Sponsor spotlight: Individual income taxes — who pays what

Nancy Ekrem

There will be a lot of political rhetoric about increasing the national debt with trillions more in spending, adding billions to allow the IRS to audit high- income taxpayers, and creating more changes in the tax code in the next few months.

To help you break through the media clutter, here is the latest information on who pays individual income taxes. The information comes directly from the IRS. It includes the latest published tax data for the 2018 tax year collected in 2019. It represents the first read on the impact of tax collections after implementation of the Tax Cuts and Jobs Act. While this time period is pre-COVID, it should give you an objective view of the current nature of the tax system without the impact of additional federal spending and the impact of unemployment due to the pandemic.

How to read: The top 10% of Adjusted Gross Income (AGI) taxpayers reported approximately 47.7% of the income and paid 71.4% of the total individual income tax collected in 2019 for 2018 tax returns.

Note: The above figures net out “negative” income tax returns for those who filed a tax return, but due to adjustments and credits have negative adjusted gross income.

Source: Internal Revenue Service, SOI Bulletin – Selected Income and Tax Items, Shares of Adjusted Gross Income and Total Income Tax and Average Tax Rates. All figures are based on estimates from sampling conducted by the Internal Revenue Service using 2019 tax filing data that encompass 2018 tax returns. Income means Adjusted Gross Income (AGI) as reported on individual income tax returns.

Observations

  • The individual tax system is progressive. 97% of the taxes paid comes from 50% of the people filing tax returns.
  • In 2001, per the IRS, the top 1% paid 33.2% of all income taxes. That number is now 40.1% in 2018. Over that same time period, the lowest 50% saw their tax burden decrease from 4.9% to 2.9%.
  • Since over 70% of the income tax comes from 10% of taxpayers, you can understand how hiring more auditors to audit high income taxpayers may seem to make sense. It is the only place to get more revenue, since high income taxpayers are the ones paying most of the tax and the trend in rule changes is benefiting other taxpayer groups.
  • The information above only include those required to file a tax return. If the data included all households, the percentage of income tax paid by households would weight payment of tax more highly toward the upper AGI households.

How to read the rhetoric

Everyone should pay their fair share. It is an interesting phrase, but what does it mean? How much, exactly, is a fair share for upper income groups? The top 25% currently pay 87% of the tax. Should it be 90%? 95%? All of it? Conversely, are they talking about the 50% of taxpayers that is paying 3% of total income taxes? You will need to decide, but when applying the IRS statistics, it seems like word speak without substance.

We have a progressive tax system. The IRS statistics noted above show this to be true. And even with the impact of the 2018 Tax Cuts and Jobs Act, the progressive nature of the system still holds true.

Tax cuts favor the wealthy. Yes, tax cuts favor the wealthy because that’s who currently pays the majority of income taxes. Tax increases also always hit higher income taxpayers…for the same reason. Part of the philosophical discussion surrounds the purpose of the income tax: is it to pay for spending or is it to redistribute wealth and convert income of some taxpayers into free and low cost benefits for others?

Higher income taxes hurt small business. This is true, but perhaps in more ways than you think. Most small business tax payments are rolled into these individual income tax numbers. This is because most small businesses have their business profits taxed on their personal tax return as flow through entities. So changes in individual tax rates impact most small businesses which in turn impacts their ability to invest in their businesses and employees. To help solve this problem, the tax code contains a tax break called the qualified business income deduction.

— By Nancy J. Ekrem, CPA
Managing Shareholder
DME CPA Group PC
Certified Public Accountants & Business Consultants
nekrem@dmecpa.com

425-640-8660

 

  1. Nancy – thanks for sharing this data. It is nice to be able to see the stats which allows each reader to draw our own conclusions and form or own opinions.

  2. It would be good to see where the jobs come from. Will more taxing of the rich be “killing the goose that lays the golden eggs”? I would like to see the statistics in jobs creation.

  3. It would also be enlightening to overlay which tax groups consume what percent of the taxes. I did this many years ago and the two data overlays told a story that you never see. I believe in the progressive tax structure, but I think it is important that there is clarity in understanding who pays and who benefits by how much. Seems we tend to be critical of the very people who provide the funds for so many of the programs that are needed for the welfare of others. We should be welcoming of true facts as well as respecting that we will have different opinions related to that information.

  4. For forty years I ran a small business and I was an employee. With federal income taxes, SSI taxes, Medicare taxes, state unemployment taxes, L & I taxes, B & O taxes and sales taxes I was contributing over 53% of my income to support Federal and State government operations. I also employed and paid wages and benefits to 35 employees. In other words, I worked more for the governments than myself yet, for decades the Democrat party claimed I and those like me were not paying their fair share. President Biden preaches the same as he calls for higher income tax rates, capitol gains rates and new death taxes. They never answer the question of how much of your income is a “fair share.” The real answer is: as much as they can get away with. Witness Jay Inslee and the State Democrat legislators imposing a stealth income tax called a capitol gains tax. It is prohibited by our state constitution Article VII, § 1 (Amendment 14) but, they don’t care. Capitol gains are income. They are taxed under the federal income tax code.
    Small business is the backbone of our economy. Taxing small business owners to the point that they lack incentive to put their sweat equity and risk capitol into a business will destroy our economy.

