Where do the US tax dollars come from?
This topic may sound a bit boring but since our elected officials toss this data around, as taxpayers we should all have a basic understanding of the facts. My only caveat is you should be careful of your sources on the topic.?
Well, now that we are beyond the most significant tax deadline of the year, and this topic is often discussed, this is a suitable time to look at the data from the latest data available. And it is fortunate that The Pew Research Center put out a great write up on April 18th which specifically indicates where US tax dollars come from. It’s an excellent article and much of this post comes from the article.?
Some key data in the Pew Article:
- The US government expects to collect about $2.33 trillion in individual income taxes this year and Individual taxes are about 48.5% of what the US collects. (See the image for a full picture.)
- The individual federal income tax is progressive but does break down at the highest income levels. Also, the tax impact on individual Americans is highly variable depending on income level, sources of income, marital status, age, state and county of residence, homeownership, parenthood, and many other factors.
- In 2020 (most recent year the IRS has detailed data) taxpayers with $1M and over in adjusted gross income (AGI) had average effective rates of over 25%
- Average effective tax rates (total income tax as a percentage of AGI) were highest among taxpayers with AGIs between $2 million and $10 million (28%). The average effective tax rate for taxpayers with AGIs of $10 million or more was actually a bit lower, primarily because they tend to get more of their income from dividends and long-term capital gains, which are taxed at lower rates than wages, salaries and other “ordinary income.”
- Millions of Americans don’t pay anything, and actually receive money from the IRS, mostly as a result of refundable tax credits. Those that benefit from refundable credits are lower income people. (After refundable credits, taxpayers with AGIs below $30K got back more than $78b in 2020.)
- Since 2000, there has been a downward trend in average effective tax rates for all but the richest taxpayers – those with AGIs of $10 million or more. But the three major tax law overhauls during this period have affected different classes of taxpayers quite differently:
o The tax cuts of 2001 and 2003 benefited the highest-income taxpayers the most. Those with AGIs of $5 million or more saw their average effective tax rate drop from 27.2% in 2002 to 23.2% in 2003. Taxpayers with AGIs between $500,000 and $5 million saw their average effective rates fall from 28.8% to 25.5%. Taxpayers with lower incomes experienced much smaller rate cuts. (Note that two provisions targeted to higher income taxpayers took effect in 2013. They were a new net investment income tax and Medicare surtax. Those helped raise the average effective tax rate on the highest-earning taxpayers - AGIs of $5 million or more -from 20.7% in 2012 to 27% the following year. And those with AGIs ranging from $500,000 to under $5 million also saw their average effective tax rate increase, from 24.2% to 27.5%, while other groups experienced little to no change.
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o The tax cuts of 2017, which altered provisions throughout the tax code, had their biggest impact on upper-middle-income taxpayers with AGIs of at least $200,000 but less than $500,000. Although average effective tax rates fell for all income groups, they fell the most for that upper-middle group, from 19.2% in 2017 to 16.6% in 2018.
How much do distinct groups of taxpayers actually pay?
The IRS collected $1.66 trillion in individual income taxes in 2020. (Net of credits.) About 54% of that sum came from taxpayers with AGIs between $100,000 and $1 million – a group that accounted for just under a fifth of all returns filed (31.3 million), and about 30% of all taxable returns.
At the top of the income ladder, 0.02% of returns filed in 2020 showed AGIs of $10 million or more, but those taxpayers collectively paid $210.2 billion in taxes after refundable tax credits, or 12.6% of total individual income tax collections.?
The Pew article can be found here.?
This is great data from Pew but remember that there are many more taxes beyond the federal to consider, and there is considerable misunderstanding on those considerations. Many people think about low state tax rates and assume that overall low taxes follow. The problem is that often when other taxes are added in, the net tax in the state is not so low. I won’t go into the specifics here, however if you are interested in the additional state information the Tax Foundation is a great resource and even has interactive tools. It also has data on Corporate and other taxes beyond just individual taxes https://taxfoundation.org/?And the link to specific states is here https://statetaxindex.org/
One of the other items of misinformation is about the size and growth of the tax code. We often hear about “70,000 pages”.?I will readily admit that the tax code is very complex, but that figure is grossly overstated. The code itself was about 2,300 pages in 1985, and today it’s about 3,500 pages long. There are many additional pages of regulations and explanations to the code is where the larger number comes from. Remember however that the regulations and explanations were also in existence in 1985 as well.?
Now after reading this post, if you are curious about the tax code, there are a number of sources to get it, including the federal government for free. You can even get it from Amazon from a source that many professionals use, Wolters Kluwer. https://www.amazon.com/Internal-Revenue-Code-Employment-Excise/dp/0808057294/ref=monarch_sidesheet