Top Half of U.S. Income Earners See Tax Burdens Grow

Published April 1, 2006

As the annual tax filing deadline approaches, many public officials traditionally use the occasion to launch into a debate about the airness of the nation tax laws. Policymakers who believe the federal income tax rewards the wealthy at the expense of the poor are likely to be shocked by the latest data from the Internal Revenue Service (IRS) and National Taxpayers Union Foundation (NTUF).

IRS figures released late last year for Tax Year 2003 (for which returns were filed in 2004) show the richest Americans shoulder a disproportionate burden of the federal income tax, and the burden is getting heavier.

The top 1 percent of income earners paid more than 34 percent of all federal income taxes for 2003, while the wealthiest 10 percent had to bear 66 percent of the total tax load. The trend continued down the income scale to where just one-fourth of income earners paid 84 percent of the income taxes, and the upper half accounted for virtually the entire revenue pot (nearly 97 percent). The ther half of America contributed 3.5 percent of the total, a smaller slice than they did while Bill Clinton was in office.

Increasing Share by ealthy Since 2001, one of the most popular features on the NTUF Web site ( has been “Who Pays Income Taxes?”–a series of charts that has tracked the distribution of the federal income tax burden over time. This historical snapshot has confirmed a trend that analysts have long attempted to convey: When people make money faster, the government takes it even more quickly.

Between the final stock market and wage “boom year” of 2000 and the economic slowdown of 2001, the share of taxes borne by the richest 1 percent fell from 37 percent to less than 34 percent. Other higher-income categories’ tax shares also slipped.

Yet the 2003 data, which encompass the beginning of a robust economic recovery, show the upper-earning tiers are beginning once again to pick up a greater share of the tab. The top 1 percent’s burden has climbed above 34 percent, while the highest 5 percent and 10 percent categories are also paying a greater proportion.

Defining Away Middle Class

Perhaps the most telling dataset produced by the IRS isn’t expressed in percentages–it’s tallied in dollars. The minimum dollar threshold for the wealthiest tenth of taxpayers started at just under $95,000; for the wealthiest quarter, it began at just above $57,000.

“To most dual-income or middle-aged households, especially in the Northeast, these amounts would seem capable of supporting a house on Main Street but not a mansion on Prosperity Lane,” said NTUF President John Berthoud. “Ironically, while the political left continues to bemoan the ‘vanishing middle class,’ the government has already defined it away for tax purposes.”

Comparing All Federal Taxes

Yet advocates of an even more progressive tax system contend that compared to the slice of the income pie they earn, the wealthy still don’t account for an equal helping of the tax pie. IRS figures show they are wrong.

While the richest 1 percent of Americans reported about 17 percent of all Adjusted Gross Income, they paid twice as much (34 percent) of the overall income tax bill. The bottom half earned 14 percent of the income but accounted for only 3.5 percent of tax payments.

Still other advocates claim all of these calculations paint a false picture of tax distribution by focusing on only one part of the federal tax panorama. After all, they note, tens of millions of households in America face a payroll tax bill bigger than their income tax bill. This is true because of caps on the amount of wages subject to Social Security and Medicare taxes; well-paid Americans feel proportionally less pain from this levy. As Rep. John Linder (R-GA) noted during NTUF’s 2005 National Taxpayers Conference, “90 percent of Americans pay more in payroll taxes than income taxes” (one reason why Linder’s “FairTax” reform legislation, HR 25, would replace both types of taxes).

It is also certain that lower- and moderate-income households take a harder hit to the wallet from federal excises on products ranging from air travel to telephones. But do these factors dramatically change the overall distribution of the tax burden? A December 2005 study from the Congressional Budget Office (CBO) provides a fairly conclusive answer.

Confirming Tax Disparity

After examining all forms of federal taxation, the CBO determined that the lowest fifth of income earners in the United States paid a 4.8 percent effective tax rate in 2003, compared to the wealthiest 1 percent’s overall burden of 31.4 percent. (This figure does not include state and local taxes, which can boost the total past 40 percent.) A working-class household with a $34,100 income (which CBO measured differently from the IRS) still paid less than a tenth (a net 9.8 percent) of its earnings to the federal government. Part of the continuing disparity has to do with the Earned Income Credit, a social program wrapped up in the tax code that sometimes sends households payments that exceed their income tax liabilities.

Does this mean lower- and moderate-income households should be paying more in taxes? Most Americans would say “no,” recognizing that every family should be able to provide for itself before it must provide for the government.

“What’s more important is how the government’s idea of ‘wealthy’ seems to increasingly include just about anyone with a steadily climbing income,” concluded Berthoud. “Once upon a time, that phenomenon was called ‘The American Dream.'”

For more information …

“Who Pays Income Taxes?” is available online at