Federal income tax is always a hot-button issue that has led to countless heated debates and quarrels in Washington D.C. and beyond. But do you know how much each individual group of Americans pays in taxes?
The latest data is in, and the results will likely surprise you.
Source: The Motley Fool.
The report
Earlier this month, the nonpartisan Congressional Budget Office (CBO) released its report outlining how both income and taxes were distributed to Americans in 2011. It should come as no surprise that the report noted, "before-tax income was unevenly distributed across households in 2011."
It goes without saying that the top 1% of households earn a disproportionate amount of income, but the actual discrepancy is not as well known. In 2011, households in the bottom of 40% of the income bracket earned 14.9% of before-tax income. The top 1% earned 14.6%.
This is a far cry from 1979, when the bottom 40% of Americans earned 17.4% of income, which was almost double the 8.9% earned by the top 1%, as shown in the chart below:
It, too, must be noted that the gap that began to emerge in the latter half of the last decade has all but evaporated.
Yet, one of the most fascinating facts from the report wasn't that there was an income gap in the United States -- we all were likely well aware of this reality -- but that there was a tax gap, too. And it isn't the way you thought it would be.
The tax gap
The United States uses what is known as a progressive tax structure, meaning the more an individual earns, the higher percentage of that income is paid out in taxes. And in 2011, the average Federal Tax rates spanned a very wide spectrum:
As a result, the report found that the top 1% of Americans paid a disproportionately greater amount in taxes, as well. Recall that the top 1% of Americans earn 14.6% of the country's before-tax income. Well, they also account for 24% of the total taxes paid in the United States in 2011. In total, the top 20% of households, as measured by income, earned 51.9% of income, but also paid out 68.7% in taxes:
The CBO notes that, thanks to the progressive tax structure, "households in the highest quintile of before-tax income paid a greater share of federal taxes in 2011 than they received in before-tax income, while households in each of the other quintiles paid a smaller share of federal taxes than they received in before-tax income."
While this didn't max a huge dent in income distribution in the U.S., in some respects, it made the income distribution slightly more even:
The CBO projects federal tax rates will rise for all income brackets according to 2013 law, but this increase will be most felt by those in the highest tax brackets. For example, in 2011 the 1% had an average Federal Tax Rate of 29%, but the CBO projects that will stand at 33% in the future. This means that the distribution of after-tax income may actually become more equal in years to come.
The key takeaway
We live in a free country, and we must both hope and trust that our elected officials will do what is correct concerning matters of taxation, income distribution, and so much more. But before any decision is to be made by us or them concerning any issue, we must ensure we have the correct information before us to appropriately inform our voting decisions. And this example is certainly no exception.
