OUR THOUGHTS ON:

Who Pays the Individual Income Tax in the U.S.?

Tax

By Ron Kramer

Senate Budget Committee Chairman Kent Conrad (D-ND) has proposed a budget plan to reduce the federal deficit by $4 trillion over the next decade. Conrad’s proposal is a “50-50” plan, providing an even split between spending cuts and tax hikes. Conrad’s proposal also contains a 3% tax surcharge on taxpayers with annual incomes over $1 million.

On May 20, Conrad announced that he would defer rolling out his budget proposal and wait to incorporate the recommendations from lawmakers working with Vice President Biden on reducing the deficit. Translating this from “Washington speak”: Conrad doesn’t currently have the necessary Democratic support to roll out his plan containing tax hikes.

Since the President’s and the Senate Democrats’ plan contains substantial tax hikes to continue to fund government spending, it’s interesting to look at where the tax hikes will come from. It’s not going to come from just those U.S. taxpayers making more than $1 million a year -- a substantial part of the tax increases will have to come from middle-class Americans and business owners.

Who pays the individual income taxes in the United States? To answer this question, we can look at the most recent study of U.S. individual income tax data released by the Internal Revenue Service (IRS). The study was released in the fall of 2010 and reports on calendar year 2008 tax data.

Table 1, below, prepared by the Tax Foundation, a Washington, D.C.-based conservative think tank, in October 2010 from the 2008 tax return data provided by the IRS, summarizes how the burden of individual income taxes was borne by U.S. taxpayers in 2008.

 The following observations flow from Table 1:

  • For 2008, a total of 139,960,580 individual income tax returns were filed reporting positive adjusted gross income (AGI) amounting to $8.427 trillion. Income taxes totaling $1.032 trillion were paid.
  • The top 1% of U.S. taxpayers earned AGI of at least $380,354 for 2008.
  • The top 1% of U.S. taxpayers earned 20% of total AGI and paid 38.02% of all U.S. individual income taxes. This compares with 22.8% and 40.4%, respectively, for 2007.
  • The top 5% of U.S. taxpayers earned AGI of at least $159,619 and accounted for 34.73% of total AGI and 58.72% of all U.S. individual income taxes paid.
  • The top 10% of U.S. taxpayers earned AGI of at least $113,799 and accounted for 45.77% of total AGI and paid 69.94% of all U.S. individual income taxes paid.
  • The bottom 50% of U.S. taxpayers paid only 2.70% of all U.S. individual income taxes.

The 2008 IRS study also presented data with respect to the top 0.1% of all U.S. taxpayers. In 2008, the top 0.1% of U.S. taxpayers represented about 140,000 tax returns. These taxpayers reported nearly 10% of all AGI earned in the U.S. and paid approximately 18.5% of the nation’s individual income taxes. For 2008, the average income for a taxpayer in this top 0.1% group was $6 million, and to break into the top 0.1% group, a taxpayer had to have AGI of at least $1.8 million. Thus, the income range for 90% of the top 1% of U.S. taxpayers was from $380,354 to $1,800,000 for 2008.

Therefore, a proposed 3% surcharge on the incomes of taxpayers earning more than $1 million per year would likely generate only $25 to $50 billion per year in additional tax revenues over the next decade, a far cry from the $2 trillion in tax increases called for in the Senate Democrats’ budget proposal. Care to guess where the additional tax increases would come from?

For further information, please contact Ron Kramer.

 

Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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