We’ve all seen the pie charts of where our federal dollars go, but I had never thought about where those dollars come from until I read an article in the Wall Street Journal last April. Would you be as surprised as I to find out that just over half of federal revenues come from the personal income taxes we pay, followed by social insurances taxes at around 30% of revenues collected?[1]
The computation of each individual’s contribution to the tax burden is dependent on how income is earned, how much is earned, and how it is taxed, all compiled in the personal income tax return. Here are the expected statistics for personal income taxes for 2022 based on the staff of Congress’s Joint Committee on Taxation and the Journal. In this analysis, income includes non-taxable items like tax-exempt interest and employer contributions to payroll taxes and health plans.
About 43% of the 180,000,000 taxpayers earn $50,000 or less. They will earn about 10% of total income (as defined above) and will owe -4.8% of income taxes, since many credits (Earned Income Tax Credit, etc.) are administered through the IRS and payable as refundable tax credits. This analysis is only of income taxes and does not include payroll taxes that would be paid on wages that would exceed the credits.
The next level are taxpayers with incomes between $50,000 and $100,000. Their share of total income is a little less than 20%, and they pay approximately 6% of total taxes collected. They are about 27% of the total number of taxpayers.
About 20% of filers earn between $100,000 and $200,000, report a quarter of total income, and pay about 20% of the taxes collected.
About 25% of filers, those reporting between $100,000 and $500,000, will earn half the income and pay about half the taxes collected. Taxpayers earning over $1,000,000 will pay almost 40% of the taxes collected on about 15% of total income reported. There’s no shortage of stories of megawealthy individuals who legally have no responsibility for personal income taxes because they manipulate their finances to result in little or no taxable income. As they have no income, they are not included in these statistics.
In case the percentages above give a muddled view of how income is taxed, the average estimated tax rate based on reported income is:
- $0-$50,000 -4.9%
- $50,000-$100,000 3.6%
- $100,000-$200,000 7.9%
- $200,000-$500,000 13.2%
- $500,000-$1,000,000 20.5%
- >$1,000,000 25.5%
Worth noting though is that while in 2018, 597,000 returns showed income in excess of $1,000,000, that number is expected to be 917,000 in 2022. I wonder what 2023 will show.
Tax policy is coming under debate as part of the Biden agenda to raise taxes. The favorable tax policy on capital gains and qualified dividends, the legalities that allow some wealthy taxpayers not to pay taxes at all, and the step up in basis for assets upon death are all under scrutiny. Of course, this debate has been ongoing for years, so it’s doubtful that there will be any significant changes in a divided Congress
References
Saunders, Laura (2022, April 15).Your Income Taxes Are Due. Here’s Who Pays the Most. The Wall Street Journal.
[1] Another surprise for me, corporate taxes came in at around 8% and estate taxes at .6% of total revenue collected.
Article submitted by Lois S. Fried, CPA, CFE, CVA, ABV
