Certain multimillionaires do pay a reduced effective income-tax rate compared to some middle-income taxpayers; taking a portion of your earnings via long-term capital gains instead of a paycheck is merely one reason that happens. But the top 20% of income earners paid 70% of federal taxes in 2007, according to the most recent data obtainable from the Congressional Budget Office. That class also drew in 60% of overall pretax income, per the CBO.
Meanwhile, 46% of taxpayers do not pay out any federal income tax, but they often pay a large piece of their income to levies at the federal, state and local level. Those include payroll taxes for Social Security and Medicare; state and local sales taxes on groceries, clothing and additional purchases; and federal and state excise taxes on things such as gas, cigarettes, alcohol and airline tickets.
The payroll tax for Medicare is paid by every employed individual, but the Social Security tax isn’t levied on income over $110,100 (in 2012). Therefore individuals with larger six-figure incomes pay a lower portion of their income to Social Security taxes than those making less money.
Wealthy people carry a larger allocation of corporate income taxes, which are eventually sustained by individuals. “All taxes have to be paid by somebody at some point,” says Steve Wamhoff, legislative director at Citizens for Tax Justice. “The corporate tax is paid by the owners of corporate stock and business assets.” In 2011, federal corporate income taxes consumed nearly 7.7% of the top 1% of income earners, in comparison to a 0.4% portion for taxpayers in the lowest fifth of the income bracket, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.
But partially because taxpayers acquire money in various ways, the top 1% of earners receive a scaled-down share of their income that goes to payroll taxes. Then there are state and local taxes to add in. Individuals in the lowest 20% of the income bracket paid about 17% of their income to federal, state and local taxes in 2011, versus about a 30% effective rate for the top earners, according to an estimate from the Institute on Taxation and Economic Policy.
But the portion of total taxes paid roughly matches the portion of total income for each of the income groups. Sales taxes can have an outsize effect on lower-income people. “After they buy basic necessities, they typically won’t have a lot of money left over to save or invest,” says Mr. Wamhoff. A wealthier family is “more likely to have a portion of their income that they can put to savings or investments that will never be subject to sales taxes.”
And for the 46% who don’t pay federal income tax?
Roberton Williams, a senior fellow at the Tax Policy Center, says 23% of U.S. taxpayers do not earn sufficient money to owe that tax once they take their individual exemption and standard deduction. Another 23% qualify for tax breaks that bring their tab to zero or produce a refund.
“They start off with relatively low income to begin with,” Mr. Williams says, “and therefore have low tax liability before claiming any breaks.”
More affluent individuals encounter a tax rate as excessive as 35% on earnings, “but they get the biggest tax breaks,” he says. “They start off with such a high tax that the biggest tax breaks don’t bring them down to zero. They’re benefiting hugely from tax breaks—much more than the poor people—but because they start off at the high level, their tax bills stay positive.”
That being said, 1,470 millionaires were amongst those who paid no federal income tax in 2009, the most recent data shows.
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