Center for progressive economics

Decoration Icon

The Blog

DOES THE UNITED STATES HAVE HIGH INCOME TAX RATES?

Americans love to complain about their high income tax rates, both Federal and State, but an analysis of the nominal tax code rates and the actual tax rates after all exemptions, deductions and special tax rates for capital gains, etc, are quite different. The source for the data presented in this article was published by the Tax Foundation and was obtained directly from IRS data files.

The IRS has published detailed Adjusted Gross Income (AGI) and actual income tax data for each state and the total US for 2006.  In 2006 the Federal Income Tax rates had six brackets from 10% to 35%.  The top rate of 35% applied to taxable income above $336,550 for returns using the single, married filing jointly or head of household filing status and $168,275 for married filing separately returns.

The IRS analysis indicates that all Americans reported $7.8 trillion in AGI on over 133 million returns in 2006 on which we paid slightly less than $1 trillion in Federal Income taxes, a average rate of 12.75%. The top 1% of returns reported an average AGI of  $1.24 million and an average tax rate of 23.81%, while the top 10% of returns reported an average AGI of $274,555 and an average tax rate of 19.25%.  By contrast the bottom 50% of returns, almost 67 million tax filers, had an average AGI of only $14,940 an average tax rate of only 3.12%. In 1980 the combined average tax rates for all returns was 15.31%, so the 12.75% rate reflects a 17% decline in average tax rates over the last 26 years.

Surprisingly, when we look at the combined Federal Personal Income statistics for the past 26 years, from 1980 to 2006, the average rate of tax for all 3.1 billion returns was only 13.54%.  The top 10% of returns during this period had an average tax rate of 20.3% while the remaining 90% of returns had an average tax rate of 8.76%

The analysis also reveals substantial variations in income by state, with the median income, the midpoint at which 50% of the incomes are greater and 50% lesser, ranging from a high of $40,815 in Connecticut to a low of $24,464 in Mississippi. In Connecticut the lowest 50% of filer paid 4.60% in Federal taxes while in Mississippi the same group had a Federal tax rate of only 1.56%. 

In Connecticut you had to have an AGI of $671,706 in be in the top 1% of earners followed by the District of Columbia where the top 1% included all returns with an AGI of $637,407.  At the other end of the range, Mississippi and West Virginia had the lowest entry point for the top 1% at $249,052 and $225,697, respectively.

Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income, but even when we add in the state income taxes, our actual income tax burdens are low when compared to other developed nations.  In my home state of South Carolina, for example, we have a state income tax that ranges from 3% to 7% based on your Federal taxable income.  The SC average Federal income tax rate was 10.75% in 2006, and when you add in the SC income tax dollars, the combined SC rate increases to only 14%.

 A recent study by the Government Accountability office has determined that from 1998 to 2005 67% of American corporations paid no Federal Income taxes.  In addition, the study revealed that 68% of foreign corporations doing business in the US did not pay any Federal Income taxes during the same period. American Corporations do not have to pay any US taxes on foreign operations unless they “repatriate” the earnings by physically moving funds back to the US. In today’s global financial system it is easy for corporations to maintain cash and other investments in foreign banks and only repatriate funds that your American operations absolutely need.  Some will claim that while the data presented in the article indicates that the US has a personal tax environment compared to other developed nations, we are ignoring the additional costs of the employee and employer contributions to Social Security and Medicare, a combined rate of 15.3%.  Firstly, Social Security and Medicare are more reasonably looked at as social insurance since they can and do provide income and medical insurance to workers below retirement age who are injured or ill and cannot work.  Secondly, while all wages and salaries are subject to the combined Medicare tax rate of 2.9%, the Social Security tax combined rate of 12.4% is not levied on annual wages and earnings above a specific level, $106,800 in 2009.  If we add the average US tax rate of 12.75% for 2006 and the combined Social Security and Medicare rate of 15.30%, we get a total tax rate of 28.05%.  This is not directly comparable to the much higher tax rates paid by European nations since their tax rates include all their medical costs.  Here is what the OECD Reporter has to say about marginal tax rates in the European Union and the US.

So where does our analysis of ‘all-in’ tax rates lead? One lesson is that the gaps at the margin between top income earners domiciled in various OECD countries are narrower than often imagined and certainly not as wide as the headline rates show. In fact, the marginal top rate in most countries rises substantially when considering the all-in rate of taxes on income, to 61% in France and Turkey, 62% in Denmark and Sweden, 65% in Japan and 66% in Belgium. The highest all-in rates for taxpayers in the United States fall in the 40–48% range, depending on the State where they are resident.

Of course, our rates would be higher if in any year we actually raised taxes to fund any Federal deficits.  In 2006, for example, the Federal Government had a $248 billion deficit. To fully pay for the deficit our Federal income taxes would have needed to average about 16% instead of the 12.75% we actually paid.   

