Very interesting USA federal tax data via the tax foundation. Top 1% has adjusted gross income of $343,000; over $154,000 puts you in the top 5%; $112,000 puts you in the top 10% and $66,000 puts you in the top 25%.

The chart only shows federal income tax data. So the costly social security tax (which is directly based on earned income* so in reality is federal income tax but is handled in a separate account so is consistently not classified as income tax data) for outside the top 5% (income above $106,800 [for 2011] does not have to pay the social security tax) is not reflected in the rates paid here.

Looking at the data excluding social security is fine, but it is very important to remember the social security (plus medicare) tax is the largest tax for, I would guess, most people in the USA. Social security tax is 6.2% paid by the employee plus 6.2% paid by the company – a total of 12.4%. That part of the tax was capped at $106,800 in income for 2011. The medicare tax is 1.45% of income paid by the employee and 1.45% paid by the employer (and it has no cap). So that totals 2.9% (for the employee and employer tax) and brings the total to 15.3%** for most earned income.

	Number of Returns with Positive AGI	AGI ($ millions)	Income Taxes Paid ($ millions)	Group’s Share of Total AGI	Group’s Share of Income Taxes	Income Split Point	Average Tax Rate
All Taxpayers	137,982,203	$7,825,389	$865,863	100.0%	100.0%	–	11.06%
Top 1%	1,379,822	$1,324,572	$318,043	16.9%	36.7%	$343,927.00	24.01%
1-5%	5,519,288	$1,157,918	$189,864	14.8%	22.0%		16.40%
Top 5%	6,899,110	$2,482,490	$507,907	31.7%	58.7%	$154,643.00	20.46%
5-10%	6,899,110	$897,241	$102,249	11.5%	11.8%		11.40%
Top 10%	13,798,220	$3,379,731	$610,156	43.2%	70.5%	$112,124.00	18.05%
10-25%	20,697,331	$1,770,140	$145,747	22.6%	17.0%		8.23%
Top 25%	34,495,551	$5,149,871	$755,903	65.8%	87.3%	$ 66,193.00	14.68%
25-50%	34,495,551	$1,620,303	$90,449	20.7%	11.0%		5.58%
Top 50%	68,991,102	$6,770,174	$846,352	86.5%	97.7%	> $32,396	12.50%
Bottom 50%	68,991,102	$1,055,215	$19,511	13.5%	2.3%	< $32,396	1.85%

Source: Internal Revenue Service. Table via the tax foundation.

Other interesting data shows that the top 1% earn 16.9% of the total income and pay 36.7% of the total federal income taxes. Those in the top 1-5% earn 14.8% of the total income and pay 22% of the income taxes. Those in the top 5-10% earn of the income 11.5% of the income and pay 11.8% of the federal income taxes. So once you exclude the main tax on income (social security) and use adjusted gross income the tax rates are slightly progressive (higher rates for those that are making the most – and presumably have benefited economically the most from the economic system we have).

Given that this is skewed by excluding the regressive (higher taxes paid by those earning less – social security is the same rate for everyone except those earning the very most who don’t have to pay it on their income above $106,800 [in 2011]) social security tax I believe we should have a more progressive tax system. But that is mainly a political debate. There are good economic arguments for the bad consequences of too unequal a distribution of wealth (which the USA has been moving toward the last few decades – unfortunately).

In addition to the other things I mention there are all sorts of games played by those that desire a royalty type system (where wealth is just passed down to the children of those who are rich, instead of believing in a capitalist system where rewards are given not to the children of royalty but to those that are successful in the markets). A good example of the royalty model is Mitch Romney giving his trust fund children over $100 million each. These schemes use strategies to avoid paying taxes at all. Obviously these schemes also make the system less progressive (based on my understanding of the tax avoidance practiced by these trust fund babies and those that believe it is ethical to give such royalty sized gifts to their royal heirs).

I don’t like the royalty based model of behavior. I much prefer the actions of honorable capitalist such as Warren Buffett and Bill Gates that give their children huge benefits that any of us would be thrilled with, but do not treat them as princes and princesses who should live in a style of luxury that few kings have every enjoyed based solely off their birthright. Both Bill Gates and Warren Buffett have honorably refused to engage in royal seeking behavior that many of their less successful business peers have chosen to engage in. Those that favor trust fund babies are welcome to their opinion and have managed to get most of congress to support their beliefs instead of a capitalist model that I would prefer so they are free to engage in their desire to parrot royalty and honor the royalty model of behavior.

* earned income – you also don’t have to pay social security or medical tax on unearned income (dividends, capital gains, rental income…). Again this by and large favors wealthy taxpayers. Everyone is eligible for the same favorable tax treatment but only those that have the wealth to make significant amounts of unearned income get this advantage.

** the social security tax has been reduced by 200 basis points (this relief was recently extended) as part of dealing with the results of the too big to fail banking caused credit crisis. So under the temporary reduction the personal tax rate is 4.2% and the total cost is 13.2%.

Related: Taxes – Slightly or Steeply Progressive? – Taxes per Person by Country – USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Retirement: Roth IRA Earnings and Contribution Limits

Comments