Are You Paying Too Much of America's Taxes?

Let's face it: Nobody likes paying taxes. Those complex forms, the confusing rules ... and then there's the whole awful matter of surrendering a good chunk of your income to the government. Even if you move to one of the states with no income taxes, you'll invariably have to pay the federal government something -- unless you've got a fantastic (or particularly devious) tax attorney.

One of the biggest political battles in recent memory is over whether high earners are paying their "fair share" of the tax burden. Without taxes, the government wouldn't be able to support itself -- but are America's wealthiest taxpayers doing enough to support the government? Is it fair that some groups pay less than others? Should the burden shift from one group to another? These are all difficult questions for anyone to answer, but you'll hopefully find enough information here to at least come closer to an answer -- and if you've already found your answer, you might find a reason to change your mind.

First, let's take a look at how important your taxes are to the federal government, based on the current year's revenue projections from the White House budget:

Where Does the Government's Funding Come From? | Create infographics

Individual income taxes are the bulk of the U.S. government's revenue. In fact, when you consider all the taxes that rely on income but don't count as a direct income tax, the working American supports by far the largest part of federal spending:

Income and Everything Else | Create infographics

But not all taxpayers are taxed equally. Let's see how much different taxpayers at different income levels are paying relative to their share of America's paycheck pie. Don't forget to click on both buttons in the chart to see the difference between each group's share of income and its share of taxes:

Who Earns, Who Pays? | Infographics

But how much money do you really need to make each year to reach these tax brackets? The Urban-Brookings Tax Policy Center broke down just what it took to get into various tax brackets in 2011. Based on their numbers, and the effective average tax rate of each bracket, we can get some idea of how much might be left over for you:

Sources: Urban-Brookings Tax Policy Center and The Tax Foundation.
*Includes all filing types.
**75th percentile used (bottom percentile is effectively zero income).

While high-earning taxpayers will have a larger chunk taken out, they're still left with a much larger chunk of income free and clear. Most higher-income taxpayers make excellent use of this extra income with investments, as more than 90% of the highest 10% of earners maintain a retirement account, and 48% own individual stocks. Contrast that with the poorest 20% of earners, only 11% of whom hold a retirement account and 4% of whom owned any stock.

Of course, this tax picture doesn't fully account for Social Security and Medicare taxes. What would a taxpayer in these brackets have to pay for these two mandatory programs, and how much would really be left over? We'll be calculating this on the assumption that the taxpayer isn't self-employed, which would double their payroll tax rates:

Sources: Urban-Brookings Tax Policy Center and The Tax Foundation.
*Includes all filing types.
**Social Security payroll tax has an income ceiling of $113,700.
^75th percentile used (bottom percentile is effectively zero income).

Because of the Social Security tax ceiling, taxpayers around the 10th percentile of income feel the payroll tax weight the most -- as a percentage of gross income, a 10th-percentile taxpayer would wind up paying twice as much in payroll taxes as someone in the top 1%.

Now that we've got an idea of who pays, let's see what, exactly, they're paying for.

U.S. Federal Budget | Infographics

There are two huge categories in the federal budget that don't get labeled very clearly. Most of the undefined "mandatory spending" represents other forms of income security, such as unemployment compensation, the supplemental nutrition assistance program (SNAP), and the like. Veterans' benefits are also part of this category. Non-defense discretionary spending is pretty broad, but its major expenditures can be broken down in a relatively straightforward way. Here's how Brookings fellow Isabel Sawhill analyzes it:

I estimate that out of the total nondefense domestic discretionary spending in 2012, 44% was for competitiveness purposes (mostly education, training, and transportation), another 12% was for low-income programs, 13% was for public safety and disaster relief, and 11% was for veterans. The remainder ... is only 4% of total federal spending. ... [M]ost of it is what I would call "overhead" -- salaries and office space for the people who run the government, administer the laws, promulgate and enforce the regulations, prepare Social Security checks, monitor fraud, respond to Congressional and citizen requests, and so forth. Even relatively efficient organizations have overhead rates that are as high or higher than 4%.

The difference between what the government spends and what it takes in is projected to be $973 billion this year. Social Security, Medicare, and Medicaid will have a shortfall of $703 billion -- much of which is due to Medicaid, which doesn't get its own payroll tax. There are a number of ways to handle the Social Security shortfall, but even the strongest efforts at reform only seem capable of closing the gap by more than $100 billion. What could we do to get rid of that awful deficit? Don't forget to click every button in the following chart:

How Can We Reduce the Deficit? | Create infographics

None of these quick-and-dirty fixes comes close to solving the problem, except for a broad 20% spending cut -- and the impact of that reduction in spending would probably cause tax revenue to shrivel. You can't take more than $700 billion out of the economy all at once without causing a whole lot of problems. But let's say your taxes suddenly increased by 10% (not your tax rate, just the total amount of income taxes you paid). Someone in the top 1% would be paying nearly $12,000 more but would still have more than $360,000 in net after-tax income. Someone just edging his or her way into the top half of the income scale would wind up paying about $250 more -- but that person's total after-tax income would only be a tenth as much as the top one-percenter.

It's not quite as easy as saying "I should pay less" or "they should pay more." There are many different ways that the government might solve the deficit problem, or at least get closer to it. Most of these methods, unfortunately, will probably involve some manner of higher taxes. Should we expect everyone to pay more, or are some people paying too much already?