We often hear the populist argument that the rich need to pay their fair share of taxes. What exactly does that mean? Are poor and working class Americans also paying into the system?
According to the Tax Policy Center the richest 20 percent of American households (earning roughly $110,000) pay 86.8 percent of all individual federal income taxes paid. The average tax bill of the richest 20 percent is $50,176.
Meanwhile, 45.3 percent of Americans pay zero in federal income taxes or have negative income tax. That translates into some 77.5 million American households with no federal tax burden because they had no taxable income or had enough tax breaks to zero out their tax liability. The lowest 20 percent pay -2.2 percent meaning they get back what they haven’t paid into the system at all.
When we consider arguments of fairness we have to ask whether it’s fair that you can work hard, become successful and then be forced to pay disproportionately into a public system, but never extract the same level of services or benefits.
It's unwise to characterize the poor as tax dodgers. They may pay other federal taxes such as excise taxes on gas, alcohol, and cigarettes. There are also payroll taxes and sales taxes as well as state taxes.
Some rich people manage to lower their tax burdens by reducing their taxable incomes through actions and maneuvers that are perfectly legal, including storing their wealth in investments.
But the tax-escaping rich person is not as common as we might be led to believe. As MarketWatch explains:
Despite the fact that rich people paying little in the way of income taxes makes plenty of headlines, this is the exception to the rule: The top 1 percent of taxpayers pay a higher effective income tax rate than any other group (around 23 percent, according to a report released by the Tax Policy Center in 2014) — nearly seven times higher than those in the bottom 50 percent.
On average, those in the bottom 40 percent of the income spectrum end up getting money from the government. Meanwhile, the richest 20 percent of Americans, by far, pay the most in income taxes, forking over nearly 87 percent of all the income tax collected by Uncle Sam.
The top 1 percent of Americans, who have an average income of more than $2.1 million, pay 43.6 percent of all the federal individual income tax in the US; the top 0.1 percent — just 115,000 households, whose average income is more than $9.4 million — pay more than 20 percent of it.
These numbers give a new dimension to the "fair share" debate.