Who really pays federal income tax?
As the 2020 election season approaches, we are certain to hear arguments about our federal income tax. Conservatives will complain that our citizens are over-taxed. Progressives will complain about “tax cuts for the rich.” Any proposal for change will likely be long on rhetoric, and short on facts. Before the whining about “fairness” begins, it may be helpful to consider who really pays federal income tax.
Contrary to popular belief, the U.S. government did not always tax income. Prior to the 20th Century, most federal revenue came from excise taxes and tariffs on goods. The Revenue Act of 1861 provided for a federal tax on income, but it was repealed a few years later. Congress tried again with 1894 Wilson-Gorman Tariff Act, which the U.S. Supreme Court held to be unconstitutional. The 16th Amendment, which permitted Congress to levy an income tax without apportioning it among the states, was ratified in 1913. Thus, our federal income tax is only about 100 years old.
The idea that high-income folks use “tax dodges” to escape paying federal income tax is simply an urban legend. Each year, the IRS Statistics of Income division publishes an Individual Income Tax Returns Complete Report. Data is available for Tax Year 2017 (returns filed in 2018). The top 1 percent of wage earners (those who earn over $515,371), collectively earn a total of one-fifth (21.04 percent) of all adjusted gross income. Together, they pay 38.47 percent of federal income tax. Put another way, over 38 percent of all federal income tax is paid out of the 21 percent of all wages, which are paid to the top 1 percent of wage earners.
The top one quarter of wage earners (those who earn over $83,682), earn a total of over two thirds (69.14 percent) of adjusted gross income. Together, they pay 86.10 percent of federal income tax. That means that over 86 percent of federal income tax is paid by one quarter of wage earners.
The top half of wage earners (those who earn over $41,740), earn a total of 88.75 percent of adjusted gross income. Together, they pay 96.89 percent of federal income tax.
The bottom 50 percent of wage earners (those who earn less than $41,740) account for about 11.25 percent of all adjusted gross income, but pay only 3.11 percent of all federal personal income tax. In fact, about one third (32 percent) of all IRS returns filed for Tax Year 2017 paid no federal income tax. Further, some wage earners receive federal refunds, even though they never paid any federal income tax. Tax deductions, and most tax credits, are non-refundable; those who pay no tax, receive no refund. Exceptions include the earned income tax credit, the health insurance premium tax credit, a portion of the child tax credit, and a portion of the American opportunity tax credit for higher education. For those credits, the IRS pays refunds to some wage earners who never actually paid any federal income tax.
Fairness, like beauty, is in the eyes of the beholder. Conservatives tend to favor limited government, and argue that our federal government spends far too much. Progressives tend to favor expanded federal programs and entitlements, and argue that nearly all federal income tax should be paid by high-wage earners. Some folks in the middle favor a federal “flat tax.” They argue that our federal tax code is far too complex, and that upper income rates are far too high.
In a Washington Post opinion piece in 1983, U.S. Sen. Daniel Patrick Moynihan observed that “everyone is entitled to his own opinion, but not his own facts.” The question of who should pay our federal income tax is certainly a matter of opinion. The question of who really pays it is certainly not.
William P. Carlucci is a local attorney and past president of the Pennsylvania Bar Association.