The wealthy pay their fair share — and then some
President Trump and Republican congressional leaders recently proposed a framework for tax reform. Inevitably it was described by some as yet another “tax cut for the rich who don’t pay their fair share.” However, the latest available data from the IRS (based on the 2015 tax year) shows that the U.S. individual income tax regime is very progressive — meaning the highest earners pay a disproportionately large share of the total tax bill. (Source: Who pays income taxes?) I doubt “tax reform” will change that. Here are the most recent numbers.
The top 1% of income earners (those with adjusted gross income of $480,930 and up) paid 39.04% of the total federal income tax on individuals.
The top 5% (those with adjusted gross income between $195,778 and $480,929) paid 59.58%.
The top 10% (those with income between $138,031 and $195,777) paid 70.59%.
The bottom 50% (those with income of less than $39,275) paid 2.83%.
According to the Tax Policy Center, a whopping 44.3% of American households didn’t pay any federal income tax at all in 2016. (Source: Tax Policy Center)
To be fair, these numbers don’t reflect the fact that many lower-income individuals have Social Security and Medicare taxes withheld from their wages or pay these taxes through the self-employment tax. Even so, it’s hard to make a convincing argument that the “rich” (meaning high earners in this context) aren’t paying their fair share of federal taxes. To add gravitas to the preceding statement, consider the following federal income taxes that only the “rich” have to cough up.
39.6% tax rate on ordinary income
For most individuals, the current federal income-tax rates on ordinary income (from salary, self-employment, interest, and the like) and short-term capital gains are familiar territory: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks is 39.6%. For 2017, this rate only affects singles with taxable income above $418,400, heads of households with income above $444,550, and married joint-filing couples with income above $470,700. These income levels approximate the threshold for the oft-scorned “One Percent.”
0.9% Medicare surtax on salary and self-employment income
Higher-income folks can get whacked by the 0.9% Medicare surtax on salary and self-employment income, which can result in a higher-than-advertised federal tax rate on ordinary income. The 0.9% surtax can kicks in if your salary and/or net self-employment income exceeds $200,000 if you use single or head of household filing status or $250,000 if you are a married joint-filer.
20% rate on long-term capital gains and dividends
The tax rates on net long-term capital gains and qualified dividends are also familiar territory for most individuals: 0% for folks in the bottom two tax brackets and 15% for almost everyone else. However, the maximum rate for higher-income individuals is 20%. This elevated rate kicks in at the same taxable income thresholds as the 39.6% rate on ordinary income.
3.8% Medicare surtax on net investment income
Higher-income folks can also get whacked by the 3.8% Medicare surtax on net investment income, which can result in a higher-than-advertised federal tax rate on all or part of your capital gains, dividends, interest, rental income, and income from passive business investments (such as ownership interests in partnerships, LLCs, and S corporations in which you don’t actively participate). The 3.8% surtax can bit if your modified adjusted gross income exceeds $200,000 if you use single or head of household filing status or $250,000 if you are a married joint-filer.