DOES THE UNITED STATES HAVE HIGH INCOME TAX RATES?

Americans love to complain about their high income tax rates, both Federal and State, but an analysis of the nominal tax code rates and the actual tax rates after all exemptions, deductions and special tax rates for capital gains, etc, are quite different. The source for the data presented in this article was published by the Tax Foundation and was obtained directly from IRS data files.

The IRS has published detailed Adjusted Gross Income (AGI) and actual income tax data for each state and the total US for 2006.  In 2006 the Federal Income Tax rates had six brackets from 10% to 35%.  The top rate of 35% applied to taxable income above $336,550 for returns using the single, married filing jointly or head of household filing status and $168,275 for married filing separately returns.

The IRS analysis indicates that all Americans reported $7.8 trillion in AGI on over 133 million returns in 2006 on which we paid slightly less than $1 trillion in Federal Income taxes, a average rate of 12.75%. The top 1% of returns reported an average AGI of  $1.24 million and an average tax rate of 23.81%, while the top 10% of returns reported an average AGI of $274,555 and an average tax rate of 19.25%.  By contrast the bottom 50% of returns, almost 67 million tax filers, had an average AGI of only $14,940 an average tax rate of only 3.12%. In 1980 the combined average tax rates for all returns was 15.31%, so the 12.75% rate reflects a 17% decline in average tax rates over the last 26 years.

Surprisingly, when we look at the combined Federal Personal Income statistics for the past 26 years, from 1980 to 2006, the average rate of tax for all 3.1 billion returns was only 13.54%.  The top 10% of returns during this period had an average tax rate of 20.3% while the remaining 90% of returns had an average tax rate of 8.76%

The analysis also reveals substantial variations in income by state, with the median income, the midpoint at which 50% of the incomes are greater and 50% lesser, ranging from a high of $40,815 in Connecticut to a low of $24,464 in Mississippi. In Connecticut the lowest 50% of filer paid 4.60% in Federal taxes while in Mississippi the same group had a Federal tax rate of only 1.56%. 

In Connecticut you had to have an AGI of $671,706 in be in the top 1% of earners followed by the District of Columbia where the top 1% included all returns with an AGI of $637,407.  At the other end of the range, Mississippi and West Virginia had the lowest entry point for the top 1% at $249,052 and $225,697, respectively.

Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income, but even when we add in the state income taxes, our actual income tax burdens are low when compared to other developed nations.  In my home state of South Carolina, for example, we have a state income tax that ranges from 3% to 7% based on your Federal taxable income.  The SC average Federal income tax rate was 10.75% in 2006, and when you add in the SC income tax dollars, the combined SC rate increases to only 14%.

 A recent study by the Government Accountability office has determined that from 1998 to 2005 67% of American corporations paid no Federal Income taxes.  In addition, the study revealed that 68% of foreign corporations doing business in the US did not pay any Federal Income taxes during the same period. American Corporations do not have to pay any US taxes on foreign operations unless they “repatriate” the earnings by physically moving funds back to the US. In today’s global financial system it is easy for corporations to maintain cash and other investments in foreign banks and only repatriate funds that your American operations absolutely need.  Some will claim that while the data presented in the article indicates that the US has a personal tax environment compared to other developed nations, we are ignoring the additional costs of the employee and employer contributions to Social Security and Medicare, a combined rate of 15.3%.  Firstly, Social Security and Medicare are more reasonably looked at as social insurance since they can and do provide income and medical insurance to workers below retirement age who are injured or ill and cannot work.  Secondly, while all wages and salaries are subject to the combined Medicare tax rate of 2.9%, the Social Security tax combined rate of 12.4% is not levied on annual wages and earnings above a specific level, $106,800 in 2009.  If we add the average US tax rate of 12.75% for 2006 and the combined Social Security and Medicare rate of 15.30%, we get a total tax rate of 28.05%.  This is not directly comparable to the much higher tax rates paid by European nations since their tax rates include all their medical costs.  Here is what the OECD Reporter has to say about marginal tax rates in the European Union and the US.

So where does our analysis of ‘all-in’ tax rates lead? One lesson is that the gaps at the margin between top income earners domiciled in various OECD countries are narrower than often imagined and certainly not as wide as the headline rates show. In fact, the marginal top rate in most countries rises substantially when considering the all-in rate of taxes on income, to 61% in France and Turkey, 62% in Denmark and Sweden, 65% in Japan and 66% in Belgium. The highest all-in rates for taxpayers in the United States fall in the 40–48% range, depending on the State where they are resident.

Of course, our rates would be higher if in any year we actually raised taxes to fund any Federal deficits.  In 2006, for example, the Federal Government had a $248 billion deficit. To fully pay for the deficit our Federal income taxes would have needed to average about 16% instead of the 12.75% we actually paid.       


Comments are closed.