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Who Pays U.S. Income Taxes (and Who Doesn't)

By Daniel B. Kline - Oct 10, 2017 at 6:33AM

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In a progressive tax system, making more money means paying a higher tax rate. Does it actually work that way?

The federal individual income tax has been all over the news since President Donald Trump presented Congress with an outline for sweeping tax reform. It remains to be seen whether Congress will pass any legislation resembling Trump's tax plan, as lawmakers have struggled for years to agree on any major changes to the tax code no matter which party controlled the House and Senate.

Regardless, to make sense of any tax reform proposals, it's important to understand how our current system works and who pays what when it comes to individual (not corporate) income tax.

Our current system is designed to be progressive: If you make more money, you're supposed to pay more in taxes. And that's actually how it works, according to a Pew Research study of Internal Revenue Service (IRS) data from 2015 (the most recent available). 

A chart of how taxes are paid.

Image source: Pew Research.

Who pays the most taxes?

People with higher incomes do in fact pay the highest average effective tax rates. Taxpayers with incomes over $200,000 paid 58.9% of all federal income taxes, despite the fact that those high-earners only accounted for about 4.5% off all returns filed.

People making between $100,000 and $200,000 actually paid the highest share of all taxes paid at 21.7%, but they had a 12.7% effective tax rate -- well below the 19.4% rate paid by people making between $200,000 and $500,000. It's also less than half the effective tax rate paid by the two income groups above $500,000.

By contrast, nearly 44% of all returns were filed by people making less than $30,000 a year, yet they accounted for only 1.4% of taxes collected. That group also paid the lowest effective tax rate at 4.9%, and "two-thirds of the nearly 66 million returns filed by people in that lowest income tier owed no tax at all," according to Pew's research.

Tax fiorms, a calculator, anf a note that says "tax time"

The U.S. tax system is supposed to be progressive -- i.e., the more you make, the more you pay. Image source: Getty Images.

Does the U.S. tax system work?

It's fair to say that the U.S. tax system mostly works as it's intended to. Lower-income tax filers do pay a lower share of taxes, and effective tax rates steadily decrease along with income.

Pew did find, however, that the tax code "starts to lose its progressivity" when income reaches the very highest tiers.

"In 2015, the effective rate peaked at 29.3% for taxpayers in the $2 million-to-under-$5 million group, then fell to 28.8% for the $5 million-to-under-$10 million group and 25.9% for those making $10 million or more," wrote Pew's Drew DeSilver.

This data is, of course, based on averages. There are certainly individuals who work the system to their advantage, and at higher income levels, that has a bigger impact on overall tax collections. Still, as of 2015, it does appear that the tax system for individuals works to make your tax burden rise in tandem with your income.

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