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JLeslie's avatar

Anyone have information on what percentage of income tax each tax bracket actually pays on average?

Asked by JLeslie (47091 points ) August 23rd, 2010

This article prompts me to ask this question. It basically states that the top 400 tax payers in the US actually pay on average 17% income tax after the use of all of their loop holes and deductions. So I was wondering what each tax bracket actually pays compared to what their tax bracket indicates.

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CrankMonkey's avatar

Income tax is only one of many taxes that people pay.

Wage taxes take a larger percentage a low earner’s pay. There are earned income credits that can be used to recover wage taxes, however, but not everyone claims them. Another argument is that wage taxes are really insurance premiums and not taxes.

Owning a business provides many opportunities for high earners to shield income, as it is possible to claim many things as business expenses, or to get income as capital gains.

Our tax system is extremely complex, so any numbers you look at will have some kinds of assumptions built in to them.

JLeslie's avatar

@CrankMonkey I am only interested in the actual % paid to the IRS. Meaning gathering statistical averages for a past year for each tax bracket and looking at total gross income and the taxes owed.

augustlan's avatar

[mod says] Folks, please try to answer the actual question. Thanks!

JLeslie's avatar

I found this but I need to be able to print it out which I cant right now to decipher if it comes close to answering my question. I think I have to do the math to find my answer it only gives percents to total from what I can tell. Hopefully someone will know the answer or an easier link.

LuckyGuy's avatar

That is a sickening chart. It shows tax rates increasing to 1.5M and then dropping off for incomes above that.
You might have to divide the total each group paid by the number returns to find an average payment. then divide by the value for the income group. It might work.

For example, if the group is 100k to 200k you call it 150k Then divide the total paid by the number of returns then divide by 150k to get the rate.
I don’t see a better source than the 2006 Year data you have here..

JLeslie's avatar

@worriedguy I was hoping for total gross income, not adjusted gross, but I might spend some time doing the math tonight or tomorrow.

Michael's avatar

@JLeslie I think you can find what you are looking for at the Congressional Budget Office.

The statistic you are talking about is usually called an “effective tax rate” (also sometimes called an “average tax rate”). It is defined as total taxes paid divided by total income. The effective tax rate is especially important in a system such as ours which is based on graduated marginal rates. The top marginal rate right now is 35 percent, but that only applies to income over about $370,000 (for a married couple). The income below that is taxed at lower rates. In other words, everyone in the country, regardless of total income, pays exactly the same income tax rate on their first dollar of earnings.

A simple example might also help here. Let’s imagine a hypothetical millionaire named Susie who lives in a country with just three tax brackets. The first bracket is 10 percent on income up to $100,000. The next bracket is 20 percent on income up to $500,000, and the final bracket is 30 percent on income over $500,000. Susie’s marginal tax rate is 30 percent because she makes more than half a million dollars. Every additional dollar she earns will be taxed at 30 percent. But…her effective tax rate is only 24 percent (math below).

Graduated marginal income tax rates are only one reason why effective rates are below marginal rates. Another reason is tax deductions and credits. Let’s use the same example, but this time let’s imagine that Susie can deduct $100,000 from her income. With the deduction, even though Susie makes a million dollars, her taxable income is only $900,000. She still makes more than half a million so her marginal rate is the same, but her effective rate is now down to 21 percent. (again, math below)

One more reason. In many systems, including ours, certain kinds of income get a preferential tax rate. To illustrate this, let’s imagine that one quarter of Susie’s income comes from capital gains (the sale of capital assets like stocks and real estate) and that in her country, capital gains are taxed at just 15 percent (just like here in the United States). Well, with her $100,000 deduction that we mentioned, and the fact that $250,000 of her income is taxed at a lower rate, she now pays the normal income tax on just $650,000. Her taxable income still puts her in the top bracket so she has the same marginal rate as before. Her effective rate, however, is now just over 17 percent.

Last point. Imagine now that there is another resident of this country named Bob, and Bob makes $500,000 but he does not qualify for the deduction that Susie has, nor does he have any income that merits a special rate. Bob simply pays the normal income tax on all of his income. His effective rate would be 18 percent, and higher than Susie’s even though he makes half as much.

Math for part 1 of the example
First $100,000 taxed at 10 percent = $10,000 in tax paid
Next $400,000 taxed at 20 percent = $80,000 in tax paid
Next $500,000 taxed at 30 percent = $150,000 in tax paid
Total tax = $240,000
$240,000 in taxes / $1,000,000 in total income = 24 percent effective rate

Math for part 2
$1,000,000 in total income – $100,000 deduction = $900,000 taxable income
First $100,000 taxed at 10 percent = $10,000 in tax paid
Next $400,000 taxed at 20 percent = $80,000 in tax paid
Next $400,000 taxed at 30 percent = $120,000 in tax paid
Total tax = $210,000
$210,000 in taxes / $1,000,000 in total income = 21 percent effective rate

Math for part 3
$1,000,000 in total income – $100,000 deduction – $250,000 capital gains = $650,000 normal taxable income
First $100,000 taxed at 10 percent = $10,000 in tax paid
Next $400,000 taxed at 20 percent = $80,000 in tax paid
Next $150,000 taxed at 30 percent = $45,000 in tax paid
$250,000 taxed at special 15 percent rate = $37,500 in tax paid
Total tax = $172,500
$172,500 in taxes / $1,000,000 in total income = 17.25 percent effective rate

Math for part 4
$500,000 in taxable income (no deductions, no special rates)
First $100,000 taxed at 10 percent = $10,000 in tax paid
Next $400,000 taxed at 20 percent = $80,000 in tax paid
Total tax = $90,000
$90,000 in taxes / $500,000 in total income = 18 percent effective rate

ETpro's avatar

@JLeslie What a Great Question. If only the poor saps pulling for tax cuts for the top 2% knew how they are being played for dupes.

What I would like to get to is the actual tax rate—or effective tax on gross income, not adjusted gross. The 17% number you mentioned for the top 400 earners may be that, but I am not sure. If anyone knows, please chime in.

@Michael Great Answer. Thanks for all the detailed research.

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