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Income Taxes: Who Pays and How Much?


Cletus C. Coughlin

Spring brings not only March winds and April showers, but also tax-filing season. Whenever the topic of taxes comes up, it usually makes people wonder who pays and how much. That's a fair question, and a close look at some federal income tax facts may provide some surprising answers. The table indicates who is paying federal individual income taxes based on income groups. Perhaps more important, it reveals the relative percentage of taxes paid by these different groups of taxpayers. (Note that this chart only provides information on individual federal income tax and does not include other taxes, such as payroll taxes or state income taxes.)

Federal tax receipts for 2003 totaled $1.7 trillion, with the largest share - 43 percent - coming from individual income taxes (IIT). As shown in the table, receipts from IIT totaled $747.9 billion, the result of 128.6 million filed returns that reported total adjusted gross income (AGI) of $6.3 trillion.1 Thus, the ratio of taxes to income, known as the "total average tax rate," was 11.9 percent. Undertaking the same calculation for earlier years, one finds that the average tax rate for 2003 is the lowest rate for 1985-2003.


From Top to Bottom

To answer the question of who pays and how much, however, we need to take a closer look at the data, which indicate income tax burdens for specific income groups. Let's start with the top 50 percent income group, compared to the bottom 50 percent. The former group accounted for 86 percent of income (AGI) and paid 96.5 percent of taxes (IIT), while the latter accounted for 14 percent of income (AGI) and paid 3.5 percent of taxes (IIT). The average tax rate for the top 50 percent was 13.4 percent, while the rate for the bottom 50 percent was 3 percent. Both of these rates for 2003 were at their lowest levels for the period of 1985-2003.


The Top Half Dissected

Next, let's look at groups in the top 50 percent. The top 25 percent accounted for 64.9 percent of AGI and paid 83.9 percent of taxes (IIT). Their tax rate was 15.4 percent. Meanwhile, the top 10 percent accounted for 42.4 percent of AGI and paid 65.8 percent of taxes (IIT). Their tax rate was 18.5 percent. Comparing the top 25 percent with the top 10 percent, it is clear that those with higher incomes pay higher average tax rates. This fact continues to hold as we examine those with even higher income, which is a characteristic of a progressive tax system (i.e., the income tax rate increases as income increases). The top 5 percent experienced an average tax rate of 20.7 percent, and the top 1 percent paid a 24.3 percent rate, roughly eight times the average rate of the bottom 50 percent. The rate of 24.3 percent is approximately twice the average tax rate for all taxpayers.


The Perfect Tax Structure

It has proved to be a major challenge in the United States to reach political consensus on a tax system that simultaneously:

  1. provides desirable incentives to work, save and invest;
  2. is viewed as fair;
  3. is easy to understand; and
  4. generates sufficient revenues to fund spending decisions.

Improving our knowledge of the existing tax system, though, is a good place to start.


Federal Income Tax Burden by Income Group, 2003

Income Group Number of Returns AGI ($ millions) Income taxes paid ($ millions) Group's share of total AGI (%) Group's share of income taxes (%) Average tax rate (%)
All taxpayers 128,609,786 6,287,586 747,939 100 100 11.9
Top 1% 1,286,098 1,054,567 256,340 16.77 34.27 24.31
Top 5% 6,430,489 1,960,676 406,597 31.18 54.36 20.74
Top 10% 12,860,979 2,663,470 492,452 42.36 65.84 18.49
Top 25% 32,152,447 4,078,277 627,380 64.86 83.88 15.38
Top 50% 64,304,893 5,407,851 722,027 86.01 96.54 13.35
Bottom 50% 64,304,893 879,735 25,912 13.99 3.46 2.95
SOURCE: Internal Revenue Service, Individual Income Tax Returns with Positive Adjusted Gross Income (AGI), Tables 5 and 6


Figure 1

Income Floors on Adjusted Gross Income (AGI) in 2003 Dollars

Income Group Minimum Income
Top 1% $295,495
Top 5% $130,080
Top 10% $94,891
Top 25% $57,343
Top 50% $29,019
Bottom 50% less than $29,019
SOURCE: Internal Revenue Service, Individual Income Tax Returns with Positive Adjusted Gross Income (AGI), Tables 5 and 6