      1. Matt
        So I have been told by a former Democrat President. It took a village who arrived on a ship of fools who then elected the current leaders of our government.

  5. Basically this all boils down to a which came first, the chicken or the egg, argument. Like, who knows? Do the rich create jobs by growing their businesses or do the poor (cheap labor) make it possible for the rich to grow their businesses and get even richer in the process? (In colonial times, business growth depended on almost free slave labor). The truth is probably a little bit of both actually. As to the question of what is a fair tax for everyone it would probably be some sort of flat tax on everyone (including corporations as the SCOTUS says they are the same as people) , say 15% or something like that.

    The problem with the flat tax concept is that many corporations and members of the so called rich class can manipulate the loop holes built into the system such that they often figure out a way to pay little or no taxes at all at the federal level. (Most of the charitable foundations are a tax dodge of some sort. Lots of times rich people give their money away to avoid having to pay taxes on it). So, why would the rich ever voluntarily agree to pay any sort of flat tax with no exceptions? Relatively rich people in both major parties write the tax laws for their benefit. The “Republic” Party is really good at this. Our state sales tax is a regressive system that benefits the rich because it is a flat tax that all have to pay when they buy almost anything. Our county and city property tax system is, in fact, a tax on property wealth. I guess the only “fair” tax is the one the other guy is forced to pay. Last year in all taxation I paid about 45% of my adjusted gross income. Is that enough?

  6. Then again, is it a complete coincidence that two of the richest people in the world and companies like Boeing, Microsoft, Amazon, Costco, T-Mobile and Starbucks grew here and created an unbelievable amount of income for so many? Adequate taxation aids in funding societies’ needs and provides a safety net for those who cannot provide for themselves. Or, we can use it to punish those we hate then run off to our anti-hate protest.

    1. Glenn, I sometimes wish it were a requirement to hold higher public office that you must have run a business for ten years. What a difference in perspective we would get. Now all we have is professional politicians who have never created a job or met a payroll.

    2. Boeing and Microsoft created a lot of really rich people thru stock options and favorable employee stock buying plans. Amazon, T-Mobile, Costco and Starbucks, not so much, but very good compared to people working for most really small business’s which generally provide the worst employee benefits like health care and retirement funding or opportunities like matching 401Ks and the like.

      No business creates jobs because it wants to, it creates jobs because it has to, to survive and make a profit. Very few small business’s offer fringe benefits because they want to; they do it, to the extent they can, because they have to, to get competent help. Starbucks and Costco offer excellent fringe benefits because they want to and they realize it is good business practice in general, to take care of their employees. I worked for Sears for years and it was a great company that took care of it’s employees until Reagan destroyed the Union movement and began the destruction of the American middle class. At that point, Sears decided that the employee was the enemy and started cutting pay and benefits. Its an over simplification, but that is part of why Sears no longer exists.

      The best way to avoid unfair taxes is probably to own a one man or woman or family business and ask for cash as much as possible. Then, keep really bad income records and not make much money on paper. I suspect this happens a lot.

  7. Nancy, incredible article. I oft share the Tax Foundation table. The top 1% pays way more than their share. However, I have a different theory about tax rates and who benefits from cuts. I think of income tax as something like gravity. We’re all rockets trying to blast off and get as high as we can get. Individual wealth is how high above the planet we can reach, and tax is the gravity we are fighting against. Higher tax rates *HELP* the wealthy. Established companies, with established wealth, are already in space and higher marginal rates (gravity) doesn’t affect them as much. They can export and orbit another planet while still doing commerce on earth, and they enjoy the counter-competitive effects that high gravity has on their would-be competitors.

    Income tax is evil. It presumes that your time is worthless, that your body and what you choose to do with it is worthless. There are other ways to fund government.

  8. Interesting. How did Reagan take down Sears’ union? I recall the air traffic controllers’ strike, but even FDR opposed public unions. This has been a long fight with my teacher brother and I, a private union member.

  9. FYI, Mr. Nelson, Sears was not a unionized employer but they did try very hard to see that their employees got as good or better benefits as the unionized workers they had to compete for to get and keep good help. They did this to prevent their employees from feeling a need to unionize. With Sear’s good benefits and profit sharing, we had better benefits than the union jobs available at the time.

