top 20% of American households paid 88% of federal income taxes, and their average tax rate is 15.6%.
80% of American households paid the balance of federal government income taxes, which is 12%. What this means is that 80% of the population paid only 12% of the taxes…so the vast majority of Americans pay less of the total recipients.
Now lets take it a step further. Out of that 80% that paid the balance of taxes in 2016, 44.3% of those American households did not pay any tax at all. That is zero dollars for the environment, military, safety net programs such as food stamps, department of education, etc. 44.3% of Americans (almost one-half) paid zero dollars to keep our country running.
Since the high earners paid such a large percentage of the country’s taxes, and such a high percentage of their income goes to the government, in some ways that can discourage working hard, investing, and success. There are many times I asked myself that question as well…why work.
Lets use this as an example of how the system works for high earners. For anyone in the highest 2017 income tax bracket (which is 418K for single people or 470K for married people) for every dollar they earned above those dollar amounts, ~40% of that next incremental dollar goes to the government. So if a single person earns 500K, then 40% of every dollar made after 418K goes to the federal government.
Then you need to add state taxes on top of that. As an example, for anyone in San Francisco California, the highest tax bracket is in place for income over 500K, and their tax rate for that highest bracket is 12.3%. So if you earn over 500K, and live in San Fran or some other part of California, then about 52 cents of every dollar earned after ~500K goes to taxes.
Now some states try to what I think is the right thing. In South Carolina, where needhelppayingbills is headquartered, they have a law in which they tax pass through entities at only a 3% rate, which I greatly enjoy! As the low rate in SC for pass through businesses helps offset the top income tax brackets federal government rates I face.
As mentioned, 44.3% of American households pay zero taxes. This can be because their income is so low and/or they have credits or deductions that offset their tax obligations. Another con of the progressive system is that there may be a small subset of those 44.3% who do not work as hard as they normally would as they now pay zero dollars in taxes, they may be on public assistance, etc. So they do not want to work/increase their income and start to pay some taxes or lost government aid.
The risk with these progressive federal government tax brackets is why work as hard if the state and federal government actually take more of your money than you do? As being in the top tax bracket is disheartening in that the government takes way too much money. That is obviously a big con in a progressive system….the more money earned, the more investments you make and the harder you work, the less percentage you take home each month.
I do agree that more successful people should pay more taxes, at least to an extent. The question is how much is too much as, like I said, at some point it is reasonable to ask why work anymore when the government “takes home more of my pay” than I do. So there needs to be a proper balance found between paying taxes and not discouraging work or risk taking investments.
But I also think that everyone should pay some taxes. Even If the very low income/people in poverty…at least they should pay a few dollars per year (or something) so they have some “skin in the game”. This will keep them interested in where there money goes, how the government spends it, and having skin in the game for any issues I think is always a positive. I do not think anyone should be zero.
While no one knows the answer to what the correct tax rates for each income group should be, the point is that it is not an easy solution and there are many pros and cons of how much to tax various income groups. I think it also needs to be recognized in this country that vast majority of tax revenue is paid by individual filers who are wealthy and high earners. They in effect pay for government services such as education, Medicaid, the Military, social security, etc. that everyone benefits from. As there still seems to be too much criticism of professional success in this country, and that is based on some emails we receive from those seeking help, the fact many want the successful to still pay even more in taxes, politicians such as the Bernie Sanders movement, etc. So the solutions are complicated, but we should not lose sight of who is or isn’t paying taxes today.