I often hear remarks that the 1% should be paying their fair share of taxes and that wealthy individuals are unfairly given tax breaks compared to middle/lower economic classes. In reality, the top 1% of income-tax filers contributed 40.4% of the revenue in 2022, based on recently released IRS data. Meanwhile, the top 10% of filers shouldered 72% of the tax burden. Contrary to common debates, U.S. income taxes already exhibit significant progressivity.
The GOP’s 2017 law, which will expire at the end of 2025, lowered tax rates on people across the income spectrum. Under this 2017 law, the top marginal rate on high earners is currently 37%. Despite 37% already being a high tax rate, many politicians argue that it should revert to the previous 39.6% so millionaires and billionaires must “pay their fair share.”
But what does paying a “fair share” really mean? According to IRS data, more than 40% of income tax revenue is already coming from every 1 out of 100 filers, which is a disproportionate amount compared to other cohorts. To understand this in greater detail, I will break these statistics out by cohort.
The Top 1%: This cohort is made up of 1.5 million tax returns with adjusted gross incomes (AGI) above $663,000. This is approximately 22.4% of the US’ total earnings, yet their share of income taxes paid was nearly double at 40.4%, with an average federal tax rate of 26.1%. Arguably, paying two times more in taxes than their share of income is extremely punitive towards the top 1% and further muddies our understanding of “fairness.”
1-5%: This cohort is made up of 6.2 million tax returns with AGI between $262,000-$663,000. This is approximately 15.9% of total earnings, while contributing 20.6% of income tax revenue. The average federal tax rate is 18.8%.
5-10%: This cohort is made up of 7.7 million tax returns between $179,000-$262,000. This is approximately 11.1% of total earnings, which nearly matches their share of taxes paid at 11%. The average federal tax rate is 14.3%.
10-25%: This cohort is made up of 23.1 million tax returns between $100,000-$179,000. They represent 20.5% of total earnings and pay 15.2% of income tax revenue. The average federal tax rate is 10.7%.
25-50%: This cohort is made up of 38.5 million tax returns between $50,000-$100,000. They represent 18.6% of total earnings and pay 9.9% of income tax revenue. The average federal tax rate is 7.7%.
The Bottom 50%: This cohort is made up of 76.9 million returns with earnings under $50,000. They represent 11.5% of total earnings and pay 3% of income tax revenue. The average federal tax rate is 3.7%.
To summarize, the top 25% of earnings reported 69.9% of all income in 2022 but paid 87.2% of all income taxes. Regardless of the 2017 individual tax rate cuts, the US’ current tax system continues to exploit the upper middle class and beyond at the federal level. If you consider state and local tax rates, the disproportionate amount of taxes paid by the wealthy are astonishing.
Additionally, these numbers overstate the actual income-tax burden on the bottom 50% because refundable credits, which are given to those with no tax liability, are counted as government spending and are not included in IRS figures. In summary, this means that millions of Americans actually face negative income tax rates and receive government payments akin to welfare.
Furthermore, these figures only account for income taxes and do not factor in payroll taxes. While some studies show that including payroll taxes slightly alters the progressivity of the overall tax system, the general trend remains the same.
Given the data above, it seems ridiculous that the top 1% is “getting a free ride.” Ultimately, this vague language about “fair share” is impossible to define and opens our tax system to vulnerabilities and potential exploitation.
While we may be able to influence these decisions with our vote, the easiest way to make an impact on your federal taxes is by relocating to Puerto Rico under Act 60. With a 4% income tax rate, and the potential to lower it to 2% depending on your income level or where you reside, you can save millions on your taxes each year.