The Tax Foundation has released its analysis of who pays the federal income tax. No surprise, really. Wealthy people pay the bulk of the tax, while low income earners pay little, if any, federal income tax.
- In 2019, taxpayers filed 148.3 million tax returns, reported earning nearly $11.9 trillion in adjusted gross income, and paid $1.6 trillion in individual income taxes.
- The top 1 percent of taxpayers paid a 25.6 percent average individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).
- The share of reported income earned by the top 1 percent of taxpayers fell to 20.1 percent from 20.9 percent in 2018. The top 1 percent’s share of federal individual income taxes paid fell to 38.8 percent from 40.1 percent.
- The top 50 percent of all taxpayers paid 97 percent of all individual income taxes, while the bottom 50 percent paid the remaining 3 percent.
- The top 1 percent paid a greater share of individual income taxes (38.8 percent) than the bottom 90 percent combined (29.2 percent).
As we’ve previously written, that’s how the system is supposed to work under fiscal federalism.
A fundamental principle of what’s known as “fiscal federalism” is that redistributive tax policies are best enacted on a national basis, one of the justifications for the highly progressive federal income tax. Federal taxes offset regressive state and local tax structures without providing incentives for taxpayers to relocate to reduce their tax liability. Thus, our third point:
3. All state and local tax structures are regressive. But when the steeply progressive federal income tax system is considered, the overall federal-state- local tax burden is progressive in Washngton and every other state, and the differences among the states represent smaller proportions of households’ overall tax burdens.
The latest TF report confirms results from their analysis of data provided by several prominent nonpartisan government entities last fall.
In the latest analysis, TF analyst Erica York writes,
In 2019, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid $612 billion in income taxes while the bottom 90 percent paid $461 billion in income taxes.
Readers should note the IRS dataset does not account for the refundable portion of tax credits such as the earned income tax credit. If the refundable portion were included, the tax share of the top income groups would be higher than what is reported here. The refundable portion is classified as a spending program by the Office of Management and Budget (OMB) and therefore is not included by the IRS in tax share figures.
Much more at the link. We’ll lift just one of the several charts accompanying the analysis.
That’s what progressivity looks like.
While we’re on the subject, an economist colleague passed along a recent academic report examining support for income redistribution, an oft-stated goal of those supporting progressive tax reform. It’s, well, academic, with lots of equations, models, literature review, and hypothesizing. So, not an easy read, though the conclusions are clear and, for many, counterintuitive.
Here’s the paper, with the catchy title, “Why Are Relatively Poor People Not More Supportive of Redistribution? Evidence from a Randomized Survey Experiment across Ten Countries.” Economists Christopher Hoy and Franziska Mager conducted a sweeping analysis, described this way in the abstract.
We test a key assumption underlying seminal theories about preferences for redistribution, which is that relatively poor people should be the most in favor of redistribution. We conduct a randomized survey experiment with over 30,000 participants across 10 countries, half of whom are informed of their position in the national income distribution. Contrary to prevailing wisdom, people who are told they are relatively poorer than they thought are less concerned about inequality and are not more supportive of redistribution. This finding is consistent with people using their own living standard as a “benchmark” for what they consider acceptable for others.
A couple of more thoughts from their conclusion:
Our findings are clearly counter to the hypothesis that informing people that they are relatively poorer than they thought will increase their concern about the gap between the rich and poor (Hypothesis 1). We also do not find statistically significant effects in line with the hypothesis that the treatment will increase people’s support for the government to reduce the gap between the rich and poor (Hypothesis 2).
Our research bolsters findings from other studies on the elasticity of people’s preferences for redistribution (Kuziemko et al. 2015, Hauser and Norton 2017), which is that it is easier for information to alter people’s concerns about inequality than their desire for government-led redistribution. For example, Kuziemko et al. (2015) show that providing multiple pieces of information about inequality in the United States does not lead to greater support for redistribution even though it does have a large impact on people’s concern about inequality. We show a similar pattern whereby even though we are able to detect effects on people’s concern about inequality from the treatment in most countries, this does not lead to statistically significant changes in their preferences for redistribution.
A lot more in the analysis, of course, and much of it dense and, ultimately, inconclusive as to why support for redistribution among less wealthy people does not grow as information about their “relative poverty” becomes more clear.
It could be, at least in the U.S. and at least partially, that many lower-income people already pay few taxes and benefit from federal and state income support programs. In other words, the system is working.