    Reagan made an example of standing up to the traffic controller’s union and breaking them as a first salvo in the drive on the Right of the political spectrum to end, or greatly nullify, the various unions’ power and membership. He was out to prove that unions could be defeated both publicly and privately. The minute Sear’s management didn’t have to worry anymore about their employees in the auto service industry unionizing, they began cutting our pay and benefits. Sears went from being a truly great career company to work for to being just another place to get a pay check for awhile until you could find something better. Morale went down and employee turnover went way up. There was no more feeling of mutual loyalty between employer and employee.

    I don’t know what the answers are to fair taxation or the rightness or wrongness of unionization. I do know that in terms of real percentages of income, taking 22% of the income of someone making $60,000/Yr. is way more devastating than taking 28% from someone making $500,000/yr. in terms of impact on lifestyle and the power to consume in a consumer driven economy. I also know roads, schools, sanitation and national defense has to be paid for by someone or the society will fail for everyone sooner or later. We are really all in this together, like it or not.

  10. I like the flat tax with some work on these sneaky greedy details of how they get out of it. If we can’t trust them…them what can we do…but for the 100s of millions people and the Billionaires….10% would do so much good. If they would quit hiding it.
    We paid 25% with no deductibles. No kids….too much equity so couldn’t itemize. Yes it stings. We just need to work together…we also I believe expect something in the way of at least services for community if you are physically able to work…but don’t. Except if you need childcare. I believe that if a man or woman has kids and they go to school that the mom or dad should get up, get dressed, get on a provided bus and go stuff envelopes, help beautify the parks, and all those things. No pay. As you are being paid.
    Main reason I think this is a good idea is that when your children are harassed at school. Those kids say. My mommy works for the government..now it also teaches children get up get out get on with it. It helps the parent too, meeting others.etcetc. it a win win. You gain personal respect. YOU are more involved with community, you teach your children this way, and protect them from ridicule. This generational welfare wasn’t meant to be forever. Many have forgotten that and think they are too good for some jobs…well tough. I for instance even being married to an attorney needed work. My job…layed me off for 3 months every year. I took it upon myself to clean rich very rich peoples homes…their toilets…I was a millionaires daughter and I never thought I was too good.
    I only mention this as I literally heard many people say. Why should I work, I can make enough on welfare. Now this I want to think is a small amount of people..Just things in my head after working for the government most of my working years.

  11. I know it tough. Did you provide medical insurance for your employees?
    My father was in your situation at a time when taxes were very high. He too was non Union. He got the big jobs too but the union literally blew up his cat in K C. He did provide health insurance in addition to what you are saying. He did city water systems and sewer system construction. Made 32 million in his life. He also married 4 times….so you can imagine how those hits went. Haha. I know. I like unions to a point…but they do take advantage of people…in there own ways. Like don’t pick up that pipe…its not your job…that sort of thing increases costs to the customer. We the people as tax payers are the customer.
    So I do understand what you are saying. I am sorry too. I am sure you worked very hard and worried often. Will I get that bid…
    I’m not going to pester you. .

  12. Billionaire Steven Forbes, Conservative Right wing pundit and Forbes Business Magazine publisher has advocated a no loophole federal flat tax on everyone’s income for over twenty years now. His billionaire buddies want nothing to do with that, of course, as they would lose their loop holes big time. That tells you all you need to know about federal taxation laws and how they affect the disappearing middle class in America.

    Trump duped the middle class into thinking they got a big tax cut from him when he actually only lowered the taxes on the very very poor and the very rich. For the middle class, what the Trump tax cut actually did was do away with most of their itemized loop holes which forced many of the smarter ones (tax wise) into a higher tax bracket. Worse yet, the Trump tax cuts have contributed to a much higher budget deficit which used to be unthinkable to true Conservatives.

    Of course the ultra rich pay a greater share of the tax burden over all because they are the ones who have most of the money these days. Bezos just bought himself a $500 million super yacht with his extra cash laying around. Damn I’m sorry he gets stuck with such a high tax burden. Let’s see, what is the second home interest write off on $500 million ?

    1. I guess I must have missed all the Democrat support for the flat tax…
      I, also, missed the itemized (loop holes) deductions. Other than putting a $10K limit on state and local deductions I don’t know of any others. He, also, doubled the standard deduction, so many people no longer need to itemize.
      Do you really think Jeff Bazos took out a loan to buy a yacht, so he could claim the interest???

      1. Most of Amazon’s success can be attributed to timing, hard work, and [most importantly] State Sales Tax avoidance, followed by a sweetheart USPS deal. If you did business with Amazon in the last decade, congratulations; you evaded taxes. You didnt pay your fair share.

  13. Yes, it’s easy to politicize economics. Unfortunately, 1950’s or even 1980’s politics have entirely shifted. The labor situation in the country can’t be looked at the same way we used to. Neither party has been a friend to the middle class. Both have run us into massive debt. Hopefully, one day we will get past whatever narrative we’ve been trained to parrot and start supporting our own interests. I’m afraid we are ultimately to blame, as long as they keep us in our own corners.

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