Americans paid about $3 trillion in taxes in 2004, totaling $26,738 per household, according to a new study released March 26 by the Tax Foundation.
“Which Taxes Weigh Most Heavily on Americans with Different Incomes?” shows $17,338 of that amount went to the federal government, with $9,400 going to state and local governments.
While paying income taxes–and having to fill out Byzantine tax forms to file them–drives millions of Americans to distraction and frustration each April, Americans should also remember payroll, property, sales, excise, estate, and other taxes add to our tax burdens.
And for Americans with low and middle incomes, these non-income taxes usually make up a bigger slice of their annual tax bill than the federal income taxes they pay to the IRS.
IRS Takes About 1/4
Federal income taxes make up only 26 percent of the nation’s total tax bill.
The remaining 74 percent–nearly three-fourths of the U.S. economy’s total tax burden–is composed of the other federal, state, and local taxes paid by American households every year.
How do federal income taxes compare to other taxes? Figure 1 gives some perspective. It shows every major type of tax in the United States that is recorded by the U.S. Commerce Department’s Bureau of Economic Analysis.
To make the numbers easy to understand, we’ve presented them on a per-household basis. That is, we’ve divided total collections for each type of tax by the number of American households, which was about 113.5 million in 2004.
Payroll Taxes Huge
On average, federal payroll taxes per household actually outweighed personal income taxes in 2004–$7,069 per household compared to $7,062.
Perhaps more surprisingly, the total of all households’ property taxes, sales taxes, and state-local income taxes was $7,130 per household, actually outweighing the average federal income tax bill by $68 per household.
Some taxes, such as income and estate taxes, fall heavily on upper-income households, while others–such as cigarette, payroll, and sales taxes–fall more heavily on those with low incomes.
Burdens Vary
One way of showing how important different taxes are to different Americans is to group everyone into five equal groups known as “income quintiles” and show how much in taxes each pays. Each one of those groups contains 20 percent of the U.S. population, or about 58 million Americans.
If a household earned less than $23,700 in 2004 it fell into the bottom 20 percent of incomes. A household that earned between $42,305 and $65,000 was in the middle 20 percent of incomes. And any household income above $99,502 was in the top 20 percent.
Using those five income groups, Figure 2 asks the following question: “Out of every dollar of tax paid by households, how many pennies go to each type of tax federal, state and local?”
Federal income taxes are listed at the bottom of Figure 2. Above them are federal payroll taxes, federal corporate income taxes, and the other major types of taxes paid to federal, state, and local governments.
As is clear from the figure, the composition of Americans’ tax bills varies widely among those in the lowest, middle, and top income groups.
Heavy Sales, Receipts Burdens
Overall, sales and gross receipts taxes, property taxes, excise taxes, and the federal payroll tax consume the vast majority of each tax dollar from lower-income households. Federal income taxes and federal payroll taxes dominate the tax bills of Americans in upper-income groups.
For households in the bottom fifth of income, the single most burdensome tax is the type that falls on purchases: state and local sales and gross receipts taxes. Those make up 32 cents of their tax bill.
Property taxes are next (22 cents), followed by federal payroll taxes (21 cents). These three non-income taxes together make up 75 cents of every tax dollar paid by the bottom income group, while federal income taxes account for just 4 pennies.
Payroll Taxes Burden Middle
For households in the often-discussed middle fifth of the income scale, by far the most burdensome tax is the federal payroll tax.
Payroll taxes withdraw 15.3 percent of workers’ pay below $97,500 (the limit was $87,900 in 2004), and those dollars are used to fund federal government transfer payments to today’s senior citizens through Social Security and Medicare. (Legally, half of payroll taxes are paid by employers and half by employees. However, economists agree the full burden is shifted onto workers in the form of lower compensation.)
For those in the middle fifth of incomes, 32 cents of every tax dollar goes to federal payroll taxes–more than any other income group. That compares to 18 cents for federal income taxes, 15 cents for sales and gross receipts taxes, and 12 cents for property taxes.
By a wide margin, the Americans most heavily burdened by the federal income tax are those in the top income group. Thirty-six cents of every tax dollar paid by households earning more than $99,502 in money income went to federal income taxes in 2004. That’s compared to 23 cents for payroll taxes, 9 cents for state and local income taxes, and 9 cents for property taxes.
Andrew Chamberlain ([email protected]) and Gerald Prante ([email protected]) are staff economists at the Tax Foundation in Washington, DC.
